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Assess risk and opportunity by learning all about Initial Public Offerings (IPOs), their types, how they are allotted, and more!
An Initial Public Offering (IPO) marks a significant milestone for any private company. It allows a company to expand its capital base by offering its shares to the public for the first time. For you, as an investor, IPOs are an opportunity to become part-owners of a company at an early stage.
Not all IPOs, however, are the same. They come with variable pricing mechanisms, allocation methods, and regulatory frameworks. Exploring various IPO categories prevalent in India helps you understand how they work, how shares are priced, and what you can expect throughout the process.
With this information at hand, you can make informed investment decisions and identify IPOs that suit your requirements and goals.
An IPO is the process by which a privately held company offers its shares to the general public for the first time and gets listed on a stock exchange. This public listing helps the company raise funds for expansion, debt repayment, or other corporate purposes.
IPOs allow you to buy equity in companies expected to grow and create value over time. During the IPO process, companies work with investment bankers and regulatory bodies, such as the Securities and Exchange Board of India (SEBI), to ensure compliance.
IPOs in India are primarily categorised based on the pricing method and how shares are allocated to you. The two main types are Fixed Price Issues and Book Built Issues. Both have unique characteristics that affect how you participate and how share prices are determined.
In a fixed-price IPO, the company sets a fixed price at which the shares are offered. This price remains constant throughout the IPO subscription period.
Key Features:
You know the exact price before applying for the IPO
The process to buy IPOs is simple, as no bidding is involved
Allocation is generally done proportionately or via a lottery system, depending on oversubscription
Advantage:
The IPO process is easier for you, as a retail investor, to understand without bidding complexities.
Disadvantage:
The price determined by the company may not reflect the true market demand. It may lead to over- or under-valuation.
The book-building process is more flexible compared to the fixed price issue IPOs. Here, the company sets a price band (floor and cap), and you can place bids within this range. The final price is decided based on demand and supply.
Key Features:
In a book-built issue IPO, the price is discovered during the bidding process
Institutional investors, high-net-worth individuals, and retail investors participate in the process
The final issue price is fixed after the bidding closes, based on investor demand
Advantage:
Unlike fixed price issue IPOs, more market-driven pricing helps reflect the company's true valuation.
Disadvantage:
Bidding in a book build issue IPO may be complex for a first-time investor.
IPOs can also be classified based on the objectives of the issuer and investor categories. These categories include the following:
In this process, existing shareholders sell their shares to the public without the company issuing any new shares. As a result, the proceeds from the sale go directly to the selling shareholders.
These are special IPOs aimed at small and medium enterprises (SMEs) with relaxed norms. The aim is to encourage growth and investment in smaller companies.
In case a company wants to raise capital after an IPO, they have these two options:
A listed company may issue additional shares to raise capital after its initial public offering (IPO).
A company can raise more money by issuing new shares after selling initial shares. To do so, it must first offer them to those who already own shares in the company. These existing shareholders are given a chance to buy the new shares in proportion to how much they already own.
Understanding the types of IPOs and their characteristics empowers you to navigate the market confidently. Whether through fixed-price offerings or the book-building process, knowing how shares are priced and allotted can help you make informed decisions. It also helps you better comprehend the dynamics of capital markets.
This content is for educational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.
IPOs are mainly classified into Fixed Price and Book Built issues, with variations like OFS, FPO, and Rights Issues.
Book building allows investors to bid within a price band, facilitating market-driven pricing. This process is unlike a fixed price issue, where the price is predetermined.
Retail investors, high-net-worth individuals, institutional investors, and employees may apply depending on the IPO terms.
QIBs provide stability, enable large capital inflows, and influence final pricing through their bids.
Prices are set through bidding in book-built issues or fixed by issuers in fixed-price issues. They are influenced by market demand and company valuation.
Shares are credited to your Demat account and become tradable on stock exchanges.
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