different-types-of-ipo

Different Types of IPO

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Different Types of IPO

The Initial Public Offering is a beneficial way in which several growth-driven companies offer their shares in the public to raise capital and to fuel their future growth. The process is straightforward: the company sells its securities to the major public. When this public buys shares of their company’s equity, the company gets a capital boost.
Thus, all the people invested in a specific company have the opportunity to acquire the fortunes of the company, which is equal to their shareholding. If a company performs well and earns major profit, people, in turn, get huge money from their shares. If all goes well, the relationship between the company and the public is mutually beneficial.

There are two types of IPO, and the difference between these two IPOs is simple and easy to understand.

  • Fixed Price Issue
  • Book Building Issue

Fixed Price Issue

Under the fixed price issue, the company sets a fixed price at which all their shares will be offered to the investors. To make this happen, a company hires a merchant banker, an entity that will appraise and reduce the level of risk for a company.
The merchant banker finds out the total current value of a company along with its future prospectus. Apart from finding, they also make a risk overview of all the investments and how it would reimburse the investors when they face such enormous risk.
After studying and going through extensive research, they determine the price of a particular share that should be fixed in order to raise considerable capital for their company.
In this type of IPO, all investors know the price of a particular share decided by the company before the company enters into public. They pay the total fixed price while subscribing to the IPO of a specific company.

Book Building Issue

In the book building issue, the price is released during the process of IPO. The company sets no fixed price in this process, but there are two different price bands.
The lowest price band is known as the “floor price,” and the highest price band is known as the “cap price.” However, investors interested in buying the shares have to make a bid within a demanding time before the company sets the price.
However, the bidding is done within the range of 20% set by the company or within a price band. Also, the company needs to clarify the number of shares they wish to sell to the investors.
In the end, the final price depends entirely on the bids the company obtains from the investors.

The difference between both the pricing issue depends on these factors given below:

  • Pricing

    • In a fixed price issue, the price of the share is set on the first day of its listing, and later on, the price which is fixed per issue is printed in the order document. Whereas in a book building issue, the price is not specified, and only the pricing band is fixed initially. In the end, the exact share price is fixed only after the closing date of the bid.

  • Demand

    • In a fixed price issue, the demand is known only after the closing of the issue. Whereas, in a book building issue, the demand can be known every day.

  • Payment

    • In a fixed price issue, investors have to pay 100% advance payment of the share price at the time of bidding for a share. Whereas, in a book building issue, the payment is made after the allotment of the shares.

  • Reservations

    • In a fixed price issue, 50% of the allocations are reserved for those who have investments below two lakhs, and the rest is given for high amount investors.
    Whereas, in a book bidding issue, 35% of the allocations are reserved for Qualified Institutional Buyer (QIB), 35% are reserved for small investors, and the rest are reserved for the other categories of the investors.

  • How many types of IPO are there?

    • There are two types of IPOs. A fixed price issue where the price of shares is fixed and a book building issue where the shares are set after the closing date of the bid. A company can make use of both types of shares separately or combined for an IPO.

  • What is the reservation difference between fixed price issue and book building issue?

    • The reservation difference between fixed price issue and book building issue is; 50% of the allocations are reserved for those who have investments below two lakhs, and the rest is given for high amount investors.
    Whereas, in a book bidding issue, 35% of the allocations are reserved for Qualified Institutional Buyer (QIB), 35% are reserved for small investors, and the rest are reserved for the other categories of the investors.

  • What is a fixed price issue?

    • Fixed price issue means the company sets a fixed price of all their shares and mentions it in the offer document

  • What is a book building issue?

    • The book-building issue means the company does not fix the price, but it has price bands. The price is discovered only after generating and recording the demand of an investor.

  • What is IPO?

    • IPO stands for Initial Public Offering, is a process in which a private company goes into a public company by issuing its shares to the public for the first time to raise capital and grow their business.

Final Thoughts

The number of fixed price is more than the book building issue because the company fixes the price of shares. However, the capital accumulated from the book building issue is way more than the fixed price issue after there are market price corrections.
In most cases, several investors use book building issues in IPO because it quickly makes it place in the stock market itself without any hassle.