Types of IPO: Fixed Price vs Book Building
Initial Public Offering or IPO allows a private company to raise funds by offering its shares to the public for the first time. Most investors, whether beginners or experienced, know the basics of IPOs, but not everyone understands all its details. Two key concepts that often confuse people are Fixed Price Issues and Book-Building Issues. In this blog, we’ll explain the types of IPO and IPO application process, helping investors evaluate opportunities better and make the right investment decisions.
What is an IPO?
IPO is when a private company sells its shares to the public for the first time, becoming a publicly traded company. It allows businesses to raise funds for expansion, debt repayment or growth.
For investors, an IPO offers an opportunity to invest early in a company’s growth story. Evaluating an IPO involves reviewing the company’s financial performance, management quality, industry trends and market sentiment.
Two different types of IPO, such as Fixed Price Issue and Book Building Issue, also shape the IPO application process and pricing.
Types of IPO
As mentioned, there are primarily two types of IPO which are fixed price Issues and book building issues. Let’s understand each in detail:
Fixed Price Issue
In Fixed Price Issue, the company sets the issue price before going public with the help of underwriters, based on financial performance, industry trends and market outlook.
Investors know the exact price they will pay if they receive an IPO allotment ensuring transparency and simplicity. However, the fixed price may not reflect true market demand, leading to shares being underpriced or overpriced.
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Book Building Issue
In a Book Building Issue, the company gives a price band instead of a fixed price. Investors place bids within this range (for example, ₹75–₹80). Investors place bids within this range and the final price is decided after the bidding closes, based on overall demand. SEBI introduced book building in India in 1995 to make the IPO process more efficient.
Advantages and Disadvantages of Book Building Issue
Here are some pros and cons of the book building issue.
Pros
Finds the right price through investor demand.
Shows how much trust investors have in the company.
Fair pricing, not controlled only by the company.
Cons
More costly than fixed price IPOs.
Slower process since price is decided after bidding.
Mostly suitable for big IPOs, not small ones.
Advantages and Disadvantages of Fixed Price Issue
Here are some pros and cons of the fixed price issue.
Advantages
Easy for beginners to understand and apply.
Investors know the price in advance.
Faster and simpler than book building.
Lower cost of issue compared to book building.
Works well for small IPO sizes.
Disadvantages
High chance of overpricing or underpricing.
Doesn’t show real demand before allotment.
Less interest from big institutional investors.
Risk of heavy price swings after listing.
Company may raise less money if shares are undervalued.
How Retail Investors Participate?
For retail investors, the IPO application process is straightforward:
- Apply online through your broker or bank using the ASBA (Application Supported by Blocked Amount) facility.
- Funds remain blocked in your bank account until IPO allotment is finalized.
- If shares are allotted, the corresponding amount is debited. If partially allotted, only that amount is deducted and the rest is unblocked. If no allotment happens, the full blocked amount is released.
Difference Between Fixed Price and Book Building IPO
Here’s a quick comparison between fixed price vs book building.
| Criteria | Fixed Price Issue | Book Building Issue |
|---|---|---|
| Price | Pre-decided and fixed | Book-built issues have a price range. |
| Demand Transparency | Known only after the issue closes | Demand visible during bidding process |
| Allotment Price | Fixed and predetermined | Discovered after bids are collected |
| Retail Investor Appeal | Easier to understand and participate | Slightly complex but more market-driven |
| Risk of Mispricing | Higher, as price may not reflect the true demand | Lower, as final price reflects investor bids |
| Suitability in IPOs | Commonly adopted by Mainboard IPO companies. | Usually adopted by SME IPO companies. |
Conclusion
Understanding the different types of IPOs like fixed price and book building, helps investors make informed decisions. Fixed Price offers simplicity, while Book Building enables better price discovery. With ASBA, the IPO application process remains secure and transparent. Careful research, realistic expectations and a good grasp of how IPO allotment works help investors align opportunities with their financial goals.
FAQs
- How many types of IPOs are there?
There are mainly two types of IPOs, which are Fixed Price Issue and Book Building Issue. Sometimes, Dutch Auction IPOs are also used but less common in India. - What is the difference between Book Building and Fixed Price Issue?
In a Fixed Price Issue, price is pre-decided. In Book Building, investors bid within a price band and the final price depends on demand. - How is IPO Allotment done?
IPO allotment is done after applications close. If demand exceeds supply, the lottery system ensures fair distribution among retail investors while institutional and HNI investors get shares based on proportionate allocation.
