UNIT-V EQUITY MARKETS

Q: Explain in detail the concept of Equity Market and its importance.

Introduction

The equity market, also known as the stock market or share market, is a key component of the financial system where shares (ownership interests) of companies are issued and traded. It provides a mechanism for companies to raise long-term funds for business expansion and for investors to participate in the profits and growth of these companies.

In an equity market, investors buy shares of a company and, in return, become part-owners. This ownership allows them to share in the profits (through dividends) and benefit from increases in share prices.

Structure of the Equity Market

The equity market in India is divided into two main segments:

Primary Market
- This is the market where new securities are issued for the first time.
- Companies raise capital by offering shares to the public through Initial Public Offerings (IPOs) or Follow-on Public Offers (FPOs).
- Merchant bankers, underwriters, and registrars play a key role in this process.
- Example: When LIC of India launched its IPO in 2022, it raised funds through the primary market.
Secondary Market
- Once shares are issued in the primary market, they are traded between investors in the secondary market.
- This market provides liquidity and price discovery for securities.
- The major stock exchanges in India are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).

Participants in the Equity Market

The main participants include:

Individual investors
Institutional investors (mutual funds, insurance companies, pension funds)
Foreign Institutional Investors (FIIs)
Stockbrokers and intermediaries
Regulatory bodies such as SEBI

Functions of the Equity Market

Mobilization of Savings:
Converts household savings into productive investments.
Capital Formation:
Helps companies raise equity capital for growth and expansion.
Liquidity:
Provides an easy exit option for investors by allowing the buying and selling of shares.
Price Discovery:
Determines the fair value of securities based on demand and supply.
Wealth Creation:
Enables investors to earn returns through dividends and capital appreciation.
Corporate Governance:
Public ownership brings transparency and accountability in management.

Importance of Equity Market in the Economy

Promotes Economic Growth:
By channelizing funds into productive sectors, it boosts industrial and infrastructure development.
Encourages Entrepreneurship:
Startups and new ventures can raise equity funding to expand their business.
Facilitates Foreign Investment:
A well-functioning equity market attracts global investors, increasing foreign exchange inflows.
Indicator of Economic Health:
Stock indices like Sensex and Nifty reflect investor sentiment and the overall performance of the economy.
Employment Generation:
Expanding businesses funded through equity capital create jobs in multiple sectors.

Recent Developments in the Indian Equity Market

Digital Trading Platforms: Investors can trade instantly using online and mobile platforms.
Increased Retail Participation: More individuals are investing through SIPs and online brokerage apps.
Rise of Startups and Unicorns: Many tech startups like Zomato, Nykaa, and Paytm entered the market through IPOs.
T+1 Settlement Cycle: Faster transaction settlements have improved efficiency and liquidity.
Regulatory Reforms: SEBI has strengthened disclosure norms and investor protection mechanisms.

Conclusion

The equity market plays a vital role in the development of an economy. It bridges the gap between investors with surplus funds and businesses that need capital. A vibrant and transparent equity market not only fuels corporate growth but also reflects the confidence and health of the nation’s economy.

In India, with increasing financial literacy, digital accessibility, and regulatory strength, the equity market has emerged as a key driver of economic progress and wealth creation.

Q: Explain the Development of Equity Culture in India / What are the Major Developments of Equity Culture in India?

Introduction

The term equity culture refers to the habit or practice of investing in shares of companies by individuals and institutions as a regular form of saving and wealth creation. It reflects the extent to which people participate in the ownership of businesses through the stock market.

In India, the equity culture has developed gradually over the decades—from a period of low investor awareness and limited market access to today’s scenario of widespread participation, digital trading, and growing confidence in capital markets.

Early Stage: Limited Awareness (Before 1990s)

Before economic liberalization, India’s equity market was small, underdeveloped, and dominated by a few large industrial groups.

The Bombay Stock Exchange (BSE), established in 1875, was the only major stock exchange.
Most investors preferred bank deposits, gold, and real estate over equity shares due to lack of knowledge and trust.
Market operations were largely manual, and price transparency was poor.

Hence, during this phase, equity culture was very weak in India.

Phase I: Economic Reforms and Liberalization (1991–2000)

The economic reforms of 1991 marked a turning point in the Indian financial system. Several initiatives promoted capital market development and investor participation:

Establishment of SEBI (1992):
The Securities and Exchange Board of India (SEBI) was set up to regulate and protect investor interests. This increased market transparency and trust.
Introduction of NSE (1994):
The National Stock Exchange (NSE) brought computer-based online trading, replacing the traditional floor-based system.
Dematerialization of Shares:
The introduction of DEMAT accounts and Depositories (NSDL, CDSL) in the late 1990s eliminated paper certificates and made trading safe and convenient.
Entry of FIIs and Mutual Funds:
Foreign Institutional Investors and mutual funds were allowed to participate, improving liquidity and professionalism in the markets.

