Types of IPO: Fixed Price and Book- Building Issue

An Initial Public Offering (IPO) allows private companies to offer their shares to the general public for the first time. Through the IPO, companies raise capital to support business expansion, repay debt, and invest in future growth.

The IPO can differ based on how the share price is determined, how shares are offered, and the market segment in which the company is listed.

This article discusses the different types of IPOs to help investors understand how share prices are set and how the allotment process works.

What is an IPO?

An IPO is the process by which a private company offers its shares to the public and gets listed on a stock exchange. Companies use the IPO route to raise capital, provide an exit for existing investors, or do both.

An IPO can include a fresh issue, an offer-for-sale, or both. Investors apply for shares during the IPO subscription period, after which the allotment process determines which applicants receive shares. Once listed, investors can trade the shares in the share market.

Also Read: Complete Guide To IPO investing

Types of IPO in India

The IPO is broadly divided into two types:

Fixed-price Issue

In a fixed-price issue, the company sets the share price before the issue opens, and investors know the exact price before applying. The price remains stable during the IPO process. To determine the set price, the company works with financial specialists such as merchant bankers and underwriters.

Book-building Issue

In a book-building issue, the company provides a price band instead of one fixed price. Investors generally bid within this range, and the final issue price is determined after considering demand received during the bidding process.

The price band consists of a lower limit, called the floor price, and an upper limit, called the cap price. During the bidding process, investors place bids in this range, indicating the amount they are willing to pay for the number of shares they wish to purchase.

Difference Between Fixed Price and Book Building Issue

Here is the main difference between a fixed-price and book-building issue.

Understanding Mainboard IPO and SME IPO

A Mainboard IPO is a public issue by large, well-established companies. The company usually raises capital of more than ₹25 crore and gets listed on the NSE or BSE.

To invest in a mainboard IPO, the minimum investment is generally around ₹14,000 to ₹15,000 per lot.

An SME IPO means a public issue by small and medium-sized companies. Here, the company raises capital of less than ₹25 crore and gets listed on BSE SME or NSE Emerge.

To invest in an SME IPO, the minimum investment is generally around ₹2 lakh and may require a minimum application of two lots.

How to Know IPO is Fixed Issue or Book-Building Issue?

To know whether an IPO is a fixed-price or book-building issue, you can read the draft red herring prospectus (DRHP). This official document, issued by the company, contains all the relevant information.

However, a DRHP can be difficult for individual investors to read and understand. To understand it more easily, see this guide.

In a DRHP, look for information explaining whether the shares are offered at a fixed price or through a book-building process. For a book-building issue, the final offer documents will detail the applicable price band and bidding process.

FAQs

What are the different types of IPO?

An IPO is classified into two different types: a fixed-price issue and a book-building issue. In a fixed-price issue, the company sets the issue price, and investors apply at that price. In a book-building issue, the company provides a price range (with a lower and upper price band).

What are the upper and lower price bands in an IPO?

An upper price band is the maximum price, and the lower price band is the minimum price set for the IPO. This lower price band is multiplied by the lot size to determine the minimum investment required to apply for an IPO.

What is lot size in IPO?

The lot size is the number of shares in a single IPO application. One lot can include multiple shares. The company sets the IPO lot size, which is an important factor in determining the minimum and maximum investment amounts.

Is the combination of a fresh issue and an OFS possible?

Yes, an IPO can combine a fresh issue and an OFS. In a fresh issue, the money goes to the company, and in an OFS, the proceeds go to the selling shareholders.

What is a follow-on public offer?

The follow-on public offer is a process through which an already listed company issues more shares. FPOs help companies raise more capital for growth, expansion, and debt repayment.