#ipo process

If you have ever invested in an IPO, this question may have crossed your mind: How does a company decide its IPO price? Well, it’s a common doubt that comes among investors. So, when a company decides to launch its IPO, it can decide the issue price using 2 methods: Book building vs Fixed Price. This decision is an important part of theIPO process. Now the real question is how the company decides whether its issue price will be book building or a fixed price. Well, in this article, we will help you understand the difference between Book Building and fixed price. But first, understand the IPO price for a little more understanding. Read on.

What is the IPO Price?

When a company decides to launch its IPO, it decides the price of its shares, on which investors bid or apply for the company's shares. Simply, an IPO price is the price that investors pay per share during the bidding process. There are 2 methods through which a company decides its IPO pricing, as follows:

What is a Book-Building IPO?

When you read that this IPO is a book-building IPO, this is what it means: when a company decides a price range (For eg, ₹100 to ₹110) rather than choosing just a single fixed price for its shares is called Book-building. Meaning investors get a chance to bid for the IPO within that price range. This IPO pricing method usually helps the company determine the final price/cut-off price based on investors’ demand. The book-build ipo method is usually used by mainboard IPOs.

Let’s understand this properly with a live example:

Recently, one of the largest producers of Coking coal, Bharat Coking Coal (BCCL), launched its IPO with a price band of ₹21–₹23 per share. This is a Book-Build ipo. An investor can choose to apply for an IPO within the price range of ₹21, ₹22, or ₹23. After the IPO closes, the final issue price or cut-off price is decided based on the demand received at different prices.

In a book-building IPO, the lowest price an investor can bid is known as the floor price, or the lower end of the price band. The highest price the investor can bid for is known as the Cap price or upper end of the price band.

How is the share price decided in a Book-Building IPO?

Price band is decided:

At the time of the launch of the IPO, the company decides on a price band mentioned in the ipo prospectus, for eg, ₹72 to ₹76.

Investor applies for the bid:

Investors then apply for the IPO within the price range of ₹72 to ₹76.

Demand is recorded

Investors' bids on the different price levels are collected during the IPO.

The cut-off price is decided

The price at which most investors bid is set as the cut-off price or final-issue size. For eg, from the price range of (₹72 to ₹76), at ₹76, the company received the most bids, meaning most of the investors applied for the IPO at the upper end of the price range.

Allotment received at the cut-off price

Investors who applied for the IPO at the cut-off price will receive the IPO allotment. If ₹76 is the cut-off price, and if you bid below the cut-off price, then you will not get allotment.

What is a fixed price IPO?

As its name suggests, in a Fixed Price IPO method, the company offers its shares at a fixed price. Unlike a Book-Build IPO, where the company gives a price range between 2 numbers to choose from. In a Fixed Price IPO, investors can only bid for 1 fixed price set by the company. In a fixed price IPO, the share size is fixed (For eg, 72) before the IPO opens for subscription. The fixed price IPO method is usually preferred by SME companies due to its smaller size.

Let’s understand this better with a live example:

Kanishk Aluminium, one of the leading aluminium extrusion manufacturers, recently launched its IPO with a fixed price of ₹73 per share. Meaning the investors can only bid for the shares of the company at a price of ₹73 only. Unlike a book-build ipo, in a fixed price ipo, investors can only apply for the IPO at the predetermined price.

Difference Between Book Building and Fixed Price

Book-Building IPO

Fixed Price IPO

In Book-Build, the company defines a price band for its shares(e.g., ₹100–₹110)

In a Fixed Price IPO, a fixed price is decided (e.g., ₹100)

Introduced by SEBI in 1995 for well-managed pricing.

The traditional method of ipo pricing

Investors submit a willing bid within the price range

Investors can buy shares only at a fixed price

The final price is decided based on the investor’s demand

The final price is pre-fixed by the company

This ipo pricing is mostly used by large and mainboard IPOs

This ipo pricing is mostly used by small and SME companies

Book-Build issue allows market-driven pricing

Fixed price issue gives certainty to investors

Book-Build issue is more popular in India

The fixed price issue is less popular in India

Investors can check the demand for each price during the IPO

Investors cannot check the demand until the IPO closes

Lower risk of mispricing as the final price is decided as per the investor’s demand

Higher risk of mispricing (Undervaluation or overvaluation) as pricing is pre-fixed.

Frequently Asked Questions

Which ipo pricing method is most commonly used in India?

The book-building IPO method is commonly used in India, especially for large companies, which mostly prefer this method.

What risks are associated with each ipo pricing method?

Book-build IPO carries lower risk as the final price is determined as per market demand.

Fixed price IPO carry a higher risk as the price is pre-determined, leaving room for overvaluation or undervaluation.

Can retail investors apply for both types of IPO?

Yes, investors can apply for both a book-build ipo and a fixed price ipo through UPI or ASBA.

What is a Book-build IPO?

When a company offers its shares in a price band (for example, ₹100–₹110) is called a book-build ipo. Investors can bid for an IPO within this price range.

What is a fixed-price IPO?

When a company offers its shares with a single fixed share price (for example, ₹100) is known as a fixed price ipo. An investor can only apply for an IPO at a fixed price.