This phase witnessed a sharp rise in retail participation and the beginnings of an investment culture.

Phase II: Modernization and Technological Transformation (2000–2015)

This period saw technological advancement and financial innovation.

Online Trading Platforms:
Internet-based and mobile trading apps made investing easier for small investors.
Rise of Mutual Funds and SIPs:
Systematic Investment Plans (SIPs) became popular as a disciplined way of investing in equities.
Awareness Campaigns:
Investor education programs by SEBI, AMFI, and stock exchanges promoted financial literacy.
Corporate Governance Reforms:
Improved transparency and disclosure norms enhanced investor confidence.

These developments led to a steady broadening of the investor base in India.

Phase III: The Digital and Retail Revolution (2016–Present)

In recent years, India has experienced an explosion in retail participation in equities:

Demat and Online Accounts Boom:
Millions of new demat accounts were opened through platforms like Zerodha, Groww, Upstox, and AngelOne.
Rise of Startups and IPOs:
Companies like Zomato, Paytm, Nykaa, and Mamaearth raised funds through public issues, attracting young investors.
Simplified KYC and UPI Integration:
Easy digital onboarding and instant payment systems have made stock investing seamless.
Influence of Social Media and Financial Education:
Increased financial literacy through social media, YouTube channels, and fintech education has encouraged participation.
Shift from Traditional Savings to Market Investments:
Low interest rates on fixed deposits have driven investors toward equities and mutual funds for higher returns.

As a result, India now ranks among the top countries in retail investor growth.

Importance of Developing an Equity Culture

Encourages Long-Term Savings and Investment.
Provides Capital for Corporate Expansion.
Enhances Financial Literacy and Inclusion.
Creates a Sense of Ownership among Citizens.
Supports National Economic Growth.

Challenges in Strengthening Equity Culture

Lack of awareness in rural areas
Volatility and market speculation
Risk aversion among small investors
Need for stronger investor protection mechanisms

Conclusion

The development of equity culture in India has been a gradual yet remarkable journey. From a limited investor base to a dynamic, technology-driven market, India has made significant progress in democratizing equity ownership.

Today, with rising incomes, financial literacy, and digital platforms, the equity culture is expected to deepen further, making the stock market a key driver of economic growth and wealth creation in the country.

Q: Define Primary Market. Explain the Functions of the Primary Market.

Introduction

The Primary Market, also known as the New Issue Market (NIM), is the segment of the capital market where new securities are issued and sold for the first time.
It provides a platform for companies, governments, and public sector institutions to raise long-term funds directly from investors.

In the primary market, the funds raised go directly to the issuing company, unlike the secondary market, where existing shares are traded among investors.

Definition

According to the Securities and Exchange Board of India (SEBI):

“The primary market is that part of the capital market which deals with the issuance of new securities by companies or government entities to raise fresh capital.”

In simple terms, the primary market helps channel savings from investors to entrepreneurs and organizations that need funds for growth, expansion, or new projects.

Functions of the Primary Market

The primary market performs several important functions that contribute to capital formation and economic development:

1. Facilitation of Capital Formation

The main function of the primary market is to help companies and governments raise long-term funds for various purposes like expansion, modernization, or new ventures.
It converts savings of individuals and institutions into productive investment.

Example:
When LIC of India launched its IPO in 2022, it raised over ₹21,000 crores to meet capital adequacy requirements.

2. Offering New Securities to Investors

The primary market provides a channel for issuing new shares, debentures, bonds, and preference shares to the public.
The common methods of issuing securities include:

Public Issue (IPO/FPO)
Private Placement
Rights Issue
Bonus Issue

This enables companies to meet their funding requirements while giving investors an opportunity to earn returns.

3. Promotion of Industrial Growth

By providing funds for expansion and modernization, the primary market helps new and existing industries grow.
This leads to an increase in production, employment, and national income.

4. Encouragement of Broad-Based Ownership

Public issues in the primary market encourage wider ownership of shares among individuals, institutions, and foreign investors.
This leads to the democratization of capital and reduction in concentration of wealth.

5. Price Determination of Securities

The price at which securities are issued is often determined through methods like book-building or fixed-price offers.
The process reflects the true market demand and helps establish a fair valuation of the company.

