Book building allows a company to issue IPO at a premium (higher) price for each share instead of the present practice of issuing at Rs. 100 per share.
Book Building System is the process of price discovery in which a company hires a merchant bank to decide a price range at which shares are to be issued instead of a specific price. The merchant bank is known as an underwriter or a book runner. The bank is responsible to research the issuing company and come up with a price range for its IPO shares. Once the price range is decided, the merchant bank then prepares a prospectus calling out investors to apply the shares.
Book Building System of price discovery mechanism dominates the IPO and FPO issuance worldwide. Among several other IPO issuance mechanisms such as fixed price, tender, auction, public offer method, Book Building System is considered to be the most efficient method. Several developed countries have adopted the Book Building System. This method helps to raise a large amount of capital, gain price-relevant information from potential buyers, brings in higher net revenue, provides riskier projects and access to the stock market, and liquidity to investors.