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Modes of Listing

Like the Main Board IPO, an SME IPO can be made either through the fixed price method or book building method. There lies considerable difference between the two types of issues, the key differences are enumerated herein below :

Issue Type Fixed Price Issues Book Built Issue
Offer Price Price at which the securities are offered and would be allotted is made known in advance to the investors A maximum  of 20 % price band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.
Demand Demand for the securities offered is known only after the closure of the issue Demand for the securities offered, and at various prices, is available on a real time basis on the stock exchanges website during the bidding period.
Payment 100 % advance payment is required to be made by the investors at the time of application. 10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application.
Source: www.bseindia.com
Book Built Issue

An issuer company desirous of getting listed on SME Exchange is allowed to freely price the issue. The basis of issue price is required to be disclosed in the offer document, whereby the issuer needs to disclose in detail about the qualitative and quantitative factors justifying the issue price. The Issuer can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the draft offer documents filed and actual price can be determined at a later date before filing of the final offer document with Exchange/ROCs.

Price Discovery through Book Building Process

As defined in Regulation 2(1) of SEBI ICDR Regulations,"Book Building" means a process undertaken by which a demand for the securities proposed to be issued is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover the price for securities.

The process is named so because it refers to collection of bids from investors, which is based on a price range. The issue price is fixed after the closing date of the bid.

A company planning an IPO/FPO appoints a merchant bank as a book runner. A particular time frame is fixed as the bidding period. The book runner then builds an order book that collates bids from various investors. Potential investors are allowed to revise their bids at any time during the bidding period. At the end of bidding period the order book is closed and consequently the quantum of shares ordered and the respective prices offered are known. The determination of final price is based on demand at various prices.

Corporate may raise capital in the primary market by way of initial public offer, right issue, or private placement. An Initial Public Offer (IPO) or Follow on Public offers (FPO) to aid price and demand discovery. It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various prices, which are within the price band specified by the issuer. The process is directed towards both the institutional as well as the retail investors. The issue price is determined after the bid closure based on the demand generated in the process. .

Price Band

The offer document may have a floor price at which or a price band within which the investors can bid. The spread between the floor and the cap of the price band cannot be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The company decides the price band in consultation with the merchant bankers, and typically after undertaking a pre-marketing exercise with leading QIBs.

The price band can have a revision. SEBI requires that any revision in the price band has to be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. When the price band is revised, the bidding period has to be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.

Floor Price

Floor price is the minimum price at which bids can be made.

Cut-off Price

In a book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called "Cut off price". This is decided by the issuer and the lead manager to the issue after considering the book and investors' appetite for the stock. SEBI ICDR Regulations permit only retail individual investors to have an option of applying at cut off price as such.

Issue / Bidding Period

Any public issue is required to be kept open for at least three working days but not more than ten working days including the days for which the issue is kept open in case of revision in price band. In case the price band in a public issue made through the book building process is revised, the bidding (issue) period disclosed in the red herring prospectus shall be extended for a minimum period of three working days, provided that the total bidding period shall not exceed ten working days. The public issue made by an infrastructure company, satisfying the requirements in Clause 2.4.1 (iii) of Chapter II may be kept open for a maximum period of 21 working days.

Final Issue Price

The demand at various price levels within the price band is made available on the websites of the designated stock exchanges during the entire tenure of the issue and once the issue closes, the final price is determined by the issuer and made known to the investors.

Pure Auction as an Additional Book building Mechanism

SEBI has decided to introduce an additional method of book building, to start with, for FPOs, in which the issuer would decide on a floor price and may mention the floor price in the red herring prospectus. If the floor price is not mentioned in the red herring prospectus, the issuer shall announce the floor price at least one working day before opening of the bid in all the newspapers in which the pre-issue advertisement was released.

Qualified institutional buyers shall bid at any price above the floor price. The bidder who bids at the highest price shall be allotted the number of securities that he has bided for and then the bidder who has bided at the second highest price and so on, until all the specified securities on offer are exhausted. Allotment shall be done on price priority basis for qualified institutional buyers. Allotment to retail individual investors, non-institutional investors and employees of the issuer shall be made proportionately as illustrated in Schedule XI of SEBI ICDR Regulations. Where, however the number of specified securities bided for at a price is more than available quantity, then allotment shall be done on proportionate basis. Retail individual investors, non-institutional investors and employees shall be allotted specified securities at the floor price subject to provisions of Clause (d) of Regulation 29 of SEBI ICDR Regulations.

The issuer may:-

(a) Place a cap either in terms of number of specified securities or percentage of issued capital of the issuer that may be allotted to a single bidder;

(b) Decide whether a bidder be allowed to revise the bid upwards or downwards in terms of price and/or quantity;

(c) Decide whether a bidder be allowed single or multiple bids.

The Process
Guidelines for Book Building

Rules governing the Book Building Process are covered in Chapter XI of the SEBI ICDR Regulations

Book Building System for BSE
Book Building System for NSE

NSE too has set up a nation-wide network for trading whereby members can trade remotely from their offices located all over the country. The NSE trading network spans various cities and towns across India.

NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network.

Book Building through the NSE system offers several advantages:

Costs involved in the issue are far less than those in a normal IPO

The IPO market timings are from 10.00 a.m. to 5.00 p.m. On the last day of the IPO, the session timings can be further extended on specific request by the Book Running Lead Manager.