What is the difference between book building and fixed price IPOs?

When a company decides to go public and raise capital through an Initial Public Offering (IPO), it must choose a pricing mechanism for the offering. The two most common methods used in India are the book building and fixed price methods. Both these methods determine how the share price is set for the IPO, but they differ significantly in their processes and implications for both the company and investors. Let’s explore the key differences between these two types of IPOs.

1. What is a Fixed Price IPO?

In a fixed price IPO, the company determines a specific price at which the shares will be offered to the investors. This price is usually announced in the prospectus or the Red Herring Prospectus (RHP) before the subscription period begins. Investors can then apply for shares at this fixed price.

• Pre-Determined Price: The price is decided beforehand and remains fixed throughout the offering.
• No Bidding Process: Investors do not have the option to bid for shares at different price points. They must accept the fixed price.
• Simpler Process: The process is straightforward since the company announces the price in advance, and investors apply directly at that price.

2. What is a Book Building IPO?

In a book building IPO, the company offers a price range within which investors can bid for shares. The final price is determined based on the demand received at various price points during the bidding process. The price at which the shares will be allotted is known as the final offer price, and it is decided after the subscription period ends.

• Price Range: The company specifies a price band (a range of prices) in which investors can place their bids.
• Bidding Process: Investors place bids at different prices within the range, and the final price is determined based on the demand for the shares at various price levels.
• Price Discovery: The price discovery process allows for more flexibility, and the final offer price may vary depending on the investor demand.

3. Key Differences Between Book Building and Fixed Price IPOs

Both book building and fixed price IPOs have their unique advantages and disadvantages. Let’s compare them in a more structured way:

Feature	Fixed Price IPO	Book Building IPO
Price Setting	Pre-determined price	Price range, based on bids
Flexibility	None, price is fixed	Higher flexibility, price is discovered through bidding
Investor Participation	Investors apply at the fixed price	Investors bid at different price points within the price range
Transparency	Lower transparency, as price is fixed in advance	Higher transparency, as the demand at various price points is visible
Market Sentiment	Does not reflect market sentiment as much	Reflects market sentiment through investor demand at different price points

4. Which Method is Better?

Both methods have their pros and cons. A fixed price IPO is simpler and easier to understand for retail investors. However, a book building IPO provides more flexibility and better market price discovery. The choice between the two depends on various factors, such as the size of the offering, investor sentiment, and the company’s objectives.

• For Investors: If you are an investor looking for more flexibility and market-driven pricing, a book building IPO may be more suitable. However, if you prefer a simpler process with a fixed price, a fixed price IPO might be the right choice.
• For Companies: Companies seeking to maximize the offer price and attract institutional investors might prefer the book building route. On the other hand, if simplicity is key, they might opt for a fixed price IPO.

5. Conclusion

Understanding the differences between book building and fixed price IPOs is crucial for investors looking to participate in the primary market. Each method offers unique advantages depending on the situation. Always conduct thorough research and consider your investment goals before applying for an IPO.