What is IPO?

The word IPO stands for Initial public offering. IPO is the method by which the public begins buying shares of private companies to gain equity capital through ipo investment by public investors. Rolling out the ipo process turns a private firm into a public firm. Such a process would indeed bring about a chance to become a smart investor ineffectively doubling the marginal price of the commodity and thereby earning good returns on their investments.

IPO can be defined as the proper action by a company to obtain capital from investors who are interested in a corporation’s shares irrespective of their home or domicile location and can increase such company’s credibility and visibility while providing existing shareholders and early investors a chance to monetize their ipo investment by cashing some of their shares.

Ipo Process – How does IPO work?

The company that offers its shares is called the ‘issuer’, and this ipo process is done with the help of investment banks. After the IPO, the company’s ipo stocks are traded publicly in the open market. The same shares can be resold, through secondary market doing, by the investors. From beginning to end, there are the following steps for the whole of the ipo process.           

Company’s decision to go public

Selection of investment Banks

Prepare registration statement

Relevant regulatory body review

Roadshow to generate investor investment

Setting the prices of ipo stocks

Allocation to investor

Listing on market

Now you good to go trading

Ipo Process – Things to know before investing IPO

It is becoming popular among investors that they invest in the new IPO almost every new IPO comes with tricks in the market. On the other hand, not all IPOs are worth referring to. It is a good prerogative that you self as a smart investor must undertake the fundamental analysis of different aspects of an IPO before investing such hard-earned money. Otherwise, your excitement will be short-lived because you will soon get disillusioned.

First Understand the Business

Check the reasons for the IPO

Check the company’s financials

Evaluate the Strengths and weaknesses

Check the company’s health

Check the Business model

Read the prospectus

Check the background of the promoter and management

Conclude and decide

Types of IPO

Certainly, IPOs are diverse in form and can be structured in many different ways, sometimes depending on several criteria. There are two common types of IPOs: a fixed-price offering and a company book-building offering.

Companies can man them separately or at a time. Sizes of an IPO, however, are of different kinds, quality, cost benefits, and risks associated with. Investors need to consider the details of any offering elementary but thorough due diligence is required when an individual is deciding to participate in any IPO.

Ipo Process – How to check about upcoming IPO’s and status

To know the IPO that is soon about to come and could be used to check ipo status, one can use various tools and platforms.

Websites: SEBI website, financial news websites managed by the entity itself, and online investment platforms such as companies leaping towards publishing initial public offerings.

Mobile apps: It seems like many investment platforms and financial news websites provide mobile apps that can monitor upcoming expositions on the way from anywhere.

News notifications: In general, you can set news alerts on Google News or other special news aggregator services to deliver the notification once there is new material resulting from a pending IPO.

Investment advisors: With your investment advisor, you can also get personalized advice on planned IPOs.

Brokers: Your broker could provide you with information related to upcoming IPOs, check ipo status, as well as fill out an application form on your behalf.

Ipo Process – How to invest in an IPO

ipo investment should begin by following ipo process news, future IPOs from financial news, and IPO calendars. Investigate the business model adopted by the company, the financial health of the establishment, and the prospects of growth of the organization. The following steps should followed after this; you invest in an IPO.

Step 1: Create an account for a Demat at Upwork, grow, and so on, log in and choose an Ipo you want to deal with.

Step 2: Specify the price at which you would like to apply for the shares and the number of lots to be bought within the time windows.

Step 3: Complete the application form and specify your UP Information.

Pros and cons of investing in an IPO

 The companies come into the public market with the aim of growth capital to grow, settle their debt, or use the fund to finance other business activities. The change from a private company to a public company, even if not quite negative, should hardly be a change that is suitable for every company. It could be costly to acquire capital. To address this problem, an approach to the pros and cons of investing in IPO would be applicable.

Pros

Opportunity for Quick Profits.

IPO is offered often at the lowest price.

Early Access to Potential Growth.

Can invest in innovative, high-growth companies.

Investors could buy equity at the best possible price.

Cons

IPOs are risky. Because IPOs are the first time the general public can invest in a company, the price may be pushed upward.

Time-consuming process.

IPO can be unpredictable.

Prices will fluctuate often.

A private firm can generate money by first making its shares available to the general public through an initial public offering, or IPO. Though not everyone is familiar with all the specifics, the majority of investors, regardless of experience level, are aware of the fundamentals of initial public offerings. Book-Building Issues and Fixed Price Issues are two important ideas that frequently cause confusion. We will go over the different kinds of initial public offerings (IPOs) and IPO application process in this blog to help investors better assess prospects and choose wisely.

What is an initial public offering (IPO)?

When a privately held firm sells its shares to the general public for the first time, it is known as an initial public offering (IPO). It enables companies to raise money for growth, debt repayment, or expansion.

An initial public offering (IPO) gives investors the chance to get involved early in a company's development. Examining the company's financial performance, management caliber, market sentiment, and industry developments are all part of evaluating an initial public offering.

The IPO application procedure and pricing are also influenced by two distinct IPO categories, such as Fixed Price Issue and Book Building Issue.