Types of IPO with Example
When a company decides to go public, it can choose from different IPO structures, each designed to meet specific financial and strategic goals. These structures influence key aspects such as share pricing, investor allocation, and market participation. Let’s explore the main 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. |
FAQs
1. What is an IPO?
An IPO, or Initial Public Offering, is when a company sells its shares to the public for the first time to raise funds.
2. How many types of IPO are there?
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.
3. How is a Fixed Price IPO different from a Book Building IPO?
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.
4. Why do companies choose a Hybrid IPO?
Companies choose Hybrid IPOs to combine the benefits of both Fixed Price and Book Building methods. This helps them target different types of investors.
5. Do all IPOs require full payment upfront?
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.
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!