Fixed Price Issue and Book Building Issue

An Initial Public Offering (IPO) is a common way that a company goes public and sells shares for the first time to raise financing. There are two common types of IPOs: a fixed price and a book building offering. Let us discuss both types in detail in this post.

What is meant by Issue Price?

The Price at which a company’s shares are offered initially in the primary market is called as the Issue Price. When they begin to be traded, the Market Price may be above or below the issue price.

Who decides the price of an issue?

• SEBI does not play any role in the price fixation. There is no price formula stipulated by SEBI.
• SEBI has provided guidelines under which Issuer shall decide the Issue price in consultation of Merchant Banker
• The Company and the merchant banker are required to give full disclosures of the parameters which they had considered while deciding the issue price.

What is the Fixed Price Issue?

• Under the Fixed Price Offering, the company going public determines a fixed price at which its shares are offered to investors.
• Price at which the securities are offered and would be allotted is made known in advance to the investors.
• Demand for the securities offered is known only after the disclosure of the issue.
• To take part in this IPO, the investor must pay the full share price making the application.

What is the Book Buiding Issue?

• Under Book building, the company going public offers a 20% price band within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding
• Demand for the securities offered, and at various prices, is available on a real-time basis on the websites of major stock exchanged during the book building process.
• Investors must specify the number of shares they want to buy and how much they are willing to pay.
• Unlike Fixed price, there is no fixed price per share.

What is the Book Building Process?

• Book Building is basically a process used in IPOs for efficient price discovery.
• It is a mechanism where, during the period for which IPO is open, bids are collected from Investors at various prices, which are above or equal to floor price.
• The process is directed towards both the institutional as well as retail investors.
• The issue price is determined after the bid closure based on the demand generated in the process.

What is a Price Band in a book built IPO?

• The prospectus contains either the floor price for the securities or a price band within which the investors can bid.
• Floor Price is the minimum price at which bids can be made
• Cap price is the maximum price at which bids can be made
• The spread between the floor and cap of the price band should not be more than 20%
• It is up to the company to decide on the price band in consultation with the merchant bankers.
• The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called ‘Cut-off price’.

What is the main difference between the Book Building Issue and Fixed Price issue?

• Price at which securities will be allotted is not known in case of book building offer while in case of offer of shares through fixed price issue the price is known in advance to investors.
• Under book building, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares.
• In case of book building, the demand can be known everyday as the book is being built. But in case of Fixed price issue the demand is known at the closure of the issue.