The IPO price is the price at which a company's shares are first offered

to the public in an initial public offering (IPO). The IPO price can be
either a fixed price or a price range (book building).
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Chapters :

1. IPO Basics
2. IPO Eligibility
3. IPO Pricing
4. IPO Process
5. IPO Intermediaries
6. IPO Investors
7. IPO Prospectus
8. IPO Application
IPO pricing is one of the critical steps of the IPO process, which must occur
before the IPO launch date. If the IPO price is too high, investors may be
reluctant to invest in the company as it may result in losses. If the IPO is
priced too low, it may cause investors to doubt the performance of the IPO
because good things do not come at a low price. Therefore, the right
pricing for an IPO is very important for a fair listing.

IPO Pricing Methods

The IPO price is determined by one of the two IPO methods - Book
building or Fixed price . The issuing company may use either method,
depending on its preference. (Unless the mainboard-eligible company is
unable to meet the profitability norms prescribed by SEBI. In such a case, a
company will have to go the QIB route, where it is mandatory for the issue
to be made in the book).

1. Book Building Method

In the book-building method of issuance, the IPO price is not fixed in

advance. The issuing company announces an IPO price range (e.g., Rs 75 to
Rs 80 per share) within which bids for the IPO are accepted. The IPO price is
determined at the end of the bidding period based on the demand for the
shares at various price levels.
Book Building Advantages
The book-building method offers the following advantages to the
company:

 An efficient mechanism for price discovery.

 The company can assess its credibility based on the demand for the
issue.
 A realistic approach to pricing that is based on demand for the
shares and not set by management.

Book building Disadvantages

Book building has certain limitations, which are listed below:

 Costly compared to a fixed issue IPO.

 Lengthy process for issuing shares as the price has to be calculated at
the end of the bidding process.
 Suitable for large issuance volumes.

Book Building Features

 The IPO is launched without setting the final price of the issue.
 The issuer announces a price range for the issue. According to the
regulations, the price range should be announced at least two
business days before the opening of the issue for the
subscription.
 The issuer can revise the price range for the offering during the life
of the offering.
 A book-building issue must be kept open for 3-7 business days ,
although the period may be extended by three days if the price range
is revised.
 BSE and NSE offer a fully automated online bidding system for book-
building IPOs.

IPO Price Band Rules

The IPO price band is the range of the offer price within which investors can
place their bids. Below are the key facts and features of a price range:

 A price band has a lower price and an upper price (e.g., Rs 75 to Rs

80).
  The lower price of the price range is called the Floor Price or Base
Price , and the upper price of the price range is called the Cap Price
or Ceiling Price.
 The difference between the lower price and the upper price
should not exceed 20%.
 A retail investor can apply at any price within the specified price
range or at the Cut-off price .
 The cutoff price is the final price within the price range at which the
shares are allocated to investors.
 The cutoff price is known at the end of the bidding process.
 The basis for the price determination is stated in the prospectus.

Book building process explained

The book-building process is mainly carried out by the Lead Managers and
the Underwriters. The following steps provide a brief overview of how the
book-building process works in India
Book Building Process Steps

1. The lead manager appointed by the issuing company, in consultation

with the issuing company, determines the issue size and price range
for the IPO.
2. The lead manager and the issuing company appoint the syndicate
members to perform the duties related to the IPO offering.
3. Once the IPO is launched, investors start bidding for the required
number of shares at different prices within the price range.
4. At the end of the bid submission window, the lead manager collects
the data from all bids and determines the final issue price using the
weighted average method.
5. The lead manager must publish the details ( basis of allotment ) of all
bids received to ensure transparency of the bidding process and
derivation of the minimum price.
6. Once the cut-off price is determined, the investors who submitted
their bids at a price higher than the cut-off price or at the cut-off
price may receive an allotment. On the other hand, the bids that are
below the cut-off price will be rejected and the investors will get back
the entire subscription money.

Book Building Types

An issuing company may conduct the IPO in one of the following ways:
 1. 100% Book Built Offer
In this type of offering, the entire 100% of the issue may be offered
through the book-building process.
2. 75% Book Building
In this type of offering, 75% of the net offering can be offered
through the book-building process and 25% can be offered at the
threshold determined through the book-building process.

Book building example

In a book-building issue, the issuer announces a price range for the IPO
instead of a fixed price.
For example, the company may specify a price range of Rs 601 - Rs 650 for
its issue of 1 million shares. The lowest price in the price range, say Rs 601,
is the minimum price and the highest price Rs 650 is the maximum price.
Investors can place bids at any price within the specified price range or at
the minimum price (applicable to retail investors only).
Based on the demand and supply of the issue, the issuer determines the
final price using the weighted average method. In this case, the issuer
arrives at a final price/cut-off price of Rs 640 according to the procedure
described above.
Case 1: Bidding above the cut-off price
The investors who had applied for the IPO at a price above Rs 640 may
have a chance to receive an allotment. The investors will get back the
amount above the minimum price. Example: If you have placed a bid at Rs
645 for 10 shares, you will get a refund as below:
Cut-
Bid
Shares Application Off Shares Refund
Scenario Price Refund Calculation
Applied Amount (Rs.) Price Alloted (Rs.)
(Rs.)
(Rs)
Full Refund of Rs 5 per
10 645 6450 640 10 50
Allotment share for 10 shares
1. Entire refund of
Rs 645 per share for
Partial unalloted 5 shares.
10 645 6450 640 5 3250
allotment
2. Refund of Rs 5
per allotted 5 shares.

