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Book building and public issues are two methods of raising capital in the primary market. Companies use them to raise funds from the stock markets through an initial public offering (IPO). Both these processes involve the company’s shares being sold to investors, though they differ in how the process is carried out. This article will explore the difference between book building and public issues and discuss their respective advantages and disadvantages.

What is book building?

Book building is a method of pricing securities wherein bids are invited from investors at various prices, typically higher than the floor price set by an IPO HK issuing company. This price discovery method helps ensure that the security or share is priced realistically based on demand and supply dynamics in the market.

The issuing company may offer incentives to investors who bid higher prices to ensure a full subscription to the issue. Book building is commonly used for IPOs and follow-on public offers (FPOs). Furthermore, it determines the price at which a company’s shares will be listed on the stock exchange.

Advantages of book building

Book building has several advantages over traditional methods of public issuing, such as listing on stock exchanges and offering shares for sale through newspaper advertisements. It allows companies to price securities quickly based on current market conditions and demand from investors, which is more efficient than setting a fixed price upfront.

Book building also helps the issuer to raise the maximum amount possible from an issue since there are incentives associated with higher bids, and pricing is determined by the demand for the securities rather than a fixed rate set by the issuer. Finally, it reduces administrative costs associated with issues as all transactions can be conducted electronically, reducing the need for physical paperwork.

What is a public issue?

Public issue is a traditional method of offering securities to the public through newspaper advertisements and listing on stock exchanges, such as BSE or NSE in India. The issuer will set a fixed price at which the shares are offered to investors, which may be higher or lower than the actual market rate depending on demand and supply dynamics. This pricing method only allows flexibility as it does not consider current market conditions and investor sentiment.

Public issue is generally used by smaller companies who may need more resources to use book building technology or want to offer incentives for higher bids. Public issue is the only option available for companies that do not have access to book building technology or the resources to use it.

Advantages of public issue

The main advantage of a public issue over book building is that it can help reduce administrative costs associated with issuing securities since no complex bidding process needs to be carried out. It also allows the issuer to set a fixed price for the shares, reducing market uncertainty and making it easier for investors to make decisions.

Furthermore, it is a much simpler process than book building and can be completed in a shorter period. Another benefit of public issue is that it does not require specialised skills or knowledge to understand the process, making it easier for retail investors to participate. Finally, public issue can be used to ensure that all investors are treated equally since all investors receive the exact pricing regardless of how much they bid.

On the whole

Book building and public issue are two methods of raising capital in the primary markets. Book building is a price discovery method where bids are invited from investors at various prices, while public issue involves offering securities at a fixed rate set by the issuer. Both these processes have advantages and disadvantages, depending on what an issuing company wishes to achieve from its primary market offering. For example, book building may be better suited for companies who wish to raise maximum capital from their issues. In contrast, public issue may be better suited for companies who wish to ensure equal pricing and reduce administrative costs.

Different methods of offering securities in the primary markets have pros and cons. It is up to the issuer to decide which method will be most beneficial for them.