6. Providing Liquidity through Listing

Once securities are issued in the primary market, they are listed on stock exchanges like the BSE or NSE.
After listing, these securities can be freely traded in the secondary market, ensuring liquidity for investors.

7. Role of Intermediaries

Various intermediaries play a vital role in the smooth functioning of the primary market, such as:

Merchant Bankers / Lead Managers
Underwriters
Registrars and Transfer Agents
Brokers and Bankers to the Issue

They ensure compliance with SEBI regulations and efficient management of the issue.

8. Regulation and Investor Protection

The primary market is regulated by SEBI, which ensures:

Transparency in issue procedures
Proper disclosure of company information
Fair pricing mechanisms
Protection of investor interests

This builds trust and confidence among investors.

Conclusion

The primary market plays a crucial role in the process of capital formation and economic development. It serves as a bridge between savers and entrepreneurs by mobilizing savings into productive investments.

A well-developed and transparent primary market enhances the flow of funds to industries, encourages public participation, and contributes significantly to the overall growth of the financial system and the economy.

Q: Explain the Methods of Raising Capital in the Primary Market.

Introduction

The Primary Market, also known as the New Issue Market (NIM), is where new securities such as shares, debentures, and bonds are issued for the first time.
It provides an opportunity for companies, government bodies, and public sector enterprises to raise long-term capital directly from investors.

Companies can raise funds in the primary market through several methods of issue, depending on their capital needs, ownership goals, and regulatory requirements.

1. Public Issue

A public issue is when a company offers its shares or debentures to the general public for subscription through a prospectus.

There are two types of public issues:

(a) Initial Public Offer (IPO):

It is the first-time issue of shares by a company to the public.
The main objective is to raise equity capital and get listed on a stock exchange.
Example: LIC, Zomato, Nykaa, and Paytm launched IPOs to raise funds and expand operations.

(b) Follow-on Public Offer (FPO):

When an already listed company issues additional shares to the public to raise more capital.
Example: ONGC and NTPC have raised funds through FPOs.

Importance: Public issues help companies build capital and public visibility while giving investors ownership in the business.

2. Rights Issue

A rights issue is an offer made by a company to its existing shareholders, allowing them to purchase additional shares in proportion to their existing holdings, usually at a discounted price.

Key Features:

Maintains the control of existing shareholders.
No dilution of ownership to outsiders.
Faster and less expensive compared to an IPO.

Example: Reliance Industries and Tata Steel have raised funds through rights issues.

3. Private Placement

In a private placement, the company issues securities directly to a select group of investors, such as financial institutions, mutual funds, banks, or high-net-worth individuals (HNIs), rather than the general public.

Types:

Preferential Allotment: Issuing shares to specific investors at a pre-decided price.
Qualified Institutional Placement (QIP): A method where listed companies raise funds from qualified institutional buyers (QIBs) without a public issue.

Advantages:

Faster, less regulated, and less costly than a public issue.
Useful for companies that need quick funding or do not wish to go public immediately.

Example: HDFC Bank and Infosys have raised funds via private placements.

4. Bonus Issue

A bonus issue is when a company issues free additional shares to existing shareholders out of its accumulated profits or reserves.

Purpose:

To reward shareholders.
To convert retained earnings into share capital.

Example: TCS, Infosys, and Wipro frequently announce bonus shares.

5. Offer for Sale (OFS)

In an Offer for Sale, existing shareholders (often promoters or institutional investors) sell their shares to the public through the stock exchange platform.

Features:

The company itself does not receive funds; instead, the proceeds go to the selling shareholders.
It’s a transparent and regulated process monitored by SEBI.

Example: The Government of India used the OFS method to sell its stake in Coal India and NTPC.

6. Preferential Issue

A preferential issue is the issue of shares or convertible securities to a select group of investors at a pre-determined price on a preferential basis.

Example: Promoters may infuse capital into their own company through preferential allotment to strengthen financial stability.

7. Book Building Method

In this method, the price of shares is not fixed in advance. Instead, a price band is announced, and investors bid for shares within that range.
The final issue price is determined based on demand and investor response.

Example: Most modern IPOs in India, such as those of Zomato or LIC, use the book-building process.

8. E-IPO (Electronic Initial Public Offer)

An E-IPO allows investors to apply online for new issues using digital platforms and UPI integration, ensuring transparency and efficiency.

Example: The IPOs of Nykaa and Zerodha-backed companies used the e-IPO process extensively.

