What is IPO book building process? - The Economic Times

When setting the initial price range for an Initial Public Offering (IPO), there is always a degree of uncertainty around the actual market value. As the IPO date approaches, companies are aware that investor demand could push share prices above their intended levels and put in place measures to protect themselves from this possibility and ensure they manage their capital effectively.

What does it mean to introduce a set floor price?

One such measure is to introduce a ‘floor price’, which forms part of book building, allowing an IPO to close even if there is no interest from investors at this level. Companies have increasingly adopted this as transparency, and fair pricing becomes more crucial elements of global financial markets. As transparency becomes key in today’s markets, many Asian companies have used floor prices to provide certainty for investors.

A typical ‘book building’ process is for a company planning to go public in an Initial Public Offering (IPO) to release a draft prospectus, listing the price range within which guaranteed orders are collected from underwriters and how much money they expect to raise.

Different companies set different types of floor prices when book building. Some companies see this as the minimum return they want from the IPO, while others use it to test market demand before setting their final issue price. At times, the final share price might end up being too low or high, based on where orders were collected in that initial floor-setting exercise.

A recent example of setting a floor price

The most recent example is China Commercial Credit, which set a floor price for its Hong Kong IPO of HK$15 despite being open to an offering between HK$11 and HK$16. The company received three times the number of applications than shares on offer but used the ground rules to protect itself against any pre-IPO jitters in investor demand 

This is not the first time that companies in Asia have adopted floor prices; Cheung Kong Holdings, one of Asia’s top property developers by market capitalization, introduced one in late July with its US$2 billion IPO after initially targeting midpoint levels of HK$34-HK$40 per share. Other notable examples include insurers AIA Group Ltd and Ping An Insurance Group Co of China Ltd.

However, floor prices have not been part of the successful listing process in some instances. For instance, Country Garden Holdings Co. opened its range at HK$8.80-HK$11.50 but ended up pricing within guidance at the bottom end of the range due to strong demand. The property developer also didn’t include a floor price in its book building approach 

Asian IPO companies tend to release floor prices for their book building exercises to test how much demand there is for their shares. The ‘floor’ gives them a sense of this demand before they price the offer and can help determine how much money they would like to raise.

An easy way for traders to work out what demand there is for an IPO is by looking at the number of shares that are applied for; if the number of application forms exceeds 20% of shares on offer (for instance, 10 million applications for 10 million shares), it usually indicates strong public interest.

Bottom Line

The beauty of this move is that it provides investors with greater certainty, thereby ensuring Hong Kong remains an attractive destination for capital raising activity and providing long-term value for both issuers and investors. New investors are advised to use an experienced and reputable online broker from  Saxo Hong Kong and sign up for their demo account and practise different trading strategies before investing your money.