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IPO Book Building Process in India - Explained in Hindi | #17 Master Investor - YouTube
Channel: Asset Yogi
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Namaskar, my name is Mukul and welcome to another important video
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of Asset Yogi's Master Investing Series
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In this video we are going to understand the pricing of IPO.
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When there is an IPO, which stands for Initial Republic Offering.
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When Shares of any company are listed in the market for the first time.
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So how is the assessment done for how many prices are listed,
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that is, how is the final price is decided.
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Generally, in today's date, you will see that all IPOs come through the Book Building process,
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which SEBI also recommends.
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Within this, the demand is assessed within a particular Price range.
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And how that final offer price is decided,
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that is what we are going to understand in this video,
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also, we will see why SEBI does not recommend the Fixed Price Issue.
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Or why investors who want to invest are not assigned shares in an IPO.
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Finally, we will also understand the Timeline of a Public Issue,
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when a prospectus is released,
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when the Issue is opened,
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in how much time it closes
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and in how much time it takes to list.
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So you must stay in this video till the last.
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Friends, if you want to learn Stock Investing
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then you can follow our Master Investor Series.
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Which is absolutely free,
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you will find the link of the playlist in the description below.
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Apart from this, we have a very common query,
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that if we want to invest or trade in Shares,
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then where should we open a demat or trading account for that?
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So I recommend that you can open your account with any discount broker.
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Where Brokerage charges are very less and delivery charges are absolutely zero.
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the latest offers, recommendations and links
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Where should you open a Demat account, you will find it in the description below.
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Before starting the video, let me tell you that I have already
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covered a video on the basics of IPO.
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Also a video has been made on how the share
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allotment process of IPO is done, who will be assigned shares
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and who will not.
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So, you must watch those 2 videos
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So this video is not going to cover the basics of IPO in too much detail,
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although I will definitely summarize in between, then some things may repeat,
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but I would recommend that you must watch both videos.
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So let us continue our old example
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when there is a Public Issue,
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So you have two options, see if ABC Toys is a company it is already listed.
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And that farther wants to come with an offer
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the company wants to dilute their state or raise money from the public.
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So we call it FPO i.e. Further Public Offer or Follow on Public Offer.
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If you can say either of the two, then we call it FPO in short.
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If a company is listing for the first time, then we call it Initial Public Offering i.e. IPO.
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The process between both is the same, let's see what is the process.
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whichever company wants to list hires an investment bank
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which is a Book running lead manager.
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That is, who will lead the entire process,
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one Investment bank is hired.
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And if the size of Issue is too big then the syndicate members are also taken along.
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For example, let's assume ICICI has been appointed as the lead manager.
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So it may not be able to do all the marketing, it may not be able to sell the whole Issue alone.
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So will bring many other banks also and will make them syndicate members
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and assign a quota that you sell this much Portion, I will sell this much Portion
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And the rest of the syndicate members will sell this much
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After that Due Diligence and Filling are done,
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it is the investment bank that processes the entire Due Diligence and Filling.
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And in this the first process is of Underwriting,
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that is, if Issue is suppose to be two and a half thousand crores
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and it does not sell the whole,
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So, the portion which is not sold,
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because it is underwritten by the investment banks,
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then the investment bank will have to buy that much portion,
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and later sell it in the market.
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So, it's a risk for investment bank,
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So, it is very important for the investment bank that the pricing should be right.
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Because if the pricing goes up then the issue may not sell,
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may not get much response.
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If Pricing comes Down, then you are leaving a lot of the money on the Table,
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So, the company would not want to leave a lot of money on the table,
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definitely, some money has to be left in the form of returns for the Investors.
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So what should be the right pricing, this is what we are understanding in this video.
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So, next process here is Red Herring Prospectus.
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In the prospectus, the investment bank gives all the details,
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of what type of business it is, its strength, its weaknesses,
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and after that comes the compliances and filings,
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that is, whatever is the compliances of SEBI,
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whatever is to be filed, NSC or BSC Wherever it is being listed,
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all these filings.
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And finally comes the third process of Pricing,
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which we are talking about in this video.
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And here first Valuation is done
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The Investment bank does a valuation on its own i.e. applies the formula.
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so what are the formulas applied,
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There are only two main ways.
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One is the Comparables.
