Book Building

Book building is a technique used for marketing a public offer of equity shares of a company. It is a way of raising more funds from the market. After accepting the free pricing mechanism by the SEBI, the book building process has acquired too much significance and has opened a new lead in development of capital market.
A company can use the process of book building to fine tune its price of issue. When a company employs book building mechanism, it does not pre-determine the issue price (in case of equity shares) or interest rate (in case of debentures) and invite subscription to the issue. Instead it starts with an indicative price band (or interest band) which is determined through consultative process with its merchant banker and asks its merchant banker to invite bids from prospective investors at different prices (or different rates). Those who bid are required to pay the full amount. Based on the response received from investors the final price is selected. The merchant banker has to manage the entire book building process.
Investors who have bid a price equal to or more than the final price selected are given allotment at the final price selected. Those who have bid for a lower price will get their money refunded.
In India, there are two options for book building process. One, 25 percent of the issue has to be sold at fixed price and 75 per cent is through book building. The other option is to split 25 percent of offer to the public (small investors) into a fixed price portion of 10 percent and a reservation in the book built portion amounting to 15 per cent of the issue size. The rest of the book-built portion is open to any investor.
The greatest advantage of the book building process is that this allows for price and demand discovery. Secondly, the cost of issue is much less than the other traditional methods of raising capital. In book building, the demand for shares is known before the issue closes. In fact, if there is not much demand the issue may be deferred and can be rescheduled after having realised the temper of the market.

Sec. 147: Retrospective amendment does not mean failure to disclose material facts

CIT vs. M/s K. Mohan & Co. (Exports) (Bombay High Court)

After the expiry of four years from the end of the assessment year, the AO reopened the assessment u/s 147 by relying on the retrospective amendment to s. 80HHC by the Taxation Laws (Amendment) Act, 2005 w.e.f. 1.4.1998. The CIT (A) and Tribunal (included in file) struck down the reopening. On appeal by the department, HELD dismissing the appeal:

The assessment was sought to be reopened on account of retrospective amendment to s. 80HHC introduced by the Taxation Laws Amendment Act, 2005 with effect from 1st April 1998. If the legislature amends the provisions of the Act with retrospective effect, it cannot be said that there was failure on the part of the assessee to disclose fully and truly all material facts relevant for the purpose of assessment.

Sec. 147: AO must specify what facts are failed to be disclosed. Lapse by AO no ground for reopening if primary facts disclosed

Atma Ram Properties Pvt Ltd vs. DCIT (Delhi High Court)

In AY 2001-02, the AO assessed advances of Rs. 1.56 crores received from a group concern as “deemed dividend” u/s 2(22)(e). In appeal, the CIT (A) held that the advances received in earlier years could not be assessed. The AO thereafter reopened the assessment for AY 1999-00 (after 4 years from the end of the AY). Though the AO alleged that there was a failure on the part of the assessee to disclose full and true material facts, he did not specify what that failure was. The reopening was upheld by the CIT (A) & the Tribunal. On appeal to the High Court, HELD allowing the appeal:

(i) In AY 1999-00, the AO inquired into the details of advances received but did not make any addition u/s 2(22)(e). If the AO fails to apply legal provisions, no fault can be attributed to the assessee. The assessee is merely required to make a full and true disclosure of material facts but is not required to disclose, state or explain the law. A lapse or error on the part of the AO cannot be regarded as a failure on the part of the assessee to make a full and true disclosure of material facts;

(ii) Though the recorded reasons state that the assessee had failed to fully and truly disclose the facts, they do not indicate why and how there was this failure. Mere repetition or quoting the language of the proviso is not sufficient. The basis of the averment should be either stated or be apparent from the record;

(iii) Explanation (1) to s. 147 which states that mere production of books is not sufficient does not apply a case where the AO failed to apply the law to admitted facts on record.

(iv) The allegation that the assessee did not disclose the true and correct nature of payment received from the sister concern nor disclosed the extent of holding of the sister concern so as to enable the AO to apply his mind regarding s. 2(22)(e) is not acceptable. The assessee had filed statement of accounts of each creditor and indicated them to be sister concerns. The primary facts were furnished. The law does not impose any further obligation of disclosure on the assessee (CIT vs. Burlop Dealers Ltd 79 ITR 609 (SC) followed).

Note: Contrast with Dalmia Pvt Ltd vs. CIT (Delhi High Court) where it was held (reopening after 4 years) that despite specific & pointed queries in s. 143(3) assessment, AO cannot be said to have formed any opinion if “explicit opinion” was not recorded

Fundamental analysis

Fundamental analysis is the detailed assessment of a firm's future or growth which gives a fair idea about its worth in the stock market. This involves examining the company's financials and operations, especially sales, earnings, growth potential, assets, debt, management, products, competition and all the financial aspects dealing with a company's performance and survival. This done to gain insight on a company's future performance. Fundamental analysis takes into consideration only those variables that are directly related to the company itself, rather than the overall state of the market or technical analysis data.

The outcome of fundamental analysis is a value of the stock of the company called its ‘intrinsic value’ also known as ‘target price’. To a fundamental investor, the market price of a stock tends to revert towards its intrinsic value. If the intrinsic value of a stock is above the current market price, the investor would purchase the stock because he believes that the stock price would rise and move towards its intrinsic value. If the intrinsic value of a stock is below the market price, the investor would sell the stock because he believes that the stock price is going to fall and come closer to its intrinsic value. To find the intrinsic value of a company, the fundamental analyst initially takes a top-down view of the economic environment; the current and future overall health of the economy as a whole. After the analysis of the macro-economy, the next step is to analyze the industry environment in which the firm is operating. After which, one should analyze all the factors that give the firm a competitive advantage in its sector, such as, management experience, history of performance, growth potential, low cost of production, brand name, etc. Thus, fundamental analysis is all about evaluating a security's value based on an authentic set of information, both historical and present.