Type of IPO Fixed Price and Book Building

When a company wants to raise money through an IPO, it can choose between Fixed Price Method or Book Building Method, depending on its goals and strategy. The Fixed Price Method is simple and straightforward, where the share price is fixed in advance. On the other hand, the Book Building Method is more flexible and transparent, allowing price discovery based on investor demand.

What are IPO types based on pricing methods?

When a company wants to raise funds from the public, it offers its shares for the first time through an Initial Public Offering (IPO). This process enables the company to raise capital for growth and expansion. To go public, a company must go through several steps, and one of the most crucial among them is deciding the IPO method or IPO type on which IPO pricing would be based in the Offer.

There are two types of IPO based on pricing in India:

1. Fixed Price Method

2. Book Building Method

What does the term 'Fixed Price IPO' mean in the stock market? Who determines the price?

In Fixed Price Issue, the Issuer company offers shares to the public on fixed price determined in consultation with the Merchant banker before the IPO opens. The price is based on various factors such as market conditions and industry trends.

How does a Fixed Price IPO work?

In Fixed Price method, Issuer company sets the price of share in advance and investors are required to apply at that fixed price.

• The IPO Prospectus includes the share price and explains the rationale.
• The prospectus must be registered with the Registrar of the Companies before the IPO.
• At least 50% of the total share offered must be reserved for retail investors.

How is the share price decided in a Fixed Price IPO?

In a Fixed Price IPO, the company sets the price of each share in advance before the IPO opens. This price is decided by the company along with its underwriters based on factors like:

• Company valuation
   
• Market conditions
   
• Industry comparisons
   
• Demand estimation
   

Investors apply for shares at this fixed price, and there is no bidding or price discovery during the IPO.

In a Fixed price IPO, the share price is announced in advance by Issuer company. For example, if a company sets the price per share at Rs. 150. Then, an investor can apply at that fixed price. There is no option to bid on Cut off price in this method. 

How are shares allotted to investors in a Fixed Price Offering?

Instance:1 

You applied for 500 shares and got full allotment. In this case shares will be credited in your Demat Account.

Instance:2 

You applied but did not get allotment of shares. Then application money will be refunded to your bank account.

Instance:3 

You have applied for 500 shares but there is a partial allotment of 300 shares. Then you will get a refund for the remaining shares that had not been allotted to you. In this case, the amount for 200 shares would be refunded in your bank account.

Some Illustrations of Fixed Price IPO:

What challenges are associated with Fixed Price IPOs?

• A high price may indicate overvaluation and result in less demand for shares in the IPO.
• A low price would result in undervaluation.
• The fixed price may not reflect the current market conditions.
• May be suitable for small size IPOs.

What is meant by a Book Building IPO?

In Book-Building Issue, the Issuer company, in consultation with the Merchant banker, decides a price band or price range within which investors can place their bids. The price range has a lower price band and an upper price band. 

The investors can bid within this price range; final price is determined on the basis of bids received by the investors. This method has a more scientific approach and also evaluates the interest shown by the investors in the company.

How does Book Building IPO work?

In Book Building method, the final price is discovered through the bids of investors.

• Issuer company does not fix the price of share in advance; rather it is determined on the basis of bids received within the price range.
• The Issuer company sets a Price Band within which investors can place their bids.
• As per SEBI ICDR Regulations, 2018, Price band must be published at least 2 working days before the IPO opens in RHP.
• If the company does not mention the floor price or price band in the Red Herring Prospectus, it must announce it at least 2 working days before the IPO opens. This announcement should be made in the same newspapers where the pre-issue advertisement was published or along with the pre-issue advertisement, using the format given in the SEBI guidelines.
• The Issuer company can change the or revise the price band while the IPO is open.
• Investors can place their bids through Online or an automated bidding system provided by NSE and BSE.

Some Illustrations of Book Building IPO:

Example of Book Building Issue:

Suppose A company XYZ Ltd. Is planning to issue shares to the public through IPO.

1. They offer a price band of Rs. 20 to Rs. 24 per share.
2. Minimum Lot size is 100 shares.
3. Issuer company offers 3000 shares to the public.

Following are the bids received from the investors:

Now, the company is required to decide the price at which it sells its shares to the public on the basis of bids received.

• At the Issue price of Rs. 24, there is demand for 500 shares
• At the Issue price of Rs. 23, there is demand for 1500 shares
• At the Issue price of Rs. 22 there is demand of a total 3000 shares. So, the final price for the shares would be Rs.. 22, because that’s the highest price at which the company can sell 3000 shares.

What makes price discovery through Book Building more efficient than fixed pricing?

Book Building process of IPO reflects the market conditions and leads to a better price discovery by capturing the demand of IPO amongst the investors. Price is determined based on the bids received by investors. It is a fairer and transparent process resulting in a more stable post- IPO performance.

What is the Difference between Book Building Issue and Fixed Price Issue?

When a company raises money through an IPO, it can choose between two pricing methods:  Book Building method or the Fixed Price method. 

What are the primary IPO pricing methods companies use to go public?

Fixed Price is easier to understand for new investors, while Book Building offers more accurate pricing based on market interest. Companies usually prefer the Book Building Method for larger IPOs, while Fixed Price is more common in SME IPOs. Understanding these methods helps investors make better decisions while applying for IPOs