Fixed vs Book Building Issue: Key IPO Pricing Strategies

How do companies set IPO Prices? When a company decides to go public, one of the big questions is how to price its shares. They usually choose between two methods: fixed price and book-building process. In the fixed price method, the share price is set ahead of time. However, in case of book-building, the price is influenced by how much interest there is from investors.

Understanding the difference between fixed vs book-building issues can help you make better trading decisions.

Let’s begin!

Fixed Price Issue and a Book Building Process

In a fixed price issue, shares are sold at a set price, giving investors clarity on what they will pay. On the other hand, a book building process involves setting a price range and finalizing the share price based on investor demand. This often leads to more flexibility and potential price fluctuations.

Let us understand the fixed price issue and book building in detail!

What is a Fixed Price Issue

It is a method of issuing shares where the company sets a specific price for its securities before the public offering. This predetermined price is made known to investors beforehand.

In this process, the company goes public and establishes the share price in advance and publicly announces it. As a result, potential investors have a clear understanding of the cost per share during the initial offering.

While this method simplifies the investment decision-making process, it does not allow for market-driven price adjustments. The fixed price may not always reflect current market conditions, which can lead to under-subscription if the price is set too high or undervalued shares if the price is set too low.

In a fixed price issue, the company sets a specific price for its shares before they are offered to the public.

1. Set Price: The company determines the price at which the shares will be sold. This price is fixed.
2. Application Process: Investors apply for shares at this fixed price. They know exactly how much they will pay per share.
3. Certainty: The main advantage of this method is that it provides certainty for both the company and investors.
4. Stability: Fixed price issues often lead to more stable share prices once the shares are listed on the stock exchange.

What Is Book Building Issue With Example

It is used in Initial Public Offerings (IPOs) where the final issue price of shares is not predetermined. Instead, the company offers a price range, allowing investors to place bids within this range. The final price is then determined based on the bids received, reflecting the market’s demand for the shares.

In this method, the company going public provides a price range during the IPO. Investors submit their bids within this range, specifying the number of shares they wish to purchase and the price they are willing to pay.

The final issue price is established after analyzing the bids, taking into account the overall demand from investors. This process aids in more accurate price discovery, potentially aligning the share value more closely with market expectations and investor interest, compared to the fixed price issue method.

The book-building process is a bit more dynamic and involves a few additional steps.

Example

Let’s say a company called XYZ Ltd wants to raise funds and decides to use the book building process. They set a price range of ₹50 to ₹70 per share. Investors then submit their bids, with some bidding ₹55 for 200 shares and others bidding ₹65 for 300 shares. After collecting all the bids, XYZ Ltd finds that the highest price where all shares can be sold is ₹60. Therefore, they set ₹60 as the final price and allocated shares to investors based on their bids.

Difference Between Fixed Price Issue & Book Building

When companies set their initial public offering (IPO) prices, they can choose between two methods: Fixed Price Issue and Book Building. 

Here’s a quick look at each method:

• Fixed Price Issue: The company sets a fixed price for its shares before the IPO starts. This price is set in advance and is clearly stated in the IPO prospectus.
• Book Building: The company provides a price range for the shares, and investors submit bids within this range. The final price is determined based on these bids.

Fixed Price Issue vs Book Building Issue: A Simple Comparison

What’s Best for Investors?

• For Conservative Investors, fixed-price issues might be the better option due to their predictability.
• For Risk-Takers, book-building issues could offer a more dynamic pricing mechanism. It aligns with market conditions, potentially leading to more favourable pricing.

Here’s a comparison to help you understand the differences between a Fixed Price Issue and a Book Building Issue:

Basis	Fixed Price Issue	Book Building Issue
Price Setting	The company sets a specific price for the shares before they are offered.	The company sets a price range and determines the final price based on investor bids.
Investor Knowledge	Investors know the exact price of the shares in advance.	Investors bid within a price range, and the final price is determined after collecting all bids.
Price Stability	The price is fixed and does not change, providing price stability.	The final price can fluctuate based on demand, which might lead to price changes.
Application Process	Investors apply for shares at a fixed price, knowing exactly what they will pay.	Investors place bids at different prices within the range, and shares are allocated based on these bids.
Predictability	The amount of money the company will raise is more predictable because the price is fixed.	The amount raised can vary depending on the final price determined by the bids.
Flexibility	It is less flexible because the price is set and does not adjust based on investor interest.	It is more flexible, as the final price adjusts based on how much interest investors show.

1. Price Setting

• Fixed Price Issue: The company sets a specific price for the shares beforehand. If the price is set at ₹100 per share, all investors pay exactly ₹100.
• Book Building Issue: The company provides a price range (e.g., ₹50 to ₹70). Investors place bids within this range, and the final price is set based on the bids received.

2. Investor Knowledge

• Fixed Price Issue: Investors know the exact price they will pay before applying for shares.
• Book Building Issue: Investors bid within a range and do not know the final price until the bidding process ends.

3. Price Stability

• Fixed Price Issue: Offers price stability because the share price does not change.
• Book Building Issue: The final price can vary depending on the level of investor demand, leading to potential price fluctuations.

4. Application Process

• Fixed Price Issue: Investors apply for shares at the fixed price set by the company.
• Book Building Issue: Investors submit bids at different prices within the range, and shares are allocated based on these bids.

5. Predictability

• Fixed Price Issue: The total amount of money the company will raise is more predictable as the price is fixed.
• Book Building Issue: The amount raised can vary because the final price is determined by the demand and bids.

Conclusion

In summary, the primary difference between fixed-price issues and book-built issues is that the price is determined by the company in the fixed-price issue. Whereas in a book-built issue, the price is decided by the demand from investors. However, there may be instances where the company has more influence over the price in a book-built issue or where investor demand plays a larger role in determining the price of a fixed-price issue.

You can now invest in the stock market at lifetime zero brokerage!

FAQs| Fixed vs Book Building Issue

Source: Chittorgarh

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Disclaimer: Investments in the securities market are subject to market risks; read all the related documents carefully before investing.