To finance new initiatives, increase public awareness, or profit from existing stakeholder investments, businesses can launch an initial public offering (IPO).
A company's move from private to public ownership is signified by the IPO, sometimes called "going public." A company's shares are made available for trading on the stock market upon completion of the IPO procedure.
Why do Companies go Public?
A company can use an IPO for a number of purposes, including becoming public:
1. To generate money for development and growth.
2. Additionally, it offers liquidity to founders, workers, and early investors who wish to cash out their shares.
3. Going public can boost a business's reputation and visibility, which will help it draw in top personnel and possible business partners.
4. Getting noticed and building a strong brand presence in the marketplace can also be another strategic goal.
Now, after knowing the meaning of IPO, let’s discuss different types of IPO.
Types of IPOs
There are mainly two types of initial public offering. Here are both these IPO types
in detail: -
1. Fixed Price Issue
The corporation establishes a predetermined price under the fixed price issue, at which all of its shares will be made available to investors. In order to accomplish this, a business engages the services of a merchant banker, an organisation that assesses and lowers a company's risk exposure.
A merchant banker discovers a company's complete current worth in addition to its prospectus for the future. In addition to finding, they compile a risk summary of every investment and explain how the investors will be compensated in high risk cases.
Following a thorough investigation and analysis, they establish a fixed price for a certain share that will enable them to raise significant funds for their business.
In this kind of initial public offering (IPO), every investor knows the price of a specific share that the company sets before becoming public. They pay the entire fixed amount when they purchase an IPO subscription for a particular firm.Also Read about Top 10 IPOs to Watch Out for in 2024
2. Book Building Issue
In India, the idea of the book-building problem is relatively new. In order to improve the capital market's efficiency and address difficulties with excessive pricing, the Securities and Exchange Board of India (SEBI) created it in 1995.
The firm ascertained the share price during the IPO in a book-building offering. The business establishes a pricing band or range with a lower and upper limit in place of a defined price. The terms "floor price" and "cap price" denote the lowest and highest prices in the band, respectively. You can submit bids at any price within the price band, typically 20%. As the book is being constructed, the daily demand for shares becomes apparent.
After considering each and every bid made by the investors, the ultimate price in the book-building issue is established. The IPO price is set at the "cap price" in the event of an oversubscription. The payment for this kind of IPO issue is only deducted from your account after the allocation.
What is the Difference Between Book Building Issue and Fixed Price Issue?
Aspect | Book Building Issue | Fixed Price Issue |
Price Determination | Price is discovered through investor demand | The issuing company predetermines price |
Flexibility | Offers flexibility in determining the final price | Offers limited flexibility as price is fixed |
Investor Participation | Investors actively participate in price discovery | Limited or no involvement of investors in pricing |
Transparency | Offers greater transparency in pricing mechanism | Pricing mechanism may be less transparent |
Market Conditions | Sensitive to market conditions and investor sentiment | Less affected by short-term market fluctuations |
Risk Management | May carry higher risk due to price uncertainty | Lower risk due to fixed price and predetermined terms |
Time to Market | Usually takes longer to complete the issuance process | Generally quicker due to predefined price and terms |
Pricing Efficiency | This may lead to efficient price discovery | Less efficient in determining market value |
Investor Confidence | Can boost investor confidence through fair pricing | Offers certainty but may not always reflect true value |
The Bottom Line
Initial Public Offerings (IPOs) are a significant aspect of the financial industry, giving businesses a chance to raise money and grow. Before thinking about making an investment, it is crucial for investors to comprehend the many IPO kinds and how they operate. Even though IPOs can be a profitable investment opportunity, you should thoroughly consider the risks and potential returns before making any decisions about your money.
