Types of IPO
An Initial Public Offering or IPO is one of the most popular investment options in India. It helps retail investors get first-mover advantage to invest in a company even before it’s listed on the stock exchange. And while popular, most investors aren’t aware of the fact that even with IPOs, there are different types. Yes, a company can come up with different types of IPOs. It can be a fixed price issue or a book building issue. What do these terms mean? Let us understand the various types of IPOs in India.
What are the different types of IPO?
In India, there are primarily two types of IPOs, namely, fixed price issue and book building issue. The salient features of both these types of IPO are as follows:
Fixed Price Issue
As its name suggests, a fixed price issue is a type of IPO in which the price of each share on offer is fixed in advance and disclosed to the public. This way, a prospective investor knows the precise price of each share at the time of applying and can, therefore, decide the number of shares they want to apply for. The price of a share in a fixed price offer is determined by the merchant banker hired by the issuing company. This price is arrived at after considering several important factors, including:
Current assets and liabilities of the issuing company
Current market position of the issuing company
Risk profile of the issuing company
Future growth prospects of the issuing company, etc.
The final subscription for a fixed price offering can be determined only after the issue closes.
Book Building Issue
The second type of IPO is a book building issue. This IPO type focuses on letting the demand and supply factors build or discover the allotment price of a share. The company issuing a book building IPO discloses a price band for the shares, which includes a floor price (lowest price) and a cap price (highest price). This price band is usually spread across a 20% range. Prospective investors can submit an application for this type of IPO by selecting a price between the floor price and the cap price. The allotment price is determined on the basis of the bids submitted by the applicants (after the issue closes).
What is the difference between a fixed price issue and a book building issue?
Price
The primary difference between the two types of IPOs is that the price of the shares on offer is predetermined in the case of a fixed price issue. Here the price is not subject to change upon the allotment of shares. On the other hand, the price of shares in a book building issue is not fixed. Instead, there is a price band and IPO applicants have to bid a price from within this band. The allotment price is arrived at once the issue is closed.
Subscription
The total subscription of a fixed price issue can only be ascertained after the closure of the issue. In stark contrast to this, the subscription level for a book building issue can be assessed every day during the IPO application period.
Payment
An interesting element that sets a fixed price issue and a book building issue apart is that the time of payment of application money is different in both types of IPOs. Whilst the former requires upfront payment of the entire application money, the latter calls for the payment of the application money only after the allocation of shares.
Both types of IPOs have their pros and cons. While a fixed price issue offers better clarity vis-a-vis price to prospective investors as well as the issuing company, a book building issue is centred around a price band instead. The price of shares in a fixed price offering can be on the higher side while a book building issue can enable a company to attract substantial subscription for its shares. This is why most companies prefer book building issue.
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FAQ
How many types of IPO are there?
There are two types of IPOs, namely:
Fixed Price Issue
Book Building Issue
What are the three stages of an IPO?
The three stages of an IPO are as follows:
Pre-IPO Transformation Stage
IPO Transaction Stage
Post-IPO Transaction Stage
What is the reservation difference between a Fixed Price Issue and a Book Building Issue?
The percentage of shares reserved for different types of investors varies for different types of IPOs. In a Fixed Price Issue, the reservation for shares is as follows:
For investments below Rs. 2 lakhs - 50% of the total issue size is reserved.
The remaining 50% of the issue size is for investments above Rs. 2 lakhs.
On the other hand, the reservation for different types of investors in a Book Building Issue is as follows:
Qualified Institutional Buyers - 50% of the total issue size is reserved.
Small Investors - 35% of the total issue size is reserved.
Other investors - 15% of the total issue size is reserved.
What is a fixed price issue?
A fixed price issue is a type of IPO in which the price of each share is decided and revealed in advance.
What is a book building issue?
A book building issue is an IPO type in which there is no fixed price for the shares on offer. The issuing company shares a price band from which the investors can choose their bid price.