When a company decides to raise money from the public for the first time, one of the first questions is what price its shares should be offered at. Set it too low, and the company leaves money on the table. Set it too high, and investors may stay away.
In India, most mainboard IPOs solve this through the book-building process in an IPO. Instead of the company fixing one price in advance, investors help the market arrive at it by placing bids within a range.
This guide explains how the book-building IPO method works.
What Is Book Building in an IPO?
Book building is a price discovery method in which an issuer offers shares within a price range, collects bids from investors during the offer period, and decides the final issue price based on the demand recorded in the "book" of bids.
SEBI describes it as a process of generating demand for securities and discovering the price at which they are offered. The "book" is the electronic record of all bids received at different prices, which is why the approach is called the book building method of IPO pricing.
For anyone exploring IPO investment, this is the pricing method you will meet most often. Almost all mainboard IPOs in India today are priced this way.
How Does the Book Building Process Work?
While details vary from issue to issue, the broad sequence is as follows:
1. Appointment of the BRLM:
The company appoints one or more Book Running Lead Managers (BRLMs), merchant bankers who manage the issue.
2. Filing of offer documents:
The company files its Draft Red Herring Prospectus (DRHP) with SEBI. After SEBI's observations, it files the Red Herring Prospectus (RHP) with the Registrar of Companies. These documents disclose the business, financials, risks, objects of the issue, and more.
3. Announcement of the price band:
The company announces a floor price and a cap price before the issue opens.
4. Anchor investor bidding (if applicable):
In mainboard issues, eligible institutional investors may be allotted shares one working day before the issue opens.
5. Bidding period:
The issue stays open for not less than three working days and not more than ten working days. For book-built issues, the period is typically 3–7 working days and can be extended by up to three working days if the price band is revised (subject to the overall 10-day limit).
Investors place bids for the number of shares and the price they are willing to pay within the band.
6. Book closes, and price is discovered:
The BRLM and the company analyze the demand at various prices and fix the final issue price.
7. Allotment, refunds and listing:
Shares are allotted according to the basis of allotment, unsuccessful applicants' funds are unblocked, and the shares are listed on the stock exchanges, typically on or before the third working day after the issue closes.
Retail investors usually bid through the UPI mechanism or ASBA. For individual investors, UPI can be used for applications up to ₹5 lakh, though the retail category itself is defined as applications up to ₹2 lakh.
What Is a Price Band in an IPO?
A price band is the range between the floor price (lowest) and the cap price (highest) within which investors can bid.
For example, a price band of ₹180 to ₹190 means that bids can be placed anywhere from ₹180 to ₹190 per share. Under SEBI's rules, the cap price should not exceed the floor price by more than 20%, so the band cannot be arbitrarily wide.
For IPOs, SEBI requires the price band to be announced at least two working days before the issue opens (one working day for FPOs), through newspaper advertisements and exchange websites. If the company revises the band during the issue, the bidding period is extended, and investors are informed through public notices and exchange websites.
What Is Cut-Off Price in an IPO?
The cut-off price is the final issue price decided at the end of the book building process. Retail individual investors (and eligible employees, where applicable) can choose to bid "at cut-off". By doing so, they agree to buy shares at whatever final price is decided within the band, rather than naming a specific price.
In practice, a cut-off bid is treated as a bid at the cap price for the purpose of blocking funds, so the amount blocked covers the highest possible price. Cut-off bids remain valid for allotment at any final price within the band. Bidding at cut-off is available only to retail individual investors (and eligible employees, where applicable); other categories must bid at a specific price.
How Does IPO Price Discovery Work?
Price discovery is the heart of the share market IPO pricing process. It works on a simple principle: demand at different price levels reveals what the market is willing to pay.
Throughout the bidding period, the exchanges' systems record every valid bid, covering the quantity and price. When the book closes, these bids are arranged into a demand schedule showing how many shares were sought at each price. The BRLM and the issuer then identify the price at which the entire offer can be sold, considering the quality and spread of demand, and fix the issue price.
Retail investors may revise or cancel their bids until the bidding period ends; QIBs and NIIs cannot withdraw bids and may only revise upwards.
Book Building Process Example: How an IPO Price Is Discovered
The numbers below are purely illustrative and do not refer to any actual IPO.
Suppose a company offers 1 crore shares in a price band of ₹180 to ₹190. By the close of bidding, the book looks like this:
| Bid price | Shares bid at this price | Cumulative demand at or above this price |
| ₹190 | 70 lakh | 70 lakh |
| ₹188 | 20 lakh | 90 lakh |
| ₹186 | 25 lakh | 1.15 crore |
| ₹184 | 30 lakh | 1.45 crore |
| ₹182 | 35 lakh | 1.80 crore |
| ₹180 | 20 lakh | 2.00 crore |
The offer size is 1 crore shares. At ₹190, only 70 lakh shares are sought, which is not enough. At ₹188, demand is 90 lakh, still short. At ₹186, cumulative demand rises to 1.15 crore, which covers the full offer.
