A fixed-price issue is an IPO in which the company offers its shares at one price that is declared in advance in the prospectus. There is no price band and no bidding on price: every investor applies at the same published price, and the full amount is payable at the time of application. Fixed-price issues were the standard method before book building was introduced, and they are now rare for large companies but are still used by some small companies and SME offerings. Because the price is set by the issuer and its advisers rather than by market demand, there is a greater risk that the issue is priced too high, leaving it undersubscribed, or too low, leaving value on the table. The demand is known only when the issue closes, and allotment follows the same logic as other issues: proportionate if oversubscribed and full if not. Investors should compare the stated price with the company’s earnings, book value and the valuations of similar listed firms, because the lack of a price discovery process means they have less market evidence to rely on. Cut-off pricing does not apply here.
Example: A small company announces an IPO of 40 lakh shares at a fixed price of Rs 60. Every applicant applies at Rs 60. If the issue gets bids for 80 lakh shares, it is oversubscribed twice and allotment is made proportionately.
A fixed-price issue is an IPO in which the company offers its shares at one price that is declared in advance in the prospectus. There is no price band and no bidding on price: every investor applies at the same published price, and the full amount is payable at the time of application. Fixed-price issues were the standard method before book building was introduced, and they are now rare for large companies but are still used by some small companies and SME offerings. Because the price is set by the issuer and its advisers rather than by market demand, there is a greater risk that the issue is priced too high, leaving it undersubscribed, or too low, leaving value on the table. The demand is known only when the issue closes, and allotment follows the same logic as other issues: proportionate if oversubscribed and full if not. Investors should compare the stated price with the company's earnings, book value and the valuations of similar listed firms, because the lack of a price discovery process means they have less market evidence to rely on. Cut-off pricing does not apply here.
Book building is the process of discovering an IPO's price by collecting bids from investors within a price band. The company and its lead managers announce a floor and a cap price and open the issue for a few days. During that time investors submit bids stating how many shares they want and the price they are willing to pay. The registrar and the exchanges collect these bids in an electronic book. When the issue closes, the demand at each price level is totalled and the lead managers, with the company, decide the highest price at which the whole issue is subscribed, called the clearing price. Everyone who is allotted shares pays this one price, even if they bid higher. Most IPOs in India use book building because it lets the market, not just the issuer, determine the price, and because it is hard for the issuer to underprice or overprice without seeing demand. In a book-built issue at least 75 percent of the net offer is generally allotted to qualified institutional buyers and non-institutional investors together with retail, in the proportions the rules fix.
A prospectus is the legal document in which a company invites the public to subscribe to its shares or debentures and discloses the information investors need to decide. In India the Companies Act 2013 and SEBI regulations require it to contain complete and accurate details about the business, promoters, directors, financial statements, risks, legal cases, capital structure and the purpose for which funds are being raised. There are stages in the document trail of an IPO: the Draft Red Herring Prospectus filed with SEBI, the Red Herring Prospectus filed before the issue opens, and the final Prospectus filed with the Registrar of Companies after the price and size have been fixed. The final prospectus is the binding document that records the issue price, the amount raised and the allotment details. Because investors rely on it, the company, its directors and the lead managers carry legal liability for any misstatement, and investors can seek remedies for material misrepresentation. For ordinary investors a long prospectus can be daunting, so start with the summary of the issue, the risk factors, the objects of the issue and the financial tables, and then read the rest as needed.
A price band is the range, with a lower limit (floor) and an upper limit (cap), within which investors may bid for shares in a book-built IPO. The company and its lead managers announce the band in the price band advertisement, usually a few working days before the issue opens, and the Red Herring Prospectus carries the same range. The final issue price is discovered through bidding and is fixed inside this range, so it can never be higher than the cap or lower than the floor. Under SEBI rules the cap should not exceed 120 percent of the floor price, which keeps the range reasonably tight. Retail investors normally bid at the cap or at the cut-off price so that their bid stays valid whatever the final price turns out to be. The band matters because it sets the maximum money you must keep blocked in your bank account: lot size multiplied by the cap price. Companies can revise the band during the issue, but that requires public notice and an extension of the bidding period by at least three working days. Fixed-price issues do not have a band; they have a single price.
Allotment is the step after an IPO closes in which the company decides who receives shares and how many. Once bidding ends, the registrar prepares the basis of allotment, which explains how the shares were shared between categories and applicants. If an issue is not oversubscribed in a category, most valid applicants get what they asked for. If it is oversubscribed, shares are rationed. In the retail category, successful applicants are chosen by a computerised lottery and each winner usually receives one lot, because the demand is far larger than the supply. Larger categories receive shares in proportion to their bids. After allotment, shares are credited to the demat accounts of successful applicants, and money for unsuccessful applications is released from the ASBA block. SEBI requires the whole process, from issue close to listing, to be completed within three working days. You can check your allotment status on the registrar's website using your application number, PAN or demat details, and on the exchange page for the issue.