What are the Various Types of IPOs?

Initial Public Offerings (IPOs) are a method companies use to raise capital in the primary market for the first time to support their future expansion. Through an IPO, companies offer their securities to the public. 

When investors purchase shares, the company receives a capital infusion, while shareholders gain the opportunity to benefit from the company’s success in proportion to their ownership. Ideally, this creates a mutually rewarding relationship for both the company and its investors.

But do you know that there are different IPO types? This blog will help you to know about different public offerings including their pros and cons.

Different Types of Initial Public Offerings Section

Here are the different types of IPO issues:

• Book Building Issue

The concept of book building is relatively new in India than the developed nations. In a book-built IPO, the final price of the shares is decided through the bidding process, rather than being fixed in advance. 

Instead of a single price, there is a price band where the lower end is the ‘floor price’ and the upper end is the ‘cap price.’ You can know the price band in the offer document. Investors are invited to place bids for the number of shares they wish to purchase, specifying the price they are willing to pay within the given range. 

Depending on the demand reflected in these bids, the final issue price is set. You can get the shares at or above the floor price. Throughout the bidding period, the level of demand is tracked daily as the book is built.

• Fixed Price Issue

In the fixed-price IPO method, the company, in collaboration with its underwriters, conducts a thorough evaluation of its assets, liabilities, and overall financial standing. 

Based on this assessment, they determine a fixed price per share to meet their fundraising objectives. This predetermined price is clearly stated in the offer document, which also justifies the price by outlining relevant qualitative and quantitative factors. 

Unlike book building, the demand for the securities becomes known only after the subscription period ends. Fixed-price IPOs often witness significant oversubscription, sometimes exceeding several hundred times the number of shares offered.

Main Differences Between Different Types of IPO 

Follow this table to understand the key differences between different IPO types:

Pros and Cons of Different Types of IPO 

There are both advantages and disadvantages of different types of IPOs:

• Fixed Price Issue

Pros:

• Simple and transparent; investors know the exact price in advance.
• Price stability throughout the IPO process.
• Easy for conservative investors to participate without uncertainty.

Cons:

• Risk of mispricing; fixed price may not reflect market demand.
• No flexibility to adjust prices based on investor interest or market conditions.
• Potential for lower investor returns if the fixed price deviates from true market value.

• Book Building Issue

Pros:

• Market-driven pricing; the final price reflects investor demand and market conditions.
• Flexibility to adjust pricing within a predetermined range based on bidding.
• Greater transparency and confidence for investors due to competitive bidding.

Cons:

• More complex and time-consuming compared to Fixed Price Issues.
• Higher costs due to underwriting fees and marketing expenses.
• Final price volatility; unpredictable outcomes based on demand fluctuations.

Final Thoughts

Investing in different IPO types is an exciting chance to be part of a company’s growth journey from the outset. However, it also involves certain risks, making careful research and evaluation crucial. 

Having a solid understanding of the IPO process, thoroughly analysing the company’s fundamentals, and using trusted platforms like Torus Digital can help you with hassle-free IPO applications.

At Torus Digital, we offer free account opening if you open a Demat account with us. The best part is that you do not need to pay any AMC charges for this account. So what are you waiting for? Open your account now!