Book Building Process: A Mechanism for Efficient Pricing in India

Abstract

The most significant reform in the Indian capital market is the introduction of issuing shares through the Book Building process that seeks efficient pricing. The paper attempts to examine the importance of Book-Building method in issuing shares in secondary market, estimate and compare immediate and long term performance of the issues made through Book-Building and Fixed Price method, examine the size of the companies that opted for Book-Building method, and examine whether Book-Building method is less under-pricing than Fixed Price method. The data and methodology adopted here take the project through secondary review. To meet up objectives of the study, four hypotheses are framed and tested for which T-test, Karl's Coefficient of Correlation, Mean and Median are being adopted. Results indicate that Book-Building mechanism is preferred to Fixed Price method for price discovery. However, Fixed Price method is relatively more promising in long term as compared to the issues made through Book-Building process. The study also concludes that most of the bigger issue sizes companies had opted for book building mechanism and that it has encountered less under-pricing when compared with Fixed Price offer.