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Initial Public Offering (IPO) is when a business first offers shares to the public and becomes a publicly traded company. The company raises funds by issuing shares to the general public. In exchange, the buyers receive a stake in the business and the chance to profit from its possible future growth.
The Securities and Exchange Board of India (SEBI) regulates the IPO process in India. The business must submit a draught prospectus to SEBI for evaluation and meet the qualifying requirements imposed by the board. Following SEBI’s approval of the draught prospectus, the business can issue shares to the general public through the stock exchange.
Through one of the IPO types, the price of the shares is established after a demand analysis and price adjustment. The allocation of shares depends on demand and price when the shares are made available for public subscription. An IPO is a significant event for a company since it can acquire money, gain notoriety, and offer the general public investment opportunities. Continue reading to explore the types of initial public offerings.
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Types of IPOs in India
There are two types of IPOs:
Fixed Price Issue
This is a type of IPO in which the company fixes the price at which the shares will be sold to the public. No matter the demand for the shares, investors in this kind of IPO must pay the set price to buy them.
Here is an illustration of the idea: Let’s say that DCA Ltd. is planning an initial public offering with a fixed price of ₹100 per share. Regardless of the level of demand for the shares, an investor must pay ₹100 for each share they wish to purchase. The investor might not see a large return on their investment if there is little demand for the shares. The shares will still be sold at the predetermined price of ₹100 even if there is great demand for the shares, which could result in a high return for the investor. The fixed price of the shares is predetermined, so investors know exactly how much they must spend to buy the shares, making the IPO clear-cut and straightforward. It might not always be the ideal choice for investors, as the price may not always accurately reflect the market’s demand for the shares.
Book Building Issue
The most popular IPO type in India is the book-building issue. In this kind of IPO, the price of the shares is established by a procedure known as ‘book building’, in which the share demand is evaluated, and the price is set in accordance with that evaluation. Investors bid for the shares at various rates throughout the bidding process, establishing the highest price of the shares. The highest demand and the price bid determine the final price.
To demonstrate the idea, consider the following example: Consider a scenario where XZY Ltd plans to go public, and a book-building procedure will be used to establish the share price. The corporation establishes a price range, such as ₹90 to ₹100, within which the share’s final price will be fixed. Investors submit bids for the shares at various prices within the price band during the book-building phase. For instance, one investor might offer ₹95 for ten shares, while another might offer ₹100 for 20. The final price is determined to be the highest price at which the greatest number of shares can be sold based on the market demand. The final price of the shares may be fixed at ₹100, and the shares will be sold at that price.
Shares are distributed depending on demand and price, with precedence going to buyers who make the highest bids. Since the price of an IPO is established by the process of bidding and market demand, investors have more flexibility. However, because the price is not established, it could potentially be more challenging than an IPO with a fixed price.
How Do the Fixed Price Issue and the Book Building Issue Differ from One Another?
The decision between a Fixed Price Issue and a Book Building Issue will be based on the individual circumstances of the firm and the investment goals of the investors. Both types of IPOs offer benefits and drawbacks. The following are the primary distinctions between a Fixed Price Issue and a Book Building Issue:
| Pricing | Predictability | Investment Return | Share distribution |
| When shares are issued at a fixed price, the company determines the price at which they will be presented for sale to the public. In contrast, in a book building issue, the price of the shares is established using a method known as book building, where the demand for the shares is evaluated, and the price is set in accordance with that assessment. | The Fixed Price Issue is clear-cut and easy to understand because the share price is predetermined in advance, and investors know the exact amount they must pay to buy the shares. Investors may find a Book Building Issue less predictable because the price is not predetermined and is instead determined by the demand for the shares. | Since the price may not accurately reflect the market demand for the shares, the investment return in a Fixed Price Issue might not be as high as in a Book Building Issue. The investment return may be higher in a book building issue since the price of the shares is established by demand and bidding. | In a Fixed Price Issue, shares are distributed on a first-come, first-served basis. In a book building issue, shares are distributed according to demand and price, with precedence to buyers who make the highest bids. |
Closing Remarks
Due to the company’s fixing of share prices, the number of fixed prices is higher than the book building issue. Nevertheless, after market price corrections, the capital raised from the book building issue is significantly higher than that from the fixed price issue. The majority of the time, multiple investors use book building issues in an IPO since it allows them to list their stock rapidly and easily on the stock market.