PROBLEMS BASED ON BOOK BUILDING PROCESS
Book building means:
Investors tell the company how many shares they
want and at what price.
The company then chooses one final price where it
can sell all its shares.
Question 1
A company wants to sell 10 shares.
Price band: ₹90 – ₹100
Investors apply like this:
Investo Shar
r es Price (₹)
A 3 100
B 4 95
C 5 90
Step 1: Arrange prices from highest to lowest
Share
Price (₹) s
100 3
95 4
90 5
Step 2: Add shares one by one (cumulative)
Total Shares Till
Price (₹) Now
100 3
95 7
90 12
Step 3: Find the cut-off price
The company wants to sell only 10 shares.
At ₹100 → only 3 shares (not enough)
At ₹95 → 7 shares (still not enough)
At ₹90 → 12 shares (enough)
Final Answer
Cut-off / Issue Price = ₹90
This is because at ₹90, demand becomes equal or more than
supply.
Remember this rule (VERY IMPORTANT)
Cut-off price = lowest price at which total demand
≥ shares offered
Question 1: Determination of Cut-off Price (8
Marks)
A company proposes to issue 25,000 equity shares through
the book building process.
The price band is ₹80–₹90.
The following bids are received from investors:
Bid Price Number of
(₹) Shares
90 6,000
88 7,000
85 8,000
80 10,000
You are required to:
1.
Prepare the demand schedule
2.
3.
Determine the cut-off (issue) price
4.
Answer:
Step 1: Arrange bids in descending order of price
Shares
Price (₹) Applied
90 6,000
88 7,000
85 8,000
80 10,000
Step 2: Prepare cumulative demand schedule
Cumulative
Price (₹) Shares
90 6,000
88 13,000
85 21,000
80 31,000
Step 3: Identify cut-off price
Total shares offered = 25,000
Cumulative demand equals or exceeds issue size at ₹80.
Final Answer:
The cut-off price is ₹80.
Question 2: Oversubscription Ratio (4 Marks)
An IPO offers 5,00,000 equity shares to the public.
Applications are received for 12,50,000 shares.
Calculate the oversubscription ratio.
Answer:
Oversubscription Ratio=Shares AppliedShares OfferedOversubscription Ratio=Sh
ares OfferedShares Applied=12,50,0005,00,000=2.5 times=5,00,00012,50,000
=2.5 times
Final Answer:
The IPO is 2.5 times oversubscribed.
Question 3: Retail Investor Allocation (6 Marks)
A company issues 12,00,000 equity shares through book
building.
35% of the issue is reserved for retail investors.
Retail investors apply for 8,40,000 shares.
Calculate the number of shares allotted to retail investors
and the allotment ratio.
Answer:
Step 1: Calculate retail reservation
12,00,000×35%=4,20,000 shares12,00,000×35%=4,20,000 shares
Step 2: Calculate allotment ratio
4,20,0008,40,000=1:28,40,0004,20,000=1:2
Final Answer:
Retail investors will receive 50% of the shares applied.
Question 4: Clearing Price Determination (8
Marks)
An IPO of 30,000 shares is offered through the book building
method.
The bids received are as follows:
Quantit
Price (₹) y
150 8,000
145 9,000
140 7,000
135 10,000
Determine the clearing price.
Answer:
Step 1: Prepare cumulative demand
Cumulative
Price (₹) Quantity
150 8,000
145 17,000
140 24,000
135 34,000
Step 2: Identify clearing price
Issue size = 30,000 shares
Cumulative demand exceeds issue size at ₹135.
Final Answer:
The clearing price is ₹135.
Question 5: Funds Raised – Book Building vs
Fixed Price (5 Marks)
A company issues 1,00,000 shares.
Under book building, the issue price is ₹180.
Under fixed price method, the issue price is ₹165.
Calculate the additional funds raised through book building.
Answer:
(180−165)×1,00,000=₹15,00,000(180−165)×1,00,000=₹15,00,000
Final Answer:
Book building raised ₹15 lakh more than the fixed price issue.
Question 6: Cut-off Price Determination (8
Marks)
A company plans to issue 40,000 equity shares through the
book building process.
The price band is ₹120–₹130.
The following bids are received from investors:
Bid Price Number of
(₹) Shares
130 10,000
128 9,000
Bid Price Number of
(₹) Shares
125 12,000
120 15,000
You are required to determine the cut-off price.
Answer:
Step 1: Arrange bids in descending order of price
Shares
Price (₹) Applied
130 10,000
128 9,000
125 12,000
120 15,000
Step 2: Prepare cumulative demand schedule
Cumulative
Price (₹) Shares
130 10,000
128 19,000
125 31,000
120 46,000
Step 3: Determine cut-off price
Total shares offered = 40,000
Cumulative demand exceeds issue size at ₹120.
Final Answer:
The cut-off price is ₹120.
Question 7: Cut-off Price with Exact Matching (8
Marks)
An IPO of 50,000 equity shares is issued through book
building.
The price band is ₹200–₹220.
The bids received are as follows:
Bid Price Shares
(₹) Applied
220 15,000
215 12,000
210 13,000
200 10,000
Determine the cut-off price.
Answer:
Step 1: Arrange bids in descending order
Share
Price (₹) s
220 15,00
0
215 12,00
0
Share
Price (₹) s
210 13,00
0
200 10,00
0
Step 2: Cumulative demand
Cumulati
Price (₹) ve
220 15,000
215 27,000
210 40,000
200 50,000
Step 3: Identify cut-off price
Issue size = 50,000 shares
Cumulative demand becomes equal to issue size at ₹200.
Final Answer:
The cut-off price is ₹200.
Question 8: Cut-off Price with Partial Fulfilment
(8 Marks)
A company issues 35,000 equity shares through book
building.
Price band: ₹90–₹105.
Bids received are:
Quantit
Price (₹) y
105 8,000
100 10,000
95 9,000
90 12,000
Determine the cut-off price.
Answer:
Cumulative
Price (₹) Shares
105 8,000
100 18,000
95 27,000
90 39,000
Issue size = 35,000
Demand exceeds issue size at ₹90.
Final Answer:
The cut-off price is ₹90.
Question 9: Cut-off Price (Smaller Numbers –
Easy Practice)
A company issues 10,000 shares through book building.
Price band: ₹50–₹60.
Bids received are:
Share
Price (₹) s
60 2,000
58 3,000
55 4,000
50 5,000
Answer (Summary Format):
Cumulati
Price (₹) ve
60 2,000
58 5,000
55 9,000
50 14,000
Issue size = 10,000
Final Answer:
Cut-off price = ₹50
Question 10: Mixed Investor Demand (Exam-
Style Twist)
An IPO of 60,000 shares is issued using the book building
method.
The following bids are received:
Share
Price (₹) s
300 20,00
0
295 15,00
0
290 10,00
0
280 25,00
0
Determine the issue price.
Answer:
Cumulati
Price (₹) ve
300 20,000
295 35,000
290 45,000
280 70,000
Issue size = 60,000
Final Answer:
Cut-off price = ₹280
Example 2:
Company wants to sell 5 shares
Share
Price (₹) s
200 2
180 2
160 3