Introduction
An Initial Public Offering or IPO is an affordable way for a company to raise capital and fuel its future growth. Companies can issue an IPO to fund new projects, raise their public profile, or monetize current stakeholder investments.
Issuing an IPO is often referred to as “going public” as it indicates a company’s transition from private to public ownership. Once the IPO process is complete, a company’s shares are listed for stock market trading.
Now that you know what an IPO is, let’s discuss the different types of IPOs.
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What are the different types of IPO?
The two types of IPOs include:
- Book-building IPO
- Fixed price IPO
Book building IPO
The concept of the book-building issue is relatively new in India. It was introduced by the Securities and Exchange Board of India (SEBI) in 1995 to streamline the capital market and overcome the issues of high pricing.
In a book-building issue, the company discovers the price of a share during the process of the IPO itself. Instead of a fixed price, the company sets a price band or a range with a lower and upper limit. The lowest price in the band is referred to as the “floor price,” while the highest price is referred to as the “cap price.” The price band is usually within the range of 20%, and you can place bids at any price within the band. The demand for shares is revealed each day as the book is built.
The final price in the book-building issue is determined after assessing all the bids the investors place. In the case of oversubscription, the IPO price is fixed at the “cap price.” In this type of IPO issue, the payment is debited from your account only after the allocation.
Fixed price issue
The second type of IPO is a fixed price issue. Here, the price of a share is fixed and disclosed before the company goes public. The company and its underwriter evaluate its risk, valuation, assets, liabilities, and prospects. After analyzing all the aspects, they decide the price at which the public can buy the shares.
It means you won’t have to wait for the allocation date to discover the IPO price. However, you’ll know about the demand for the shares only after the issue closes. If you opt to invest in a fixed-price IPO, you must pay the entire cost at the time of subscription.
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The share price is typically undervalued in a fixed-price IPO, making it attractive for retail investors who can benefit from the company’s revaluation.
Book building issue vs fixed price issue
Points of difference |
Book building issue |
Fixed price issue |
Price |
The price is in a range or band. It is fixed after the close of the issue |
The issue price is fixed in the beginning and mentioned in the order document |
Subscription |
Subscription for the IPO is revealed every day. This makes it easy for you to know the demand |
Subscription for the IPO is revealed only when the issue is closed. Hence, demand is not known until the process closes |
Payment |
Payment is debited from your account after the allocation |
You are required to pay the entire payment at the time of subscription |
Reservations |
Generally, 50% of the issue is reserved for QIBs (Qualified Institutional Buyers),35% for small investors, and 15% for other investors |
50% of the issue is reserved for investments below Rs. 2 lakhs and50% is for High-Net-Worth Individuals (HNIs) |
Conclusion
IPOs are one of the most popular investment tools for both novice and experienced investors. They offer excellent opportunities to participate in the growth of promising companies and earn handsome returns. But before investing in an IPO, you must research thoroughly about a company and assess the risks involved.
To start your IPO investment journey, you can open a Demat account for free with Motilal Oswal in only five minutes.
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