Different Types of IPO

Introduction

An Initial Public Offering (IPO), can open a window of opportunities for investors. Any company willing to go public launches its IPO and seeks a subscription amount from four categories of investors. They are - Retail Individual Investors (RIIs), Qualified Institutional Investors (QIIs), Non-Institutional Investors (NIIs) or High Networth Investors (HNIs), and Employees. QIIs investing more than INR 10 crore are classified as anchor investors. In India, the IPO process is overseen and governed by the Securities and Exchange Board of India (SEBI). 

There are two types of IPOs in India - Book building offering and fixed price offering. The sections below explain each IPO type in detail.
 

What is Book Building Offering?

In book building offering, the IPO price is not fixed. After elaborate discussions with the company willing to go public, the investment banker decides the price band. The price band is usually within a range of 20%. Investors can choose any price within the price band to place their bids. Hence, investors are at liberty to select the price they wish to pay for investing in an IPO, albeit within the price band. The maximum price within the price band is the 'Cut-Off Price,' and the minimum price is the 'Floor Price.'

In book building offering, the company specifies the total number of shares it wants to sell. It also informs SEBI and the public about the shareholder(s) who are offloading their stake in the company. The final price of the IPO depends on the number of bids the company receives. If the issue has been oversubscribed, the IPO price is fixed at the cut-off price.

In this IPO type, the money gets deducted from the investor's account only after the shares get allotted. 

Follow the steps mentioned below to invest in IPOs seamlessly:

1. Create an account or log in to your 5paisa online trading account
2. Head to the 'Current IPO' section to select the issue
3. Enter the bid price and lots
4. Fill in your UPI ID and hit the submit tab. 
5. Approve the mandate request to block the funds in your account
 

A reputed brokerage house decides to raise capital from the market for funding their business expansion. Hence, they plan to launch an IPO. For helping them with the application process, the company appoints a merchant banker. The merchant banker analyses the company's growth potential and financial status while finalising the price investors will most likely pay for each share.

After much calculation and deliberation, the company decides to offload 1,00,000 shares for the public. And, the merchant banker decides that the price band will be in the range of 500 - 520, meaning the minimum price an investor has to shell out for each share is INR 500. 

After the bid period gets over (usually between three and five days), the company checks the bids received by the IPO. It finds that 30,000 bids have been placed at INR 500, 60,000 bids have been placed at INR 510, and 40,000 bids have been placed at INR 520. Since bids for 1 lakh shares have been received at INR 510 and above, the company does not allot shares to investors who bid at INR 500. 

The company publishes the IPO subscription status every day during the offer period to help investors learn about the public demand for the IPO.

Fixed Price Offering

As the name suggests, fixed price offering refers to the fixed price at which shares are sold to investors in an IPO. The merchant banker decides the price in consensus with the company launching the IPO. Before determining the price, the merchant banker evaluates the company's risk level, assets, liabilities, current value, and future prospects.  
 
In fixed price offering, investors do not have to wait until the allotment date to know the price of each share since the price is disclosed at the outset. They pay the entire amount at the time of subscribing. Moreover, unlike book building offering, the subscription status in a fixed price offering is only known after the issue closes.
 
Here's an example to help you understand fixed price offering better.
 
A renowned private hospital needs urgent money for purchasing diagnostic equipment. It has two options for raising money. The first is debt financing or borrowing money from a lender. The second is by selling shares through an IPO. The hospital takes the second route to raise money since they want to avoid paying a high interest rate.
 
The hospital approaches a merchant banker that evaluates the hospital's assets and liabilities, along with growth prospects, to determine the price of each share. The merchant banker decides that the face value of each share will be INR 10, and the price offered to the public will be INR 100. 
 
The hospital then files an application with SEBI to list the company on the bourses. SEBI asks the hospital to furnish the DRHP or Draft Red Herring Prospectus. The DRHP contains vital information about the company's management, business, financials, reasons for going public, and business risks. If the DRHP is as per SEBI's expectations, the hospital gets a go-ahead to list on the bourses. The hospital then publishes its IPO advertisement in leading media channels to seek the subscription amount from investors.

How to Invest in an IPO Through 5Paisa

Follow the steps mentioned below to invest in IPOs seamlessly:

1. Create an account or log in to your 5paisa online trading account
2. Head to the 'Current IPO' section to select the issue
3. Enter the bid price and lots
4. Fill in your UPI ID and hit the submit tab. 
5. Approve the mandate request to block the funds in your account