Functions Supported by These Methods

All these methods aim to:

Mobilize long-term funds.
Encourage public participation.
Improve liquidity in the securities market.
Strengthen industrial and economic growth.

Conclusion

The Primary Market serves as the foundation of the capital market, facilitating the flow of funds from savers to business enterprises.
Through different methods — IPOs, rights issues, private placements, and others — it helps companies mobilize resources efficiently while offering investors opportunities for wealth creation.

A well-regulated and transparent primary market, supported by SEBI’s guidelines, ensures investor confidence and contributes to the overall financial development of the nation.

Q: What are the Different Products Issued in the Primary Market?

Introduction

The Primary Market (or New Issue Market) is the segment of the capital market where new securities are issued and sold to investors for the first time. It enables companies, government bodies, and public sector undertakings to raise long-term funds for expansion, diversification, or modernization.

In this market, various types of financial products (securities) are issued to meet the diverse needs of both issuers and investors.

1. Equity Shares

Definition:
Equity shares represent ownership in a company. Holders of equity shares are the real owners and have voting rights in the company’s affairs.

Features:

Dividend is not fixed; it depends on profits.
Equity shareholders bear the highest risk but also have unlimited profit potential.
They have residual claims on assets after all obligations are paid.

Example:
Companies like Reliance Industries, Infosys, and TCS issue equity shares to raise permanent capital.

2. Preference Shares

Definition:
Preference shares are a hybrid form of security having features of both equity and debt. Holders receive a fixed dividend before any dividend is paid to equity shareholders.

Features:

Preferential right in payment of dividend and repayment of capital.
Generally no voting rights.
Can be cumulative, non-cumulative, convertible, or redeemable.

Example:
Banks and financial institutions often issue preference shares to strengthen their capital base.

3. Debentures / Bonds

Definition:
Debentures or bonds are debt instruments issued by companies or governments to borrow money from the public for a fixed period at a fixed rate of interest.

Features:

Debenture holders are creditors, not owners.
Interest is payable even if the company makes no profit.
They can be secured or unsecured, convertible or non-convertible.

Example:
NTPC, NABARD, and Indian Railways Finance Corporation (IRFC) issue bonds and debentures to raise funds.

4. Public Deposits

Some companies raise funds by accepting public deposits directly from investors for a fixed tenure at a specified interest rate.

Features:

Simple and cost-effective method of raising capital.
Offers fixed returns to investors.
Regulated by the Companies Act, 2013 and RBI guidelines.

However, this method is less common now due to strict regulatory norms.

5. Mutual Fund Units

Definition:
Mutual funds pool savings from investors and invest in diversified portfolios of securities.
When a mutual fund launches a New Fund Offer (NFO), it is done through the primary market.

Features:

Professionally managed.
Offers diversification and liquidity.
Suitable for small investors.

Example:
SBI Mutual Fund and HDFC Mutual Fund often raise funds through NFOs.

6. Government Securities (G-Secs)

The Central and State Governments issue long-term securities in the primary market to finance fiscal deficits and development projects.

Features:

Low risk and high safety.
Fixed or floating interest rates.
Issued through auctions conducted by the RBI.

Examples:
Treasury Bonds, State Development Loans (SDLs), and Sovereign Gold Bonds (SGBs).

7. Commercial Papers (CPs) and Certificates of Deposit (CDs)

These are short-term instruments issued in the money market by companies and banks respectively, but when first issued, they also pass through the primary market.

Commercial Papers: Issued by corporates to meet short-term needs.
Certificates of Deposit: Issued by banks to attract time deposits.

8. Depository Receipts (DRs)

Indian companies raising funds abroad may issue:

Global Depository Receipts (GDRs)
American Depository Receipts (ADRs)

These are equity instruments issued in foreign markets and represent ownership in Indian companies.

Example:
Infosys and ICICI Bank have raised funds through ADRs/GDRs.

9. Convertible Securities

These are hybrid instruments that can be converted into equity shares at a later date.
They include Convertible Debentures, Convertible Preference Shares, and Warrants.

Example:
Tata Motors and L&T have issued convertible debentures in the past.

10. Exchange-Traded Funds (ETFs)

Definition:
ETFs are investment funds traded on stock exchanges, holding assets like stocks, bonds, or gold.
They are issued in the primary market and later traded in the secondary market.

Example:
Bharat 22 ETF and CPSE ETF were launched by the Government of India.

Conclusion

The primary market offers a wide range of products — from equity and preference shares to bonds, debentures, and hybrid instruments — catering to different investor preferences and company needs.

