What is Book Building Process in IPO?

Two Ways to Price an IPO

SEBI allows Indian IPOs to be priced using one of two methods: fixed price (where the price is set before subscription opens) or book building (where the price is discovered during the subscription process itself). Almost all mainboard IPOs today use the book building method.

What is Book Building?

Book building is a price discovery mechanism in which the issuer sets a price band (e.g., ₹480–₹500 per share) instead of a fixed price. During the subscription window, investors bid for shares at any price within this band. The final issue price — called the cut-off price — is determined after evaluating all the bids received, based on the price at which the entire issue can be fully subscribed.

The term "book building" comes from the investment banking practice of "building a book" — meaning, accumulating all investor bids and orders to determine optimal price and demand.

How the Process Works Step by Step

1. Company files DRHP with SEBI: The price band is not disclosed at this stage — only the issue size and other details.
2. Price band announcement: After SEBI observations, the company announces the price band (floor price and cap price) in the RHP and in public announcements.
3. Anchor allotment (T-1): Large institutional investors (anchors) bid at or above the cut-off price one day before public subscription.
4. Subscription window opens (3 days): QIBs, NIIs (HNIs), and retail investors bid within the price band. Retail investors can bid at "cut-off price" — meaning they accept whatever final price SEBI determines.
5. Bids consolidated: After the subscription window closes, all bids are consolidated by the registrar and stock exchanges.
6. Cut-off price determination: The book running lead managers (BRLMs) and the issuer analyze the demand curve. The cut-off price is typically the cap of the price band (upper end) in oversubscribed IPOs, since demand exceeds supply at that price.
7. Allotment: Shares are allotted based on the cut-off price and category-wise subscription ratios.

The Price Band: Floor and Cap

The SEBI regulations require that:

• The price band spread must not exceed 20% (i.e., cap price cannot be more than 120% of floor price)
• The floor price must be at least ₹1 per share (face value floor)

In practice, most IPOs set the price band with a narrow spread of 5–10%, and the vast majority of investors bid at the cap price — making the band largely cosmetic. However, the floor price serves as a minimum commitment signal from the company.

Bid Types Available to Investors

• Bid at cut-off price: Available only to retail investors. You accept whatever cut-off price is determined. Most retail investors use this to avoid missing out if they bid too low.
• Bid at specific price: Available to all investor categories. You specify the exact price within the band. If the cut-off price exceeds your bid, your application is rejected and refunded.

For retail investors, bidding at cut-off price is almost always the right choice — unless you have strong reasons to believe the IPO will be priced at the floor.

Demand at Different Price Points: The Demand Curve

During the book building process, the registrar builds a demand curve showing how many shares were bid at each price point. This gives the issuer and BRLMs a clear picture of:

• Total demand at each price
• Whether institutional demand is concentrated at cap or distributed across the band
• Whether demand is sufficient to price at cap

In most popular mainboard IPOs, demand overwhelmingly concentrates at the cap price — resulting in the issue being priced at the cap.

What Happens to Excess Bids?

When an IPO is oversubscribed (more bids than shares available), the allotment process kicks in:

• Retail (RII): If oversubscribed, allotment is done by lottery — one lot per applicant
• NII/HNI: Proportional allotment based on application size
• QIB: Proportional allotment

Excess funds are unblocked and returned to investors' bank accounts within the stipulated timeline (typically T+6 from subscription close).

Key Takeaways

• Book building sets a price band; final price is discovered through investor bids
• Almost all mainboard IPOs use book building; SME IPOs often use fixed price
• Retail investors should bid at cut-off price to maximize allotment chances
• In oversubscribed IPOs, the cut-off price is almost always the cap of the price band