Fixed Price Issue vs Book Building Issue: What Are Their Differences? 

Growth-driven companies raise capital from the primary markets through a process called initial public offering (IPO). It is when companies sell their shares to the public for the first time in the primary market. It is a win-win situation wherein companies get funds to fuel their operations and investors have an opportunity to grow their wealth.

Companies can make their initial offer either through a fixed price issue or a book building issue, or a combination of these methods. Let’s understand the details of the different types of IPO issues in this blog.

What Is a Fixed Price Issue? 

When a company chooses this method for its IPO, it chooses a fixed price at which investors can buy its shares.

Before deciding to go public, the company evaluates its assets, liabilities, and other financial aspects, with its underwriters. Generally, companies hire investment bankers to assess and reduce risk levels.

These bankers calculate the company’s current value and evaluate its prospects. They are also responsible for finding out the overall risks of investments and evaluating how the company would compensate its investors in the presence of such high risks.

After such extensive research, underwriters set the price of a share to raise substantial capital for the company. In the fixed price issue method, investors are well aware of the price of shares that a company has decided even before it goes public.

What Is a Book Building Issue? 

Though this concept is relatively new in India, it has become commonplace. Here, investors get to know the price of shares during the IPO process. In this process, the price is determined after bids are collected from investors during the period that the IPO stays open. It allows for more efficient price discovery.

Though the company does not set any fixed price, it sets two different prices which creates a price band. While the lower price is called the “floor price,” the higher price is called the “cap price.” The maximum difference between the “floor price” and “cap price” can be 20%. The offer document has a price band printed on it. Investors who wish to buy shares can bid for their preferred quantity within the price band before the issuer company sets a final price.

After considering various bids, the issue price is determined. 

As per guidelines from the Securities and Exchange Board of India (SEBI), companies can issue securities to the public via a complete book building process or 75% of the IPO via the book building process.

Differences between Fixed Price Issues and Book Building Issues 

Given below is a tabular representation of the differences between a fixed price issue and a book building issue: 

Final Word

In the case of fixed price issues, the IPO price is fixed. For book building issues the price is discovered during the IPO period. Moreover, capital raised from book building issues can be much more than funds raised by fixed price issues. Gradually, the book building issue is becoming popular in the Indian stock market.

Frequently Asked Questions