Fixed Price Method vs. Book Building Method in IPO

 When a company issues shares through an Initial Public Offering (IPO), it can choose between two pricing methods: Fixed Price Method and Book Building Method. These methods determine how the IPO share price is set and how investor demand is assessed.

1. Fixed Price Method

In the Fixed Price Method, the company and its merchant bankers determine a predetermined price at which shares will be offered to the public. Investors must apply for shares at this fixed price.

Key Features of Fixed Price Method:

✅ The issue price is fixed before the IPO opens.
✅ Investors know the price before subscribing to the shares.
✅ Demand for the IPO is known only after the issue closes.
✅ Typically used by small and medium-sized companies.

Process of Fixed Price Method:

  1. Company decides a fixed price for the shares with the help of merchant bankers.
  2. Investors apply for shares at the fixed price.
  3. After the subscription period, shares are allotted, and excess funds are refunded if oversubscribed.
  4. Shares are listed on the stock exchange, and trading begins.

Example:

A company announces an IPO at a fixed price of ₹100 per share. Investors must apply at ₹100, and the allotment is made accordingly.

2. Book Building Method

In the Book Building Method, the company offers a price range (price band) instead of a fixed price. Investors bid within this range, and the final price is determined based on demand.

Key Features of Book Building Method:

✅ The company sets a price band (e.g., ₹90 to ₹100 per share).
✅ Investors place bids at a price of their choice within the range.
✅ The final price is decided based on demand and investor bids.
✅ Typically used by large and well-established companies.

Types of Price in Book Building Method:

  • Floor Price: The minimum bid price (e.g., ₹90).
  • Cap Price: The maximum bid price (e.g., ₹100).
  • Cut-off Price: The price at which maximum bids are received.

Process of Book Building Method:

  1. The company sets a price band for the shares.
  2. Investors bid within the price range, specifying the number of shares and price.
  3. At the end of the bidding period, the final price is determined based on demand.
  4. Shares are allotted at the final price, and refunds are processed.
  5. The shares are listed on the stock exchange, and trading begins.

Example:

A company sets a price band of ₹90-₹100 per share. Investors place bids:

  • 5 million shares at ₹90
  • 10 million shares at ₹95
  • 15 million shares at ₹100

Since maximum demand is at ₹100, the final price (cut-off price) is set at ₹100 per share. Investors who bid below ₹100 are not allotted shares.

Key Differences: Fixed Price vs. Book Building

Feature

Fixed Price Method

Book Building Method

Pricing

Fixed before the IPO opens

Determined based on demand

Price Disclosure

Known before investor bidding

Final price is set after bidding

Investor Bidding

Investors apply at a fixed price

Investors bid within a price band

Demand Analysis

Known after the issue closes

Known in real-time during bidding

Risk & Flexibility

Less flexible, fixed price may lead to undersubscription

More flexible, price adjusts based on demand

Commonly Used By

Small & mid-sized companies

Large & well-established companies

Transparency

Lower, as price is predetermined

Higher, as price is based on market demand

Conclusion

  • The Fixed Price Method is simpler but riskier for the company as it does not adjust to market demand.
  • The Book Building Method is more efficient and widely used because it allows the company to maximize funds raised based on investor interest.
  • Most modern IPOs, especially for large corporations, prefer Book Building due to its transparent and demand-driven pricing mechanism.

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