In book building, an issuer approaches potential investors for indications of interest in their securities before pricing their IPO. The issuer then allocates the number of shares according to demand from these investors. This method helps them understand what price range to set for the IPO and decide on an appropriate size for the offer.
The book building process begins with an opening period during which investment banks invite qualified institutional buyers (QIBs) to submit bids for the number of shares they want and at what price. Depending on the market, this opening period can last for a few days or weeks.
Once the opening period ends, the underwriters review all bids to determine an optimal price range for the shares. They then allocate them according to demand from QIBs and other institutional investors, such as venture capital funds and mutual funds. The remaining allotment is usually made available to retail investors.
Once this process is complete, the issuer sets their IPO’s final price based on the bids received during book-building and any pricing discounts or premiums they may offer to attract buyers or sellers, respectively. After that, trading can begin on the exchanges where it was listed.
The benefits of book-building in the Asian markets
Book-building is a popular method for IPOs in the Asian markets due to its simplicity and efficiency. It helps issuers size up their offer accurately, ensuring that it is large enough to meet investor demand but not too big to cause an oversupply.
Book-building also provides significant liquidity for investors who want to enter or exit positions at any point during the opening period. This liquidity helps create a more efficient market and ensures that prices are determined based on fair value rather than speculation or guesswork.
Book-building is an essential tool used by Asian issuers when launching IPOs. Its ability to match supply with demand while providing investors with trading flexibility makes it a popular choice among institutional and retail investors.
Book-building helps issuers raise capital more quickly and efficiently when compared to other methods of issuing securities. This is especially true for smaller IPOs where the issuer may need access to various investors or distributors. Book-building provides an efficient and cost-effective way for these companies to reach many potential buyers.
Book building is an essential tool used by Asian issuers in launching IPOs. It helps them size their offer accurately based on market demand while providing investors with liquidity and flexibility throughout the opening period, making it an efficient and popular choice among institutional and retail investors in the Asian markets.
What are the drawbacks of using book-building in the Asian markets?
Despite the many benefits of book-building in the Asian markets, there are also some potential drawbacks. The most significant drawback is that book building can be used to manipulate prices, which can occur if a small group of investors submits bids at abnormally high prices during the opening period, creating an artificially inflated value for the shares. This could lead to an undeserved capital gain for those particular investors when trading begins on the exchanges.
Book-building is also more time-consuming than other methods of issuing securities and requires substantial resources from issuers and investment banks. Additionally, it may not be suitable for smaller IPOs where the issuer needs to access a more significant number of investors or distributors.
Book-building can be subject to regulatory scrutiny in the Asian markets. To avoid potential legal issues, issuers must ensure that their underwriters and other intermediaries comply with all applicable laws and regulations.
The bottom line
Book-building is an essential tool used by Asian issuers in launching IPOs. It helps them size their offer accurately based on market demand while providing investors with liquidity and flexibility throughout the opening period. This makes it an efficient and popular choice among institutional and retail investors in the Asian markets. By using book-building, issuers can raise capital to fund their projects more quickly and efficiently.
Additionally, it helps ensure that prices are based on fair market value rather than speculation or guesswork. Ultimately, book-building is an invaluable tool in the Asian markets for companies of all sizes looking to launch IPOs.