The initial public offers are they way by which the growth-driven Companies raise capital in the primary market for the first time to fuel their future growth. The Companies sell their securities to the public. The company gets a capital boost when the people buy their company’s equity. And people get to reap the fortunes of the company proportional to their share holding. If all goes well, the relationship is mutually beneficial.
There are two types of IPO,
- Fixed Price Issue
- Book Building Issue
The initial price offer can be made through the fixed price issue or book building issue or a combination of both.
Fixed Price Issue
In the fixed price IPO process, the Company along with their underwriters evaluate the companies’ assets, liabilities, and every financial aspect. Then they work with these figures to fix a price per issue to achieve the target funds. This price which is fixed per issue is printed in the order document. The order document justifies the price with qualitative and quantitative factors. The demand for securities is known only after the issue is closed. The oversubscription levels are high in the fixed price offerings, sometimes several hundred times.
Book Building Issue
Compared to the developed countries, the concept of book building is new to India. In the book building issue, the price is discovered during the process of IPO. There is no fixed price, but there is a price band. The lowest price in the band is referred to as the ‘floor price’ and the highest price is referred to as the ‘cap price’.
The price band is printed in the order document. And the investors can bid for desired quantity of shares with the price which they would like to pay. Depending on the bids, the share price is decided. The securities are offered above or equal to the floor price. The demand is known everyday as the book is built.