What is the Difference Between Fixed Price Issue and Book Building Issue

An Initial Public Offering (IPO) is a way companies raise capital from the general public and list on stock exchanges. Before an IPO opens for subscription, the company must decide how to price the shares and which pricing method to use.

In India, companies go for a fixed-price issue or a book-building issue. Both are IPO pricing methods with different pros and cons.

In a fixed-price issue, the company and underwriters set a fixed price, and investors bid at that price. In a book-building issue, the company and lead managers set a price range and allow investors to bid to determine the price.

This article explains the differences between fixed-price and book-building issues, along with their pros and cons.

What is a Fixed-Price Issue?

A fixed-price issue is an IPO pricing method in which the company, along with its merchant bankers, sets the share price before the IPO opens for subscription.

In this, the price remains fixed throughout the IPO. Investors know the exact price at which the shares are being offered when they apply for the IPO.

Key features include:

• The share price is fixed and disclosed upfront.
• Investors know the exact cost of shares before subscribing.
• It provides limited pricing flexibility.

What is a Book-Building Issue?

A book-building IPO is a dynamic pricing method in which the company sets the price range, and investors bid within it.

Once bidding closes, investor demand determines the final, or cut-off, price.

Key features of a Book-Building issue are:

• Investors bid within the price range.
• The lower range is known as the floor price, and the higher range is the cap price.
• Investors can view the bidding demand during the subscription period.
• The final price is determined based on the investors' demand.

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:

Pros and Cons of a Book-Building Issue

The pros of a book-building issue:

• Better Price Discovery:

The bidding process helps determine an issue price that more closely reflects demand from participating investors.

• Demand Assessment:

Companies can evaluate investor interest through bids received across different prices within the price band.

• Pricing Flexibility:

Book-building provides greater flexibility to arrive at an issue price based on market demand.

The cons of a book-building issue:

• Price Uncertainty:

Investors do not know the final issue price when they submit their bids within the price band.

• Complex Process:

The bidding mechanism can be comparatively more difficult for new investors to understand than a fixed-price issue.

• Demand Dependence:

Weak investor demand can influence the final pricing outcome and may affect the company’s fundraising expectations.

Pros and Cons of a Book-Building Issue

The pros of a book-building issue:

• Better Price Discovery:

The bidding process helps determine an issue price that more closely reflects demand from participating investors.

• Demand Assessment:

Companies can evaluate investor interest through bids received across different prices within the price band.

• Pricing Flexibility:

Book-building provides greater flexibility to arrive at an issue price based on market demand.

The cons of a book-building issue:

• Price Uncertainty:

Investors do not know the final issue price when they submit their bids within the price band.

• Complex Process:

The bidding mechanism can be comparatively more difficult for new investors to understand than a fixed-price issue.

• Demand Dependence:

Weak investor demand can influence the final pricing outcome and may affect the company’s fundraising expectations.

Which IPO Pricing Method is Better for Investors and Companies?

The choice between fixed-price and book-building issues depends on the company's objectives, market conditions and investors' preferences.

A fixed-price IPO may suit investors who value price certainty and a simple application process. For companies, it provides clarity about the price at which shares are offered.

A book-building issue can be more useful when accurate price discovery and demand assessment are important. Investors should evaluate the company’s financial performance, valuation, business model, and future growth prospects before applying.

FAQs

What is the difference between a fixed-price issue and a book-building issue?

In a fixed-price issue, the company decides the issue price and discloses it upfront in the prospectus. In a book-building issue, the company provides a price range, and investors' bids determine the final price.

Fixed-price issue or book-building issue: which is better?

From a retail perspective, a book-building IPO is better because it allows investors to bid within the range, and market demand determines the final price.

What happens if the fixed-price IPO is undersubscribed?

If a fixed-price IPO is undersubscribed, the issuing company can cancel the IPO or allocate shares to investors who subscribed. In some cases, underwriters may purchase the remaining shares to ensure the IPO's success.

How is allotment decided in a book-building issue?

In a book-building IPO, allotment is based on the bids received during the subscription period. Investors who bid at or above the final price are considered for allotment. However, if the IPO is oversubscribed, shares are allocated proportionately or, for retail investors, through a lottery system.