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What is the Difference Between Fixed Price Issue & Book Building Issue?

What is the Difference Between Fixed Price Issue & Book Building Issue?

Initial Public Offerings, shortened as IPOs, have been much in the limelight for the past few years. More so, it has become a common method for a company to go public and sell its shares to common people. 

With IPO, a lot of investors (beginners and experts alike) are familiar with a variety of aspects. However, not everybody knows everything. Having said that, fixed price issues and book-building issues are two such factors that generally remain non-discoverable by people.

If you are struggling to understand the meaning of the same, this post takes you through the difference between fixed price issues and book-building issues.

Defining Issue Price

The issue price is the amount that a firm declares for its shares in the market. When the trading of issues begins, the market price could be either more or less this issue price. 

When it comes to an understanding of who gets to choose the final issue price, the merchant banker and the company will have to provide complete disclosure of parameters that they have regarded when determining the price of the issue.

What is a fixed price issue?

Under this issue type, a firm that is going public will come up with a fixed price for shares that will be provided to investors. This price should be told to investors in advance. Once the issue is disclosed, the demand for securities gets known. To participate in an IPO, investors should pay the full price of the share.

Defining Book Building Issue

Under this method, a firm going public provides a price band of 20%, and investors will have to bid within this band. The issuer will determine the concluding price after closing the bidding. 

The demand for securities offered is available in real-time on the stock exchanges’ websites during the entire process of book building. Investors will have to stipulate the number of shares that they wish to purchase along with the amount that they can willingly pay.

What is a price band in a book-building IPO?

A prospectus comprises either the price band or the floor price for securities, and investors will have to bid within this range. The minimum price for the bids is known as the floor price, and the maximum price for the bids is known as the cap price. 

The spread that comes between the cap price and the floor price is known as the price band. Also, keep in mind that it should not exceed 20%. It is the company’s decision to state a price band after consulting with the merchant bankers.

Difference Between Book Building Issue and Fixed Price Issue

Now that the concepts of book building issues and fixed price issues are clear, here are some significant differences between the both:

Features Fixed Price Issue Book Building Issue
Meaning Under this specific method, the shares’ issue price is given in the prospectus, and investors must buy at that price only. Under this method, the issue price gets finalised through a bidding method. The investors will have to bid between a price band provided to them. 
Pricing The price at which securities get allotted is intimated to investors in advance.  The price at which securities are allotted is not disclosed to investors in advance, and they only get to know the indicative price range. 
Demand Demand for securities is known after the issue is closed.  Demand for securities is known every day as the book gets built.
Payment Payment is made during the time of subscription, and the refund is provided after allocation. Payment is made after allocation. 
Payment Type Application Supported by Blocked Amount (ASBA) and UPI Application Supported by Blocked Amount (ASBA) and UPI
Reservations 50% of shares are reserved for applications that are below Rs. 2 lakhs. 50% of shares are for Qualified Institutional Buyers (QIBS), 15% of shares are for retail investors, and 35% of shares are for non-retail investors. 
Prospectus The company must issue a prospectus that should contain all the details about the initial offering, including the price at which shares are provided and the number of shares offered.  The company must issue a red herring prospectus that comprises the total size of the issue and the price band. 
Uses It can be used for almost any issue, such as ESOS, rights issues, public issues, and more. It is generally used in public issues, such as FPO and IPO. 

Frequently Asked Questions (FAQs):

Q. What are the benefits of book building?

The book-building process helps firms discover the price of a security when they are offering shares for sale during an initial offering with the help of investment bankers. A lot of stock exchanges, as well as regulators, recommend the same method as it is efficient to price securities in the entire market. 

Q. How many types of book buildings are there?

As per the guidelines of the Stock Exchange Board of India (SEBI), the issuer company can issue shares to the public through a prospectus in the below-mentioned ways:

  • 100% of the entire offer to the public through book building method
  • 75% of the entire offer to the public through book building method and 25% at the decided price through book building method

In India, the book-building practice is quite recent. However, it is still a widespread methodology. 

Q. How is the book-building method better than the fixed-price method?

As compared to the fixed price method, the book-building method generates high expected proceeds but brings the issuer to uncertainty. Along with that, it also offers the option to sell extra shares that are not underpriced.