Know Your Market: Book Building

Kathmandu: The Securities Board of Nepal (SEBON) has recently implemented the Book Building Method in the Initial Public Offering (IPO) as there has been a long-standing debate on the implementation of the Book Building Method in the Primary Market of Nepal.

The Book Building Bylaws, 2077, were implemented for the execution of the Book Building Method in the Securities Registration and Issue Rules of the Nepal Securities Board. As soon as the Nepal Securities Board introduced the book-building method to the initial public offering, investors became interested in how this method is applied to the stock market and how it affects the market.

Generally speaking, the book-building method is the method of determining the actual price based on the demand of qualified institutional investors without the issue of Rs. 100 per unit. In other words, the book-building method is the real and fair pricing method for securities to be issued on the primary market based on the demand of qualified institutional investors.

Even if this method is followed, IPOs will be issued at face value as before. Board Chairman Bhishma Raj Dhungana has already stated that the method used for issuing IPOs is not mandatory for all companies.

The Book Building Method is considered to be an important means of mobilizing capital through other companies, in particular real sector companies, to demonstrate the belief that the market can accurately reflect the economic situation of the country. It shall determine the true and fair value of the securities and shares to be issued on the primary market.

Organizations wishing to issue public securities will be eligible to issue premium securities through the Book Building Method only after complying with the following conditions.

• Must be in business or commercial production for a minimum of 3 years.
• Must earn a net profit during the last two financial years at least.
• The cash flow from business activities should be positive for the last two fiscal years at least.
• It should guarantee at least 50 percent of the securities to be issued.
• The amount that should be collected by public eviction should be at least Rs 250 million.
• The organization’s core shareholders and operators are not on the credit information center’s blacklist.

Eligible Institutional Investors: The following institutions will be able to participate in the bidding process by conducting their business in Nepal following the prevailing law.

These include merchant bankers and portfolio managers, collective investment fund schemes, market makers/dealers, banks and financial institutions, insurance companies, specialized investment funds, and other stock market organizations. Other organizations that have been approved by the Board may also participate.

The adoption of the IPO book building process is intended to issue a premium to IPO. Book building is a sort of auction process. In this system, limited auctions are made out of the total securities that the company wants to issue publicly.

The price is determined by issuing the remaining securities based on the premium determined on that basis.