Types of IPO

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Types of IPO have their own investment requirements and business processes to be followed. In this detailed review, we will have a detailed look at different types of IPO available for your stock market investments.

We will also try to address the differences between both types of IPO with the help of a few relevant examples so that the overall learning process is relatively simpler.

In case you are looking to learn about IPOs and then, probably looking to invest in one, then you need to understand some of the basic intricacies. In this quick and short review, we will talk about the types of IPO and the difference between them.

This is important to know for the simple reason that in case you choose to invest in any of the upcoming IPOs, then knowing different key aspects (around IPO), can help you in making the decision with ease. In this review, we will look at different types of IPOs and the difference between those.

Types of IPO – Basics

At a general level, there are 2 types of IPOs:

Book Building Issue

There are cases when a company knows the specific price at which it looks to issue its shares through the initial offer.

However, if the company filing for an IPO does not know the specific price at which it must market its shares, then it launches its IPO with a specific price range and not at a fixed price. This particular process where the price discovery of shares is done through bidding by investors is called Book Building.

This is a tried and tested technique which is recommended by major exchanges in the world where price is finalized during the IPO process itself.

Within this price band, the lowest price is termed as the Floor Price while the highest price is known as the Cap Price of the share. The final share price is decided based on the investor bids and the overall demand after the bid closing date.

Fixed Price Issue

Fixed Price Issue, as the name suggests, applies in the case when the business is 100% sure of the specific price point it is going to launch its IPO at. Getting to a specific price range requires a detailed research, competitive analysis, industry benchmarking etc.

At the same time, if there is some confusion left with the finalized price – then it can lead to a few repercussions impacting the company valuation at the end of the day.

Book Building Vs Fixed Price

Both these types of issues are different by the following means:

  • In a fixed price issue, the investors are provided with the information of offering price of the issue (shares) well in advance so that they can create an objective goal around their investment. On the other hand, a price band is shared in case of a book building issue, which is basically a range of price and not a specific number.
  • When it comes to making the payment for the shares purchased in an issue, you are required to make the payment in advance while you are subscribing to the shares in case of Fixed Price Issue. However, in the case of book building issue, there is no such condition. You can make the payment only after you are allocated the shares.
  • In fixed price issues, 50% of the overall share allocation is reserved for applications below ₹1 Lakh (and balance for applications with higher amounts. In case of book building issues though, there is allocation as well but that is based on the category of investor and not on the bidding amount. That is, 50% of the shares are kept for Qualified Institutional buyers, 35% for retail investors and 15% for the rest.
  • Once the Fixed Price Issue is closed, the demand for the securities is made available only at that time. While, in the case of book building issue, this demand for shares can be known every day.

Types of IPO – Example

Let’s try to dig a bit deeper and understand the different types of IPO with the help of a real-life example. Hopefully, with this practical example, things get easier to digest.

Real Life Example – Facebook IPO

Let us take a real-life example to understand the importance of book building process in the IPOs valuation and how this type is more credible than the fixed price issue.

When Facebook was going to launch its IPO in May 2012 – the investment banker hired (Morgan Stanley0 used the book building process in order to reach a specific issue price. The initial price band was kept at $28 to $35, however looking at the overall demand, the band was changed to $34 to $38. With all this utter confusion (read greed), the share price saw a reasonable variation.

It reached at a price of $45 at one point in time during its first trading day but ended up just at $38.03.

This shows that you need to be very wary of the different aspects involved in finalizing the issue price. Although, Facebook currently is trading at a staggering price of $178, but that is a different story altogether.

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