Case 2: Bidding below the cut-off price

All bids below the reserve price will be rejected and the entire amount will
be refunded.
Case 3: Bidding at the cut-off price
Investors who submitted their bids at the minimum price may receive an
allotment. In the case of a full allotment, no refund will be made; in the case
of a partial allotment, the pro rata amount will be refunded to the extent of
the shares not allotted.
Note: If the demand for the issue is very high, the maximum price usually becomes the
cut-off price.
Book building and reverse book building
Bookbuilding is one of the IPO methods to raise capital from the public,
while reverse book-building is used when the company wants to buy back
the shares from its shareholders.
Reverse book-building works on the same principle as book-building and is
an efficient pricing mechanism. In reverse book-building, the shareholder
submits sell orders at different prices. The company then decides on the
final price based on supply and demand. Reverse book building is mainly
used in the case of a delisting.

2. Fixed price issue method

In a fixed price issue, the offer price is fixed (e.g. Rs 75 per share) that is
decided in advance before the IPO opens for the subscription. The SME
companies prefer a fixed price issue over the book-building method due to
the smaller issue size.
Fixed price issue features
Unlike a book-built issue, a fixed-price issue must apply the price set by the
issuing company. Below are the key facts and features of a fixed-price IPO:

 The fixed-price IPO prospectus contains all the details about the IPO
price and the basis for setting it..
 The issuer must register the fixed-price IPO prospectus with the
Registrar of Companies before the issue is opened for subscription.
 At least 50% of the net offering of securities should be made available
to retail investors.
 A fixed-price offering should be held open for 3-10 business days.
Fixed price IPO process
The fixed-price IPO method is comparatively simple compared to the book-
building method because there is no price discovery. However, deciding the
right price is very important for the issuing company. The following are the
steps for a fixed price issue:

1. The lead manager is appointed by the issuer company. They jointly

evaluate various factors such as the company's financial position,
growth prospects, assets and liabilities, and decide on the size of the
issue and the IPO price.
2. The bidding process takes place as soon as the IPO is opened for
subscription.
3. Investors submit their bids at the set price.
4. The lead manager assesses the demand for the issue at the close of
the bidding period and accordingly works with the company's
registrar (RoC) for the allotment.
5. The Registrar completes the allotment, credits the shares to the
Demat account and initiates the refund, if any.

Fixed price issue example

The price of an IPO under the fixed-price method is determined in advance.
For example, the issuer may announce a price of Rs 186 for its issue.
Investors would place their bids at Rs 186. You do not have the option to
bid at any other price or cut-off price. Once the issue is closed, you may or
may not receive an allotment depending on demand.
Scenario 1:
You applied for 1000 shares and received a full allotment. In this case, the
entire 1000 shares will be credited to your account and there will be no
refund.
Scenario 2
You have not received an allotment. In this case, the full amount of Rs
186,000 will be refunded to you.
Scenario 3
You have received a partial allotment of 200 shares. In this case, you would
receive a refund of Rs 148,800 (186*800 unallotted shares) and 200 shares
would be credited to your account.
Difference Between Book Building Issue and Fixed
Price Issue
Now that the concepts of book building issues and fixed price issues are clear, here are some
significant differences between the both:
Features Fixed Price Issue
Under this specific method, the shares’
Meaning issue price is given in the prospectus, and
investors must buy at that price only.
The price at which securities get allotted
Pricing
is intimated to investors in advance.
Demand for securities is known after the
Demand
issue is closed.
Payment is made during the time of
Payment subscription, and the refund is provided
after allocation.
Payment Application Supported by Blocked
Type Amount (ASBA) and UPI
50% of shares are reserved for
Reservations
applications that are below Rs. 2 lakhs.
Book Building Issue
Under this method, the issue price
gets finalised through a bidding
method. The investors will have to
bid between a price band provided
to them.
The price at which securities are
allotted is not disclosed to
investors in advance, and they only
get to know the indicative price
range.
Demand for securities is known
every day as the book gets built.
Payment is made after allocation.
Application Supported by Blocked
Amount (ASBA) and UPI
50% of shares are for Qualified
Institutional Buyers (QIBS), 15%
of shares are for retail investors,
and 35% of shares are for non-
retail investors.
 The company must issue a prospectus
The company must issue a red
that should contain all the details about
herring prospectus that comprises
Prospectus the initial offering, including the price at
the total size of the issue and the
which shares are provided and the
price band.
number of shares offered.

It can be used for almost any issue, such

It is generally used in public
Uses as ESOS, rights issues, public issues, and
issues, such as FPO and IPO.
more.