Types of IPO Every Indian Investor Must Know

There are two types of IPO: fixed price and book building issue. The types of IPOs are differentiated based on the process of issue pricing and how investors place their bids. An IPO helps a privately owned company to raise capital from various investors. Understanding the different types of IPO can help individuals make informed investment decisions. Knowing how IPOs work and the terms used can guide investors towards long-term financial planning. 

What Does an IPO Mean?

An Initial Public Offering (IPO) is the process through which a private company offers its shares to the public for the first time. It allows the company to raise capital from individual and institutional investors and get listed on a stock exchange. The company becomes a publicly traded entity after this process, and investors can buy or sell its shares in the open market. IPOs are often used for business expansion, debt repayment, or improving public visibility. 

What are the Types of IPO?

There are mainly two types of IPO. Understanding the types of initial public offerings can help investors participate in public issues. 

1. Fixed Price Issue 

In a fixed price issue, the company decides the price at which its shares will be offered to the public. Investors know the price in advance and must pay the full amount while applying. The demand is only known after the issue closes. This type of IPO offers price clarity but may involve some uncertainty regarding allocation if the IPO is oversubscribed. 

2. Book Building Issue 

A book building issue allows investors to bid within a price range decided by the company. The lowest price is called the floor price, and the highest is called the cap price. Investors can place bids at any price within this range. The final share price is fixed after evaluating the bids received. This method helps discover a fair market value based on demand. 

These two IPO types are widely used in India. While the fixed price offers simplicity, book building provides more pricing efficiency. 

How Does an IPO Work?

The IPO process involves multiple steps that ensure fair pricing, investor protection, and compliance with regulations. 

Planning and Approval 

A company evaluates its need for capital and readiness to go public. It prepares financial statements and business plans along with the Draft Red Herring Prospectus (DRHP). This document is then filed with SEBI for approval to launch the IPO. The DRHP is part of the initial regulatory process before the IPO proceeds. 

Appointing Intermediaries 

The company appoints SEBI-registered intermediaries such as merchant bankers, legal advisors, and underwriters. These authorised experts guide the company through document preparation, regulatory filings, and pricing strategy. 

Drafting the Prospectus 

A Draft Red Herring Prospectus (DRHP) is created and submitted to SEBI. This document contains detailed information about the company, its business model, financials, risks, and the purpose of raising funds. 

Pricing and Bidding 

Based on the chosen IPO type, either a fixed price is set, or a price band is provided for bidding. Investors apply by submitting bids through authorised platforms within the issue period. 

Allotment and Listing 

After the issue closes, shares are allotted based on demand and regulatory guidelines. The entire process from issue closure to share listing is completed within three working days (T+3). This means the issued shares are generally listed and available for public trading on the stock exchange at 10:00AM, three days after the IPO closes. Once allotted, the company is listed on a stock exchange, and shares become available for public trading. 

Difference Between Fixed and Book Building Issue

The following table highlights the difference between fixed and book-building issues. 

Terms Associated With IPO

Here are some commonly used terms during the IPO process that investors should know: 

1. Draft Red Herring Prospectus (DRHP) 

A DRHP is a preliminary document submitted to SEBI before launching an IPO. It includes financial details, company background, and the company’s plans to use the raised fundsfunds raised. DRHP helps investors understand the offering. 

2. Price Band 

Price band refers to the range within which investors can place their bids in a book building issue. The floor price is the minimum, while the cap price is the maximum. The final issue price is decided after analysing bids. 

3. Lot Size 

Lot size defines the minimum number of shares an investor can apply for in an IPO. This standard unit helps maintain uniformity and simplifies the application and allotment process. 

4. Oversubscription 

Oversubscription happens when the number of shares applied for exceeds the shares offered. This often indicates high investor interest, and shares are then allotted as per regulatory norms. 

5. Listing Date 

The listing date is when the company's shares officially become available for trading on the stock exchange. It marks the beginning of the company's journey in the public market and is significant for early investors. 

7. ASBA 

ASBA, or Application Supported by Blocked Amount, allows investors to apply for an IPO without the need to pay in advance. Instead, the required amount is blocked in the investor’s bank account and is debited only if shares are allotted.  

Conclusion

An IPO allows a company to raise public funds and transition from private to public ownership. Investing in IPOs may support portfolio diversification and potentially align with long-term wealth-building plans. Understanding the types of IPO, how the process works, and the associated terms supports informed financial decisions. It is important to assess the offering carefully and consider investment goals.