A well-diversified set of primary market products ensures that companies can access funds efficiently while investors can select instruments based on their risk-return preferences.
Thus, the variety of products issued in the primary market contributes to capital formation, economic growth, and financial market development in India.

Q: Explain the Role Played by Different Players in the Equity Market.

Introduction

The equity market, also known as the stock market, is a key segment of the capital market where shares of companies are issued and traded. It provides a mechanism for companies to raise capital and for investors to earn returns.

The smooth functioning of the equity market depends on several players or participants, each performing a distinct role. These players ensure liquidity, transparency, efficiency, and stability in the market.

Main Players in the Equity Market

The major players in the Indian equity market can be broadly classified into the following categories:

1. Companies (Issuers of Securities)

Role:

Companies are the primary issuers of equity shares in the primary market.
They raise funds by offering shares to the public through IPOs, FPOs, or Rights Issues.
Once listed, their shares are traded in the secondary market.

Example:
Companies like Infosys, TCS, and Reliance Industries regularly raise funds from the equity market for expansion and new projects.

2. Investors

Role:
Investors are the buyers of shares in the market. They provide the much-needed funds to issuers and form the backbone of the market.
They are broadly divided into:

Retail Investors: Small individual investors who invest their savings in stocks or mutual funds.
Institutional Investors:
- Domestic Institutional Investors (DIIs): Such as LIC, mutual funds, banks, and insurance companies.
- Foreign Institutional Investors (FIIs): Global funds and investment firms investing in Indian equities.

Contribution:
Investors contribute to capital formation, liquidity, and market stability.

3. Stock Exchanges

Role:
Stock exchanges provide the platform for buying and selling of shares in the secondary market.
They ensure fair trading, price discovery, and liquidity.

Major Indian Stock Exchanges:

Bombay Stock Exchange (BSE) – established in 1875, one of the oldest in Asia.
National Stock Exchange (NSE) – established in 1994, known for its electronic trading system.

Functions:

Listing of securities.
Providing a transparent trading mechanism.
Publishing stock indices like Sensex and Nifty, which serve as indicators of market performance.

4. Stockbrokers and Sub-Brokers

Role:
Stockbrokers are registered intermediaries who execute buy and sell orders on behalf of investors.
They act as a link between investors and the stock exchanges.

Functions:

Offer trading advice.
Maintain client accounts.
Ensure settlement of trades.
Provide online trading facilities.

Examples:
Zerodha, ICICI Direct, HDFC Securities, Groww, and AngelOne are prominent stockbroking firms in India.

5. Merchant Bankers / Lead Managers

Role:
Merchant bankers play a vital role in the primary market. They manage the issue of shares by companies and assist in the pricing, marketing, and distribution of securities.

Functions:

Drafting the prospectus.
Determining the issue price through book-building.
Liaising with SEBI, stock exchanges, and underwriters.
Ensuring compliance with legal and regulatory requirements.

Example:
Kotak Mahindra Capital, ICICI Securities, Axis Capital, etc., are leading merchant bankers in India.

6. Underwriters

Role:
Underwriters guarantee the subscription of a new issue.
If the public does not subscribe fully, underwriters agree to buy the unsold portion.

This ensures that companies are able to raise the required funds without the risk of undersubscription.

Example:
Merchant banks, financial institutions, and large brokerage firms often act as underwriters.

7. Registrars and Transfer Agents (RTAs)

Role:
RTAs handle the record-keeping and administrative work related to issuing and transferring shares.

Functions:

Maintain investor records.
Process applications and refunds.
Handle share allotment and dividend distribution.

Examples:
KFin Technologies and Link Intime India Pvt. Ltd. are major RTAs in India.

8. Depositories and Depository Participants (DPs)

Role:
Depositories hold securities in dematerialized (electronic) form and facilitate their transfer.
Investors hold their shares through Depository Participants (DPs) such as banks and brokers.

Major Depositories:

NSDL (National Securities Depository Limited)
CDSL (Central Depository Services Limited)

This system has made trading safe, quick, and paperless.

9. Regulatory Bodies

Role:
Regulators ensure that the equity market functions fairly, transparently, and efficiently.

SEBI (Securities and Exchange Board of India): Regulates and supervises the capital market, protects investor interests, and prevents malpractices.
RBI (Reserve Bank of India): Oversees monetary stability and regulates banks’ participation in equity investments.
Ministry of Finance: Frames policies related to capital markets.

