It is the process of determining the price at which an Initial Public Offering is offered. The book is filled with the range of prices that investors indicate they are willing to pay per share, and when the book gets closed on the closing of primary issue, the issue price is determined by an underwriter or merchant banker by analyzing these values. It is the solicitation of tentative interest from likely institutional and individual investors by the investment banking syndicate of a new security issue before the offering has been approved by the Securities and Exchange Commission.

The system of following a book building method for offering new issues through primary markets has become more popular over the conventional method of pre-determining the issue price by merchant bankers and companies, as the same enables more flexibility and transparency in the system of determining the issue price for a primary issue floated in the markets, by giving the potential investors a larger window to participate in helping the company/ merchant banker arrive at the final issue price, according to the demand and supply for instrument, at different price points.

The relatively mature capital markets across the globe have established this as a simple and more acceptable and popular method for floating of new issues, rather than arbitrarily determine the issue price at a price point, in advance to the IPO, by way of expected demand for the issue, and the premium it may be able to command. However, in some of the emerging markets where capital markets have not yet become mature enough, book building method for IPO’s is still at a nascent stage.

Book building method is a relatively new phenomenon of modern pricing mechanism for IPOs, which encourages companies to enlist with stock exchanges as it ensures fair pricing of initial public offerings (IPO). While in some of the developed countries and in emerging countries, the practice of following a book building method for raising fresh capital by companies has been in existence and finding more takers over the years, the relative nascent markets like Bangladesh have tried to introduce this system for greater participation of retail/ institutional investors in price discovery only over the past two years. It is still not mandatory, but only optional for companies in Bangladesh, to choose between conventional methods of pricing of IPO without offering much of price discovery leverage to investors. It looks for a more scientific and transparent and well acceptable book building method, for pricing the new issues. The key difference between book-building and other IPO methods is that the book-building method gives underwriters control over the allocation of shares whereas others do not. Generally initial price band is fixed on the basis of past performance, expected future earning of the issuer and the P/E (Price Earning Ratio) ratio of other peer group companies of that industry.

History of BB method in Bangladesh:

The RAK Ceramics (Bangladesh) was the first company to offer primary shares using the book building method after it got approval from the SEC. the company went for an IPO of 34.51 million equity shares of 10 Taka each at a price range between 40 Taka and 48 Taka each in April last year. In Bangladesh, at the outset, the book building method for IPO pricing was initially encouraged for companies offering securities worth Tk 30 crore or more. However, subsequent to Rak Ceramiks (Bangladesh), since then, in the year 2010, the other companies to have successfully tried out raising fresh funds through the platform of book building were M.I.Cements, which offered its IPO of 30 million shares at an indicative price of Taka 93-111 each.

Suspension of BB method:

However, just after a short stunt of little under one year, the SEC in Bangladesh used its regulatory powers to suspend the use of book building method for raising fresh funds through IPOs’ late in January 2011 till further orders, since in case of some of the companies, the stock prices were manipulated by following the book building method as a tool after some of the companies initially followed the same method. The regulator has been trying to evolve a better method of floating the IPOs, to avoid any such practice of possible misuse of the system, for the manipulation, as has been noticed in few cases.