IPO Pricing
What is IPO Pricing?
Companies decide their share release prices in IPOs through a mechanism known as IPO pricing when they launch their equities to the public. There are two established methods to determine the IPO price.
The Fixed Price Method sets an IPO share price that gets revealed to the public before actual bidding starts for the stock issuance.
A company conducts a book-building method through which it specifies a price band that determines the final share value by assessing investor interest.
An IPO's success depends heavily on proper pricing decisions because they affect both investor enthusiasm and stock exchange performance as well as market-wide perception. When businesses raise prices too high they risk lower subscription rates but when they set prices too low it creates doubts regarding their market worth.
IPO Pricing Methods
Companies have two main options to determine their IPO price through either the Book Building Method or the Competitive Bidding Method.
1. Book Building Method
Issuers refrain from determining a set price during this method. Companies release pricing bands for IPOs allowing investors to bid according to the specified range. The IPO receives its final pricing figure from investor demand across different levels.
Advantages of Book Building
The pricing method uses investor demand to discover effective prices through an efficient process.
Companies can determine market sentiment because of this approach.
Book Building produces better price clarity than the fixed approach to initial public offerings.
Disadvantages of Book Building
Costlier and more time-consuming than a fixed-price IPO.
Relying on this approach requires significant market research together with investor involvement throughout the process.
Suitable primarily for larger issues.
Key Features of Book Building
The IPO price gets established following the termination of the bidding phase.
The IPO price band should be publicly available at least two business days prior to the opening of the issue.
An open period for the issue exists between three to seven business days.
During the IPO duration, investors maintain the opportunity to change their cited prices.
The weighted average calculation method determines the final price.
IPO Price Band Rules
During bookings, the price range includes both minimum and maximum values which comprise the floor price and the cap price.
The allowable maximum price for the issue does not exceed more than 20 percent above the starting price.
During the IPO investors can submit bids at prices ranging between the floor and cap values of the band or the final cut-off allotment price.
High demand during the IPO period will result in the cap price becoming the final issue pricing.
2. Fixed Price Issue Method
A company introduces its IPO with share prices ranging between Rs 500 to Rs 550.
The investor who makes a bid of Rs 520 will receive an allotment amount at Rs 540 because the cut-off price has been set at Rs 540.
The system rejects all bids which are priced at amounts lower than Rs 540.
A bidding investor at Rs 550 might receive allotment shares by receiving the excess amount back.
Book Building Process
Both the company and the lead manager determine the total issuance and minimum and maximum entitlement prices.
The IPO commencement enables investors to submit their bids within the authorized price range.
The final IPO rate becomes established after the bidding period by evaluating investor demand.
Investors who outbid the cut-off receive shares thus investors below the price get their funds refunded.
Types of Book Building IPOs
Book Building determines the entire issue price of 100% through its mechanism.
Book-building methods determine prices for 75% of company shares but 25% of the shares are sold at a fixed price.
Reverse Book Building
This methodology functions as part of share repurchase and company delisting procedures.
During the offer, shareholders can place bids for different share prices but the company will choose its final purchase cost based on all received bids.
2. Fixed Price Issue Method
Before issue opening the company firm selects an exact share price during a fixed-price IPO. The application for investment requires investors to use the pre-established price.
Features of Fixed Price IPOs
Potential investors learn the IPO price through a predefined system before the commencement of the bidding period.
Investors can find the pricing calculation basis in the prospectus issued by the company.
At least half of the issue must be distributed among retail investors.
The IPO issue remains active for a business period ranging between three days to ten days.
Fixed Price IPO Process
The company establishes the initial public offering share price through financial data combined with market trends and valuation estimation.
The investment acquisition happens at a price set during the beginning of the process.
The distribution of shares begins after issue closure through a system based on market demand.
The situation of overshare subscription leads to reduced allotment of shares or results in no allocation for investors.
Example of Fixed Price IPO
The new initial public offering sets its share price at Rs 200 per unit when it goes public.
The investor can obtain their full request of 1,000 shares at Rs 200 if enough shares are available for allotment.
When demand in the market is high then investors might receive less than the total number of shares requested.
Every amount paid by failed investors will be returned to them when no shares are granted.
Book Building vs Fixed Price IPO: Key Differences
FAQs About IPO Pricing
1. Participation in a book-building IPO with bids lower than the established cut-off price does not result in receiving any shares from the offering.
The bidding rejection leads to a complete refund of your submitted funds.
2. During book-building IPOs investors have the ability to modify their proposed bid costs.
IPO investors possess the ability to modify their bidding levels during the IPO subscription period.
3. Book-building proves advantageous to fixed-price IPO models in terms of price discovery yet small organizations tend to use fixed-price IPO structures.
Book-building generates superior price discovery but fixed-price companies remain the preference for smaller enterprises.
4. The determination process of the cut-off price takes place how?
Brand new shares gain their final price through an assessment process that uses the investor demand and follows the bidding duration conclusion.
5. Which factors drive companies toward selecting fixed-price instead of book-building IPOs?
Small and medium-sized enterprises choose fixed-price IPOs because these offerings present manageable structures and less complexity together with affordable costs of operation.
