What are the different types of IPOs in India?
- 01 Mar 2024
- By: BlinkX Research Team
An Initial Public Offer (IPO) is a crucial step in a company's public offering, allowing it to raise funds by issuing shares to the public. IPOs attract new investors and market participants, offering an opportunity to invest in a company at an early stage of its growth cycle. Companies can use IPOs to finance new projects, scale the business, or offer partial or full exits to early investors. As an equity financing method, IPOs are cheaper and more affordable. To invest in an IPO, companies must understand the different types of IPO, including fixed price issues and book-building issues.
Types of IPOs
Here are the two types of IPO:
- Fixed-Price Issue
- Book-building Issue
The initial public offer can take various forms, known as types of IPO, including the fixed price issue, the book building issue, or a combination of the two.
Fixed Price Issue
During the fixed-price IPO process, the company and its underwriters assess the company's assets, liabilities, and other financial aspects. They then use these numbers to determine a price per issue to raise the required funds. The set price per issue is printed on the order paper. The order document justifies the pricing using both qualitative and quantitative elements. The demand for securities is only known after the offering has closed. Fixed-price products have large oversubscription levels, perhaps by several hundred times.
Book Building Issue
Compared to Western nations, the notion of book-building is novel in India. The price of the book-building issue is discovered during the first public offering (IPO). There is no set price, however there is a pricing range. The 'floor price' is the lowest in the band, while the 'cap price' is the highest. The pricing band is printed on the order paper. And investors can bid for the required shares at the price they pay. The share price is determined by the bids received. The securities are priced higher or equal to the floor price. The demand is known every day while the book is being created.
Table of Content
- Types of IPOs
- Differences between Fixed Price Issues and Book Building Issues
- How to apply for IPOs
Differences between Fixed Price Issues and Book Building Issues
Here are the differences between fixed price issues and book-building issues in two types of IPO:
Aspect | Fixed Price Issue | Book Building Issue |
Pricing | The share price is fixed on the first day of the issue and is printed in the order document. | The exact share price isn’t fixed. Only the price band is fixed. The price is fixed after the closing date of the bid. |
Demand | It is known only after the close of the issue. | It can be known every day. |
Payment | The payment should be done 100% in advance. A refund is given after the allocation. | The payment can be made after the allocation. |
Reservations | 50% of the allocations are reserved for investments below 2 lakhs, and the rest for large investors. | 50% of allocations are reserved for the QIBs. 35% for small investors and the rest for other categories of investors. |
How to apply for IPOs
Now that we've covered the various sorts of IPOs, we'll look at how to apply for one.
To apply for an IPO, an individual must have a Demat account where the securities may be held safely and digitally. A trading account to simplify the buying and selling of shares, as well as a bank account where the cash can be sent to apply for the IPO.
- The first step in applying for an IPO is to open or log into an account with a broker.
- After logging in, go to the IPO area, where the many IPOs available for subscription are displayed.
- After deciding on a chosen IPO, an investor can place an order. An investor can specify the lot size and price they want to bid.
- In the event of a book-building issue, the bid price will be deducted from your account after the order is placed. If the shares are not assigned, the cash will be credited to your account. Alternatively, one can apply for an IPO via a bank's Application Supported by Blocked Amount (ASBA).
- The IPO is deemed complete when the shares are assigned and posted on the stock markets.
Conclusion
The number of fixed-price IPOs exceeds that of book-building issues, where the corporation sets the share price. However, aftermarket adjustments, capital from book-building surpasses fixed-price offerings. In the realm of IPOs, there are two primary types of IPOs: fixed-price issues and book-building issues. While fixed prices are predetermined, book-building allows dynamic pricing based on investor demand, attracting multiple investors seeking a swift and flexible entry into the public market. Finally, to enter the market you have to have a reliable online trading app.