10. Financial Intermediaries

These include mutual funds, portfolio managers, investment advisors, and research analysts who guide investors and help channel funds into suitable equity instruments.

Example:
Mutual fund houses like SBI MF, HDFC MF, and Nippon India MF pool investor money and invest in diversified equity portfolios.

Conclusion

The equity market is a complex ecosystem that relies on the coordinated functioning of various players — issuers, investors, brokers, intermediaries, and regulators.
Each participant plays a vital role in ensuring that funds flow efficiently from savers to businesses, trades occur smoothly, and investor confidence is maintained.

A strong and well-regulated network of market participants ensures that the equity market contributes effectively to economic growth, capital formation, and wealth creation in the country.

IPO (Initial Public Offering)

An Initial Public Offering (IPO) refers to the first sale of shares by a private company to the public. Through an IPO, a company gets its shares listed on a stock exchange, such as the BSE or NSE, thereby becoming a publicly traded company.

Purpose of an IPO

To raise capital for business expansion, new projects, or debt repayment.
To provide an exit route for early investors or promoters.
To enhance the company’s visibility and credibility in the market.

Process of IPO

Appointment of Merchant Banker: The company hires a merchant banker (lead manager) to manage the issue.
Filing of Prospectus: A draft red herring prospectus (DRHP) is filed with SEBI for approval.
Pricing of Issue: The issue can be through fixed price or book-building method.
Public Subscription: Investors apply for shares during the offer period.
Allotment and Listing: Shares are allotted and later listed on the stock exchange for trading.

Example

Recent IPOs in India include Zomato (2021), LIC (2022), and Mamaearth (2023).

Significance

An IPO helps in mobilizing savings, promoting ownership among the public, and deepening the equity market.

Methods of IPO and Types of Book-Building Process

Introduction

An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time to raise equity capital. The company can issue shares through different methods, depending on how the price of the shares is determined and how the issue is subscribed.

In India, the two most common methods of issuing shares in an IPO are:

Fixed Price Method
Book Building Method

1. Fixed Price Method

Meaning:

Under this method, the company and its merchant banker fix a specific price for the shares before the issue is opened to the public.

For example, if the IPO price is fixed at ₹200 per share, every investor has to pay ₹200 for each share applied.

Features:

The price is decided in advance and disclosed in the prospectus.
Investors know the exact price before applying.
The demand for the issue is known only after the issue closes.
Generally suitable for smaller issues or companies with low market visibility.

Example:

Smaller IPOs by regional or SME companies often use the fixed price method.

2. Book Building Method

Meaning:

The book building process is a modern and flexible pricing mechanism used for most IPOs today.
In this method, the price is not fixed in advance. Instead, a price band (a minimum and maximum price) is announced, and investors bid for shares within this range.

The final price is determined based on investor demand and bidding patterns.

Steps in Book Building:

Issuing Company and Merchant Banker announce a price band (e.g., ₹250–₹270).
Investors place bids specifying the number of shares and the price they are willing to pay within the band.
Once the issue closes, the book is built—meaning all bids are collected and analyzed.
The cut-off price (final issue price) is determined at the level where demand and supply meet.
Shares are allotted to investors at that cut-off price.

Advantages of Book Building:

Reflects true market demand.
Helps in efficient price discovery.
Reduces underpricing or overpricing risk.
Encourages participation of institutional investors.

Types of Book Building Process

In India and globally, two main types of book-building systems exist:

1. 75% Book-Building Process

At least 75% of the issue is offered through the book-building route, and the remaining 25% through the fixed price route.
Mainly used when the issuer wants to combine both methods to balance institutional and retail participation.

2. 100% Book-Building Process

The entire issue (100%) is offered through the book-building mechanism.
This is the most common method used in large IPOs today.
The price band and bidding process determine the final issue price.

Example:
Major IPOs like LIC (2022), Paytm (2021), and Zomato (2021) followed the 100% book-building process.

Comparison between Fixed Price and Book Building IPOs

Basis	Fixed Price Issue	Book Building Issue
Price	Fixed in advance and mentioned in the prospectus	Determined based on investor demand within a price band
Demand Disclosure	Known after the issue closes	Known daily during the issue period
Investor Category	Retail investors mainly	Institutional + Retail + HNIs
Transparency	Limited	High
Risk of Under/Overpricing	High	Low

Conclusion

The book-building method has become the preferred approach for IPOs in India due to its market-driven pricing, transparency, and efficiency. It allows companies to gauge investor appetite, discover the right price, and ensure fair allocation of shares, contributing to a stronger and more dynamic primary market.