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i.e. Whichever company is getting listed
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In our case, let's say if ABC Toys Ltd is getting listed.
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then its competitors will be studied.
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And their price will be seen that how much is the price of shares according to earning
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So here your Price Earning Ratio, P/B ratio, Price to Cash Flow Ratio
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All these comparables i.e. this financial ratio is analyzed,
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a valuation is made according to that
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Valuation is also made by the second discounted cash flow method
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i.e. how are the Earnings and growth going to be in the future of the company,
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Accordingly, it is discounted, What value should be in today's date,
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Now I will do a video on them in detail sometime again.
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Now let us understand the pricing here that how the pricing of the IPO is done.
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So here, once the valuation was done by the investment bank.
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So the next step that comes here is What kind of Issue to bring,
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then there are two types of Issues,
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one is a Fixed price Issue and the other is a Book building Issue.
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In Fixed price issue, Price is fixed, there is no bidding,
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there it is take it or leave it,
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i.e. this is the offer price, who wants to invest can invest
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who doesn't wants to invest don't invest,
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So because the proper demand is not assessed,
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This is the reason why Book building Issue is highly recommended.
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And in today's date you will see that most of the Issues come from the book building process itself.
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So, we will still see the Fixed price Issue, Let's Summarize it.
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Suppose if this company comes with a Fixed Price Issue.
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So let's say, it says that we have to raise 250 crore from public,
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10 crores are the total shares,
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every share is worth 250 rupees,
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If you multiply 250 by 10 crores, you will get 2500 crores.
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and here one lot size is decided,
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That is, only a minimum of 50 shares can be bought by anyone.
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Whoever subscribes in this IPO.
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So, if you multiple 50 shares with 250,
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So the minimum investment for a person comes to Rs 12,500.
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If you want to bid on any number of lots, then he can list his number there.
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That is, if you take 5 lot, then 5 x 50 x 250 will be your investment.
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Here in Fixed price Issue there is a risk,
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The risk here is a bit high for the Issuer and Underwriter.
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Because if suppose people do not even subscribe,
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it means valuation has not done at all, So there is a risk because of it.
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Because the price that is being discovered here is being based on only formula,
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so here because the qualitative factors are not assessed very well,
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Also, the market forces have not been considered much, due to which there is a risk,
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At the same time, if we talk about book building Issue,
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then a fixed price is not kept here.
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understand this carefully, that here the price band is kept,
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the company says that we are keeping the minimum Floor price of 225
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and we are keeping the Cap price of 250.
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So here is the price band i.e. you can put biding at 225 to 250.
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whoever wants to subscribe in that Issue can place their bid
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There can be a difference of only 20% between the Floor price and the Cap price.
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That is, the Cap price can be only 20% more than the Floor price,
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I have talked about all this stuff in my old videos as well.
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But still, we have summarize it here
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So if this price band is being kept
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So here Issue size can't be fixed
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it's range is up to 2,250 crore to 2,500 crore.
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As much as the company can raise the money,
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So here the minimum investment, if the lot size is 50 shares,
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then the range of minimum investment will come up to 11,250 - 12,500.
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Then see here what is the benefit,
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one the risk is reducing a little bit here of the Issuer and the Underwriter.
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because he is assessing the demand
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How much more investment will be at what price,
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and how will that cut off price be decided, we will also talk about it soon.
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But here how the price is being discovered,
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along with the formula, the market demand is also being assessed.
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That is, qualitative factors will also be included in it, in the decision-making.
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when this huge amount of people will bid on it,
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they will also analyze the qualitative factors,
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and also the market forces will also be a factor in the pricing.
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For this reason the Book building process is highly recommended,
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now book building Issuer if we take it in our example,
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let's say the price band has been kept at Rs 225-250
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If lot size is kept of 50 shares.
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So it's not like you can bid at any price like 225-226-227-228.
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Here a tick size is kept i.e. in how many increments you can bid,
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So if suppose the tick size is ₹5.
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So how will the biding be 225 or 230, 235, 240, and so on
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when the biding is done in this way,
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it will be assessed according to how much demand has come at how much price.
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For example, the bid price is 225, you can see this if the bid price is 225 to 250.
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This is our Floor price and this becomes our Cap price.
