The IPO market is one of the most preferred ways adopted by investors for investing in promising companies. In recent times, there has been a lot of chattering and buzzing about types of IPO in the Indian stock market.
As a responsible investor, you need to know some of the basic concepts and terms that are related to the IPO market. In this article, we will be discussing various types of IPOs prevalent in the Indian Stock Market.
But, for better understanding, let’s get you an overview of what an IPO is.
What is IPO, and Why Companies Issue their IPOs?
Initial Public Offering or IPO, as it is generally known, is a process through which promoters and owners take their companies public. Companies offer some part of their business, more commonly known as “shares” to the interested investors.
By issuing an IPO, companies go public. This allows their shares to be traded openly in the regulated Stock Market.
- The primary purpose of issuing an IPO is to raise capital to mitigate various expenses, to promote growth, and to pay off the debts that the Company owes.
- The secondary reasons are to become more transparent in their operation, expansion in their existing structure, and exploring new business domains.
What’s in it for Investors?
Investors get an opportunity to invest in some promising companies that can reward them in the longer term. Moreover, investors can book their profit if the IPO opens a premium to the issue price. Thus, more or less, an IPO is a tool that is mutually beneficial to both investors and issuers.
What are the different processes of issuing IPOs in India?
There are two most prevalent methods of issuing IPOs in India. Let’s take a look at them, one step at a time.
Fixed Price Issue
As the name suggests, the price of the issue is fixed by the Company before it is made available to the investor for a subscription. The company management sits along with their underwriters and performs a detailed analysis of their financial performance. This includes analysis of their debts, assets, outstanding payments, liabilities, and other related information.
Once the information is properly analyzed, the Company and underwriters fix a certain issue price. This price resonates well with the Company’s performance and its requirements. Once the price is fixed, it’s mentioned in the order documents. All the necessary information that’s necessary for the justification of the issue price is included in that order.
The drawback of Fixed Price Issue
- This process makes the work difficult for investors as well as issuers. Investors don’t get the information about the number of applications made for the subscription. These numbers are the indicators of the quality of the IPO.
- On the issuer’s side, once the price is fixed, then they will not get more funds out of those shares, no matter how premium their stock sells after listing on the market.
Book Building Process
This process is rather new in India as compared to the process mentioned above. In this process, there is no fixed issue price of the share. The Company decides multiple price bands that it feels is justifiable as per their financial performance. This is done by underwriters and company executives working together.
The information on these price bands is printed order documents. Once the issue is available for the subscription, investors can do their own math and make bidding on the price they feel is most suitable for the issue.
The final issue price is fixed on the basis of the bids made. The price band that receives the maximum application is considered for fixing the final price. This process, in common terms, is known as the Book Building.
Benefits of Book building process
- There are multiple benefits of adopting a book-building process for issuing an IPO. The first is, it’s fair to both.
- Investors don’t have to pay more for the issues that are not so attractive. On the contrary, issuers don’t have to lose a big chunk of their profit by giving away their valuable shares at a dirt-cheap price.
- The secondary advantage is that the information about the number of bidders is updated daily. This helps potential investors judge the quality of the IPO. It is a general perception that the more application the IPO receives, the better it will perform after getting listed on the market.
- This is the reason why companies in India now prefer Book Building methods to issue their IPOs. It creates a perfect balance of Supply and demand, offering the level playing ground to the investors and issuers.
Comparative look at these Two Different IPOs
| Fixed Price Issue | Book Building Issue | |
| Pricing | The price of share fixed on the day issue is available for subscription and stays the same | There is no fixed price on the day subscription open. Investors can make buddings on multiple price bands. The final price is fixed only after the application for subscription ends. |
| No. of subscribers | The information about the number of applicants becomes available only after the completion of the subscription process | The information about the numbers of applicants is updated regularly and it is easily available for interested applicants to view |
| Payment | 100% Payment in advanced. Refund after final allotments. | The Payment Can Be Made After The Allocation. |
| Reservations | 50 % of the shares are reserved for the small and medium investors who invest below 2 lakh. Other 50% is reserved for High Value investors | 50 % of the shares are reserved for Qualified Institutional Buyers. 35% of the shares are reserved for small investors and remaining for other category. |
Final Thoughts
Over the years, Indian companies felt that it’s better to start offering issues on the basis of Book Building methods. Although the number of fixed price of issues has been traditionally high, the number of IPOs following the Book Building process is continuously rising in India. The stock market is becoming more transparent and beneficial for investors as well as issuers through this process.
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