What are the Different Types of IPO in India?

Initial Public Offering (IPO) is a way for companies in India to raise capital by offering shares to the public for the first time. IPOs not only help businesses secure funding but also allow investors to participate in a company’s growth journey. From traditional fixed price offerings to the more recent book-building issues, understanding the types of IPOs is essential. 

In this blog, we will explore the various IPO types available in India, highlighting their features, benefits, and key differences. 

What is an IPO?

An Initial Public Offering (IPO) is the process by which a private company offers shares to the public for the first time and allows the investors to buy ownership stakes. IPO enables companies to raise capital for expansion, pay off debt, or fund new projects. To invest in an IPO, individuals need a Demat account, where shares can be electronically stored and managed. Let’s look at the types of IPO.

Types of IPO

When companies decide to go public and offer shares for the first time, they choose between the different pricing mechanisms for IPO that best suit their financial and strategic goals. The IPO types in India are: 

Based on the Pricing Mechanism

The two types of IPOs based on pricing mechanisms are:

1. Fixed Price Issue: In a Fixed Price issue, the company offers shares at a set price, and investors know how much they will pay per share in advance. The demand for the issue cannot be determined until the issue closes.
2. Book Building Issue: IPO allows investors to bid within a price range, with the final price determined based on demand. Investors can track the demand for the issue till the issue closes.

Based on Shares Offered

The two types of IPOs based on shares offered are:

1. Offer for Sale: An IPO is categorized as an Offer for Sale (OFS) when existing shareholders sell their shares.
2. Fresh Issue IPO: An IPO is categorized as a fresh issue when new shares are issued to raise capital. 

Knowing the types of IPOs helps investors choose IPOs that match their financial goals and risk tolerance. Investing in an IPO can be a lucrative opportunity if approached with a solid understanding of its mechanisms and requirements. 

What is the difference between a Fixed Price issue and a Book-Building issue?

The key difference between a Fixed Price Issue and a Book Building Issue are:

Criteria	Book Building Issue	Fixed Price Issue
Pricing Mechanism	The company provides a price band within which investors can bid for shares.	The company sets a price for its shares, which investors must pay.
Demand	It can be determined on each day the IPO is open for subscription.	The demand cannot be determined until the IPO closes for subscription.
Payment	Amount is blocked in the bank account and is deducted if the shares are allotted.	Investors must pay the entire amount at the time of subscription and are refunded if the shares are not allotted.
Reservations	50% is reserved for QIBs, 35% for small investors and 15% for other investors.	50% for those with applications below INR 2 lakh and 50% for HNIs.
Proceeds	The price discovery mechanism results in an optimal price for securities, which usually maximizes the IPO proceeds.	As the price is predetermined, the fixed price approach generally generates lower proceeds than book-building issues.

Conclusion

IPO can be categorized as a Fixed Price issue or a Book-Building issue based on the pricing mechanism. Moreover, IPOs can be termed as an Offer For Sale (OFS) if the existing shareholders are selling their shares or a Fresh Issue if new shares are issued to raise capital. The primary difference between a Fixed Price Issue and a Book Building Issue lies in how the share price is set. A Fixed Price Issue provides a predetermined price, offering simplicity and certainty for investors, while a Book Building Issue allows the market-driven price discovery and reflects the investor demand. 

each method has its advantages, with fixed price offerings being less complex and book building allowing for potential price adjustments based on investor interest. Understanding these distinctions helps investors make informed decisions on which type of IPO suits their investment strategy and risk tolerance. 

Frequently Asked Questions (FAQs)