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So here suppose, there is a demand on 250 rupees let's say
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demand is of 4 crore of 4 crore shares
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on 245 it's 5 crores, on 240 it's 2.5 crores and so on.
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So what will the investment bank do now, because it want to sell 10 crore shares,
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then how easily they will be sold.
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So see here 4 crore shares are ready to be sold for 250 rupees.
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How far will 10 crores fill,
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see if the price is up to Rs 240, then 10 crores will be fully covered.
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Look here, 4 crores + 5 crores = 9 crores + 2.5 crores
i.e. 11.5 crores
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So if the price of 240 is set then 10 crore shares can be easily sold.
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So what will the investment bank does here, it will fix the cut-off price of 240.
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Now see it is not necessary that the investment bank and the Issuer
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i.e. ABC Limited Company which is ABC Toys Limited.
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It is not necessary that he will keep the price of 240 rupees,
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but it is a fair play as the demand is being met easily here on 240 rupees,
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So it seems like a fair price.
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but, if suppose someone has done an aggressive biding, he can be removed to the side
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plus some more qualitative factors can be studied,
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The final price is ultimately what the investment bank decides
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In Consultation with Issuer
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So here if we assume that everything else is fine and give the final cut off price of 240 only.
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So you understand who will get the share and who will not.
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So whoever bided over 240, Shares will be allotted to these people
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And at what price it will be allotted only on 240.
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Whoever you did the biding on 245,
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then the rest of the money will be refunded according to ₹ 5.
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The person who did the biding at the rate of 250 will be refunded the money at the rate of ₹ 10.
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And those who had bid below 240, these people will not be allotted shares.
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Now here we understand that there is a slight difference between a retail investor and an institutional
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or non-Institutional Investor as to what price they can bid on.
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If we talk about the retail investor, then he can directly bid on the cut off price.
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That is, an option comes directly to you, there you can tick that
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I am ready to buy shares at whatever the cut off price is
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So you don't necessarily have to bid on Cap price i.e. maximum price
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Now simply say that we are ready to bid on whatever the final price is.
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But this option is not available for QIB i.e. Qualified Institutional Buyer
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and Non Institutional Investors.
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Apart from this, the option of revising the bid is also available only with the Retail Investor.
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But this option is not available for QIB and non-Institutional investors.
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So here I hope you got the pricing is clear here.
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Now here we understand another case, suppose if there is not enough demand
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in Issue,
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let's say there is a demand of 1 crore on 250 rupees
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If you add this entire demand
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So see here the demand is only of 6.5 crores share
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because there is not enough demand,
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So what can the company do in such a case, it can revise the price band
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For example, they say that if there were not enough people for the price of Rs 250,
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then if we keep the price less then there we will be enough people.
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So let's say she revises the price band from 200 to 225 rupees.
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So here the bidding period also has to be extended by minimum 3 working days
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So this bidding period of 3 working days gets extended
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The maximum bidding period you can do is up to 10 days.
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So from this now our next question arises that how is the complete timeline of the Issue,
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then we also understand this once
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First of all, the prospectus is Issued,
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in which the price band is clearly written.
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Also, it is advertised in the Newspapers,
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Price bands are also mentioned in all the popular news papers.
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After this your Issue becomes opened,
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After that Issue is closed and finally company is listed.
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How much time it takes,
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from the prospectus to the Issue open, a minimum period of 5 days is kept,
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From Issue open till Issue closes
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in this case, if suppose it's Fixed price Issue.
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So it takes 3 to 10 days
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Minimum bid is opened for 3 to 10 days,
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If it is Book building Issue, then the minimum is kept here for 3 to 7 days.
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Also, an additional day of 3 days has been kept,
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if a company has to revise the price band, then the bidding period has to be increased by 3 days.
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So maximum you understand that Issue is not opened for more than 10 days.
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Once the issue is closed, the company gets listed within 3 days.
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Earlier this time used to be a little more, earlier it was 6 days.
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SEBI has now reduced it,
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Because in today's date all the payment is automated.
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You can also invest in IPO through UPI.
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I hope in this video I have covered all the things that how is the pricing of IPO
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what is the complete timeline of Issue.
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If you like this video then please like and share it
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If you have any query or suggestion related to this video from this channel
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And also tell your friends and family members about Master Investor Series.
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See you in the next such informative video.
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till then keep learning, keep earning and be happy.
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