Types of IPO with Example
An Initial Public Offering (IPO) is the process by which a private company offers its shares to the public for the first time to raise capital. It marks a significant milestone for a business as it transitions from private to publicly traded. There are different types of initial public offerings, each designed to meet specific business goals and attract various categories of investors. From Follow-on Public Offers to Offer For Sale, knowing these alternatives assists investors in making the right choices while allowing firms to select the suitable option for expansion, liquidity, and market placement.
Also Read More About: What is IPO?
Types of IPO
- Fixed Price IPO
- Book Building IPO
- Hybrid IPO
Let’s explore the all three types of IPO with examples:
1. Fixed Price IPO
In a fixed-price IPO, the company sets a specific price at which its shares are offered to investors. This structure provides investors with clarity about the price they will pay upfront, eliminating uncertainty. However, if the market price of the stock rises significantly after the listing, investors may miss out on additional gains.
For example, When TCS launched its IPO in 2004 at a fixed price of ₹850 per share, it gave investors clear visibility of the purchase cost. Upon listing, TCS share price surged, showcasing the potential upside missed in a fixed-price model.
2. Book Building IPO
A book-building IPO is more dynamic. Instead of a fixed price, the company announces a price range, and investors place bids indicating how many shares they want to buy and the price they are willing to pay within the range. The final issue price is determined based on demand, often skewed towards the upper end when demand is strong. This system offers greater pricing flexibility and reflects real market sentiment.
For example, Zomato’s IPO in 2021 was a book-building IPO with a price range of ₹72-₹76. High demand led to the shares being issued at the upper limit of ₹76. This approach not only maximized returns for the company but also helped gauge investor interest accurately.
3. Hybrid IPO
The hybrid IPO blends elements of both fixed-price and book-building methods. A portion of the shares is offered at a fixed price to ensure price certainty for some investors, while the remaining shares are priced through book-building to reflect demand. This strategy balances stability and flexibility but requires meticulous management to avoid allocation confusion.
For example, ICICI Prudential Life Insurance employed a hybrid approach for its IPO in 2016. While some shares were issued at a fixed price, others followed the book-building mechanism, catering to both retail investors seeking simplicity and institutional investors desiring flexibility.
Differences Between Types of IPO
Each type of IPO has unique features. Below are the main differences between Fixed Price IPOs, Book Building IPOs, and Hybrid IPOs, focusing on key aspects such as Pricing, Demand, Payment, and Reservations.
| Aspect | Fixed Price IPO | Book Building IPO | Hybrid IPO |
|---|---|---|---|
| Pricing | A fixed price is announced in advance. | A price range is provided; final price depends on bids. | Combines fixed pricing for one part and book building for another. |
| Demand | Demand is known only after the IPO closes. | Demand is visible during the bidding process. | Partial demand visibility based on the book-building portion. |
| Payment | Full payment is made upfront when applying. | Funds are blocked until the final price is set; only the required amount is debited. | Payment terms vary by segment: fixed portion requires upfront payment, while the book-building portion blocks funds. |
| Reservations | Shares may be reserved for groups like employees or retail investors at the fixed price. | Shares are reserved for certain categories, and allotment depends on bidding results. | Reservations apply to both parts, but allocation depends on the method for each segment. |
Which One to Choose?
When a firm wants to raise funds from the public for the first time, it can choose from different types of IPO. The most common IPO types are the Fixed Price Issue and the Book Building Issue.
In a Fixed Price Issue, the company sets a predetermined price for its shares before the IPO opens. Investors know exactly what price they will pay for each share. However, the total demand for the shares is only revealed after the IPO closes.
In a Book Building Issue, there is no fixed price. Instead, there is a price range called a price band within which investors can bid. The lowest price is the “floor price”, and the highest is the “cap price.” Investors place bids within this range, and the final price is set after the IPO closes.
For beginners, a Fixed Price Issue may seem simpler because the price is known in advance. For experienced investors, a Book Building Issue can be more attractive as it may offer better value and match market demand more closely.
Follow-on Public Offer
A Follow-on Public Offer (FPO) happens when a company that is already listed on the stock exchange wants to raise more funds by offering additional shares to the public. This is different from an IPO because the company is not selling shares for the first time.
There are two main types of FPO – a dilutive FPO and a non-dilutive FPO. In a dilutive FPO, the company issues new shares, which increases the total number of shares available. In a non-dilutive FPO, existing shareholders sell their shares, so the total number of shares remains the same.
An FPO also provides an opportunity for the market to reassess the company’s valuation based on its performance since the IPO. Additionally, it can help improve the stock’s liquidity, making it easier for investors to buy and sell shares in the market.
Offer For Sale
An Offer For Sale (OFS) allows existing shareholders of a listed company, such as promoters or large investors, to sell their shares directly to the public through the stock exchange. Non-promoters holding at least 10% of a company’s shares can also participate. Introduced in India in 2012, OFS provides a transparent and organised way for shareholders to reduce their holdings efficiently.
Unlike a Follow-on Public Offer (FPO), an OFS does not involve issuing new shares. The company sets a fixed price, and the process usually completes in a single trading day, making it faster and simpler than an FPO. Retail investors may sometimes get shares at a discount, and the platform ensures refunds are processed immediately if bids are not allotted.
To participate in IPOs, investors first need to open a demat account. A demat account is essential for holding and trading shares electronically, and it simplifies the IPO application process.
At Findoc, investors can easily participate in OFS offerings, track bids, and manage payments seamlessly, making it a convenient and efficient way to invest in established companies.
Conclusion
There are different types of IPOs and related offers, each with its own benefits. In deciding to launch a company with a Fixed Price Issue, Book Building, FPO, or OFS would depend on what they then perceived as fundamentals for the company and the level of comfort with investors. For those new to investing, learning about each IPO type can help make better decisions. With Findoc, investors can easily explore these opportunities, understand the processes, and make informed choices with confidence.
Now that you understand the different types of IPO and their differences, it’s time to take the next step. Browse IPOs open for subscription, explore upcoming ones, and apply IPO through Findoc to kick-start your investment journey!
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FAQs
An IPO, or Initial Public Offering, is when a company sells its shares to the public for the first time to raise funds.
There are three types of IPOs in India: Fixed Price IPO, Book Building IPO, and Hybrid IPO. Each type has unique features designed to meet different investment and fundraising needs.
In a Fixed Price IPO, the company sets a fixed share price. In a Book Building IPO, the company provides a price range, and the final price depends on investor bids.
Companies choose Hybrid IPOs to combine the benefits of both Fixed Price and Book Building methods. This helps them target different types of investors.
No, only Fixed Price IPOs require full payment upfront. In Book Building IPOs, only a portion of the funds (typically around 10-20%) is blocked until the final price is decided. Hybrid IPOs follow the rules of their respective segments.