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An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time in the primary market. This allows the company to raise capital to support business expansion, repay liabilities, or invest in future growth. When investors purchase these shares, they become part-owners of the company and can benefit from its financial performance over time.
The funds raised strengthen the company’s financial position, while investors gain an opportunity to participate in its growth. Understanding the types of IPO helps investors know how share prices are set and how the allotment process works.
Key Takeaways
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An IPO allows investors to become partial owners of a company while helping the company raise capital for growth and expansion.
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In a fixed-price issue, the share price is set in advance, and demand is known only after the IPO closes.
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In a book-building issue, investors bid within a price band, and the final share price is determined by investor demand.
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The book-building process enables more accurate price discovery and enhances transparency in IPO pricing.
Different Types Of IPO:
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Fixed Price Issue
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Book Building Issue
The initial price offer can be made through the fixed price issue or book building issue or a combination of both.
Fixed Price Issue
In the fixed-price IPO process, the Company, along with its underwriters, evaluates its assets, liabilities, and all financial aspects. Then they work with these figures to fix a price per issue to achieve the target funds. This fixed per-issue price is printed in the prospectus (offer document). The prospectus (offer document) justifies the price with qualitative and quantitative factors. The demand for securities is known only after the issue is closed. At least 50% of the offer is typically reserved for Retail Individual Investors (RIIs) in this type of IPO issue.
Book Building Issue
In the book-building issue, the price is determined during the IPO process. There is no fixed price, but there is a price band. The lowest price in the band is referred to as the ‘floor price’, and the highest price is referred to as the ‘cap price’. The Cap Price cannot be more than 20% above the Floor Price.
The price band is printed in the prospectus. And investors can bid for the desired quantity of shares at the price they are willing to pay. Depending on the bids, the share price is decided. Shares are allotted at the final issue price (cut-off price) determined after analysing investor bids. The demand is known every day as the book is built.
So, What Are the Differences Between the Issues?
The issues differ on these factors, which are tabulated below.
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Fixed Price Issue |
Book Building Issue |
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Pricing |
The share price is fixed on the first day of the issue and is printed in the prospectus. |
The exact share price isn’t fixed. Only the price band is fixed. The price is fixed after the closing date of the bid. |
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Demand |
It is known only after the close of the issue. |
It can be known every day. |
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Payment |
The payment amount is blocked in the investor’s bank account through the ASBA system and debited only after share allotment. |
The payment amount is blocked through ASBA during application and debited only if shares are allotted. |
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Reservations |
IPO allocation is divided into investor categories such as retail investors, qualified institutional buyers (QIBs), and non-institutional investors, as per SEBI regulations. |
Under SEBI ICDR Regulations (Book Built Issue allocation):
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In a fixed price issue, the final market price after listing may differ from the issue price, depending on investor demand and market conditions. That price may differ from the market-determined price after listing, depending on investor demand and market conditions. As a result, these shares may receive strong investor interest depending on market perception and demand. As far as the company and its pre-IPO shareholders are concerned, they may have given away a sizable part.
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The book-building process is relatively more efficient because the share price is determined based on investor demand. The process improves price discovery by reflecting actual investor demand. Since the price is finalized after the IPO based on bids, it helps align the share price more closely with market demand.
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The book building process exposes investors to price uncertainty until the final price is determined.
Conclusion
Both methods serve the same ultimate goal: helping a company raise capital. While Fixed Price Issues offer simplicity and certainty, Book Building provides a transparent and market-driven approach to valuation. For a retail investor, the most important step is to check the RHP (Red Herring Prospectus) to understand which method is being used and what the specific price band is before placing a bid.