So ₹186 is the highest price at which the whole issue can be sold, and it may be fixed as the issue price. Everyone who bid at ₹186 or above becomes eligible for allotment at ₹186, even if they bid higher. The extra amount blocked is released.
In real IPOs, this exercise also accounts for category-wise reservations, anchor allocations, and cut-off bids.
What Happens If Demand Is Higher at the Upper End of the Price Band?
When the issue is heavily subscribed and demand remains strong even at the cap price, the issue price is usually fixed at or near the upper end of the band.
Two things follow:
Allotment becomes competitive: If applications exceed the shares on offer, not every applicant will receive shares. Retail allotment is often done by lottery when the issue is oversubscribed beyond what proportionate allotment can handle.
- Strong subscription does not guarantee listing gains: The listing price is determined by trading on the exchange, and it can be above, at, or below the issue price.
What Happens If an IPO Is Undersubscribed?
An issue is undersubscribed when total bids are lower than the number of shares offered.
Under SEBI's regulations, an issue must receive a minimum subscription (generally 90% of the offer). If it falls short, the issuer must refund the application money, and the IPO does not go through. Where subscription is adequate overall, but one category falls short, the unsubscribed portion may be reallocated to other categories as permitted by SEBI rules, subject to certain conditions. Underwriting arrangements, where applicable, also play a role.
Low subscription is a signal worth noting, but it is one data point. Investors should still read the offer document and assess the company's fundamentals.
Book Building vs Fixed Price Issue
Let’s take a look at the difference between book building and fixed price issue:
| Feature | Book Building Issue | Fixed Price Issue |
| Price | Discovered within a band based on demand | Set in advance by the issuer |
| Investor bidding | Bids placed within the price band | Application at the fixed price |
| Demand visibility | Demand is visible during the issue | Demand is known only after closing |
| Price flexibility | Final price can be lower than the cap | No flexibility |
| Common usage | Standard for mainboard IPOs | Now rare, mostly in smaller issues |
Price Band vs Issue Price vs Listing Price: What's the Difference?
These three terms are often confused:
Price band: The range (floor to cap) announced before the issue within which investors can bid.
- Issue price: The final price per share at which shares are allotted, decided after the book closes.
- Listing price: The price at which the share first trades on the stock exchange. It is set through exchange mechanisms on listing day and may differ from the issue price.
An investor who is allotted shares pays the issue price, not the listing price.
What Is the Role of Investors in Book Building?
Investors are the reason the process works. Their bids create the demand data from which the price emerges. In a mainboard IPO, investors fall into broad categories:
- Qualified Institutional Buyers (QIBs), such as mutual funds and insurance companies. Anchor investors are part of this category.
- Non-Institutional Investors (NIIs), including high-net-worth individuals and corporates bidding above ₹2 lakh.
- Retail Individual Investors (RIIs), who apply for up to ₹2 lakh.
For mainboard IPOs, SEBI prescribes the portions available to each category. The usual allocation is up to 50% for QIBs, at least 15% for NIIs and at least 35% for retail, though the exact structure depends on the issue and is stated in the offer document. Within the QIB portion, up to 5% of the net offer is earmarked for mutual funds.
Before bidding, investors should read the RHP, understand the risk factors, check the objects of the issue, and make sure the investment fits their goals and risk tolerance.
What Is the Role of the BRLM in Book Building?
The Book Running Lead Manager acts as the issue's principal coordinator. Its responsibilities include:
- Conducting due diligence on the issuer and helping prepare the offer documents
- Advising on the structure of the issue and the price band, in consultation with the company
- Marketing the issue to prospective investors
- Managing the bidding process and the order book
- Assisting in determining the final issue price and the basis of allotment
- Coordinating with registrars, exchanges, banks and other intermediaries
BRLMs are SEBI-registered merchant bankers and are accountable under SEBI regulations for their role in the issue.
Common Misconceptions About IPO Book Building
"A higher price band means a better company."
The band reflects the issuer's and BRLM's valuation view. It says nothing definitive about quality or future returns.
"Bidding at the cap price gets me more shares."
Not necessarily. Allotment depends on subscription and category rules, not on bidding higher within the band. Bidding at the cut-off already makes you eligible at the final price.
"I pay the price I bid."
You pay the final issue price. Any extra amount blocked above it is released.
"Oversubscription means guaranteed listing gains."
Listing performance depends on market conditions, valuation, and sentiment on the day. Gains are never guaranteed, and losses are possible.
"The price is fixed by the company alone."
The band is proposed by the company and BRLM, but the final price reflects market demand recorded in the book.
