An initial public offering or IPO is the way a firm goes public and sells shares to raise capital. There are two types of IPO issues namely..,
- Fixed price issue and
- Book Building issue.
In Fixed price issue the issuing company determines a fixed price for the issue. Where as in Book Building issue, the issuing company discovers its price using the book building process.
Book building is a process of price discovery. There is no fixed price per share. Instead, the company issuing the shares comes up with a price band. The lowest price of the band is referred to as the ‘floor price’ and the highest price of the band is referred to as ‘Cap price’.
After the price band is determined the applicants are then allowed to bid for the shares. The final price is then discovered based on these bids.
The applicants of an IPO are segregated into three categories – institutional or qualified institutional buyer (QIB), NII (Non-institutional investors) or HNI (High-net worth investor) an retail individual investor (RII). In case of QIB, the merchant banker has the discretion to allot shares. In case of QIB, shares are allotted proportionately.
In retail individual investor category, investors can not apply for more than two lakh in an IPO. Retail Individual investors have an allocation of 35% of shares of the total issue size in Book Build IPO’s. NRI’s who apply with less than Rs. 2,00,000 are also considered as Retail Individual Investor category. If a retail investor applies more than Rs. 2,00,000 of shares in an IPO, they are considered as HNI.
In a book build issue allocation to Retail Individual Investors (RII’s), Non Institutional Investors (NII’s) and Qualified Institutional Buyers (QIB’s) is in the ratio of 35:15:50. QIB’s are prohibited by SEBI guidelines to withdraw their bids after the close of the IPO’s. Retail and non-institutional bidders are permitted to withdraw their bids until the day of allotment.