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What are the Different Types of IPOs Issued

What are the Different Types of IPOs Issued?

IPO types can be looked at as being classified into two categories. There are fixed price IPOs where the price is fixed in advance and every investor is only required to apply at that price. In a book built issue, the company and BRLM defines the indicative range for the IPO price and the final price is determined after the book is built based on the demand at different price levels.

There are new offers and OFS too in the IPO markets

Another way of classifying an IPO is based on the purpose of the IPO. Normally, most IPOs are new offers wherein a new company raises fresh capital through the IPO route. Here the fresh IPO leads to dilution of equity since the capital base increases to that extent. In case of an Offer for Sale (OFS) there is no fresh issue of shares and no increase in share capital. Rather it is used by the company as a means to give an exit to anchor investors and to institutions who have invested at an early stage. Quite often, IPOs are a combination of a new offer and also a partial OFS.

Fixed Price Versus Book Building – How they compare?

Transparency
In a fixed price issue there is no transparency in the fixation of the price whereas in case of book built issue, there is greater transparency and also the investors have greater say in the price discovery. The demand supply book of the IPO clearly reflects how the stock is likely to perform after it gets listed on the stock exchanges.

Real time demand
In a fixed price issue the actual demand for the stock is only evident once the issue is closed completely, not before that. On the other hand, in case of book built issues, the status of demand for the IPO is known on close to real time basis and a clear picture is available on a daily basis. This information is useful because investors can take a decision on whether to invest in an IPO or not based on the emerging demand pattern of the stock.

Rational allocation
The reservation of shares is also different in the fixed price issue versus the book built issue. In a fixed price issue there is 50% allotment for investments below Rs.1 lakh and 50% for the applications above Rs.1 lakh. In case of book built issue, the qualified institutional buyers (QIBs) have a 50% quote while the retail investors (less than Rs.2 lakh) have a 35% quota. The balance 15% is allotted to non-institutional investors like HNIs, corporates, NBFCs etc.

QIBs prefer book building
In a fixed price issue all the investors have to put up 100% payment in advance. In case of book built issue the QIBs are only required to put 10% of the total investment amount upfront and the balance can be paid on allotment. Retail investors have to put up the entire amount upfront but with the ASBA facility, they can just block funds without debiting funds to their bank accounts.

Fixed pricing is passé
Fixed price used to be quite popular in the Indian markets in the past. However, over the last few years fixed price issues have almost become absent. Almost all the new issues these days are on the book built route only.

Three Things to Know AboutNew Offer Versus OFS

Caution on OFS
Investors need to be slightly cautious if the anchor investors and the promoters are divesting a substantial chunk in the OFS. Remember, an OFS is not an indication of a company raising fresh funds but only to give an exit to investors. An OFS does not increase the capital and is not EPS dilutive. However, too much of institutional exit is not good news.

Fresh fund raising
The key difference is that a new issue is resulting in the fresh raising of funds. Thus from a future growth and expansion perspective, the new issue is a better choice. It is indicative of the fact that the company is having major plans to expand its offerings.

Pricing challenge
Most OFS tend to be aggressively priced as we have seen in the case of government divestment in the insurance companies in the last few months. That is something to be wary of.

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