TYPES OF IPOs
The IPO is a beneficial way in which various growth driven startups and companies offer their shares to the public to raise capital and to fuel their future growth. The process is straightforward. The company sells its shares to the major public in general. When the public purchases shares of their company’s equity, the entity gets a capital boost. Therefore, all the people invested in a particular company have the opportunity to acquire the fortunes of that company which is equivalent to the shareholding. If a company performs well and earns major profit, people in turn get mass money from their shares. If all goes well, the relationship between the public and company is usually beneficial.
TYPES OF IPO
There are 2 types of IPO and the explanation and difference between the two is very easy to understand. These 2 types are namely:
- Book Building Issue
- Fixed Price Issue
1. Book Building Issue:
In the book building issue, the price is revealed during the process of IPO. The company sets no fixed price in this IPO process, but there are two different price ranges or bands. The price on the lower bracket is known as the floor price and highest price band is referred to as the cap price. Nevertheless, investors interested in purchasing the shares have to make a bid within a demanding time before the company fixes the price.
The bidding is, however, done within the range of 20% set by the company or within a price range. Also, the company needs to clarify the shares they wish to sell to the investors. Towards the end, the final price depends entirely on the bids placed from the investors.
2. Fixed Price Issue:
Under the fixed price issue, the company defines a fixed price at which all their shares will be offered to the public and potential investors. To make this possible, a company hires a merchant banker or underwriter, an entity that will appraise and reduce the level of risk for the IPO raising public.
The underwriter finds out the current value of a company along with its future prospectus. Apart from finding, they also make an overview of the risk of all the investments and how it will reimburse the investors when they come across such enormous risk.
After analysing and gaining extensive understanding, they determine the price of a particular securities that should be fixed in order to raise reasonable capital for their companies. In this type, all investors know the price of securities decided by the company before the company goes public. They pay the total prices which are fixed while subscribing to the IPO of a particular company.
The difference between the two types of IPOs depends on the factors given below:
In a fixed price, investors have to pay 100% advance of the share price at the time of bidding. Whereas, in book building issues, the payment is made after the shares are allotted.
In a book building issue, the demand can be ascertained eerie day. Whereas, in a fixed price issue, the demand can be known only after ascertaining the closing of the issue.
In a book bidding issue, 35% are reserved for small investors, 35% of the allocations are reserved for QIB (Qualified Institutional Buyer) and the rest are reserved for the other categories of the investors. Whereas, in a fixed price issue, 50% of the allocations are reserved for those who have investments below Rs. 2 lacs and the remaining is given for high amount investors.
In a book building issue, the price is not certain and only the price range/band is initially fixed. Toward the end, the exact price is fixed after the closing date of the bid. Whereas in a fixed price issue, the price of the share is set on the first day of listing and later that fixed price is printed in the order document.
The number of fixed price IPOs is more than the book building IPOs because the company fixed the price of shares. However the capital which is accumulated from the book building issue is way more than the fixed price issued after there are price corrections in the market. In most of the cases, investors use book building issues because it quickly makes it place in the market itself without much hassle.