When a company chooses to go public, it can issue its Initial Public Offering (IPO) in different formats. Broadly, IPOs can be categorized based on pricing method and purpose of the offer.
1. Based on Pricing Mechanism
Fixed Price IPO
In a fixed price issue, the company, along with its merchant bankers, pre-determines the share price. All investors apply at this set price. The simplicity of this model comes with lower transparency and limited price discovery. Additionally, demand for the IPO is only known after the issue closes.
Book Built IPO
This method involves setting a price band (e.g., ₹95–₹105), within which investors can bid. The final issue price is determined based on demand at various price points—this is known as price discovery. Book building is now the preferred method due to its transparency, real-time demand data, and broader investor engagement.
2. Based on Purpose of the Offer
Fresh Issue of Shares
A fresh issue involves the company offering new shares to raise capital. This leads to an increase in equity base and is typically used to fund expansion, repay debt, or improve working capital. Since the company receives the proceeds directly, it’s viewed as a growth-oriented move.
Offer for Sale (OFS)
In an OFS, no new shares are created. Instead, existing shareholders (such as promoters or early-stage investors like PE/VC funds) sell their stake to the public. The company doesn’t receive any funds; it’s purely a way for existing investors to exit or reduce their holdings.
Note: Many IPOs today are a combination of both fresh issue and OFS.
Fixed Price vs. Book Building – A Comparative View
| Feature | Fixed Price IPO | Book Built IPO |
|---|---|---|
|
Price Transparency |
Price fixed upfront |
Price discovered via investor bids |
|
Demand Visibility |
Known only after closure |
Available on a real-time basis |
|
Share Allotment |
50% retail (< ₹1 lakh), 50% non-retail |
35% retail (< ₹2 lakh), 50% QIBs, 15% others |
|
Payment Terms |
Full payment upfront for all investors |
QIBs pay 10% upfront; ASBA blocks for retail |
|
Current Preference |
Rarely used today |
Almost all current IPOs use book building |
New Issue vs. Offer for Sale (OFS): 3 Key Insights
1. Be Cautious with Large OFS
While an OFS provides liquidity for early investors, heavy selling by promoters or institutions could signal a lack of long-term commitment. Investors should assess whether such exits align with company fundamentals.
2. Fresh Issue Signals Growth
A fresh issue of equity is often a sign of forward-looking strategy. Funds raised typically go into expanding operations, entering new markets, or strengthening the balance sheet—making it a positive indicator for long-term growth.
3. Pricing Can Differ
OFS offerings—especially by government or large institutional stakeholders—are sometimes aggressively priced, leaving little upside for retail investors. Pricing should be evaluated critically, especially in such cases.
Conclusion
Understanding the type of IPO—whether it’s a fixed price or book-built issue, or a fresh issue versus OFS—is crucial before investing. Each structure has its implications for pricing, allocation, and potential returns. With book building now the norm, and most IPOs being a hybrid of fresh issues and OFS, investors must look beyond the label and analyze the underlying intent and pricing strategy of each IPO.
