Different types of IPO

Initial Public Offerings (IPO) are an important milestone for a company as they transition from being privately owned to publicly owned. You should know the different types of IPOs available in the market before participating.

When companies decide to go public, they can choose from various IPO offering methods based on their needs, market conditions, and goals. The types of initial public offerings differ in how they are structured, priced, and who they are targeted at, providing different benefits to both companies and investors.

Whether you're an experienced investor or new to the stock market, knowing about the types of public offerings can help you make better investment decisions.

Types of IPOs

Understanding the main categories of IPO is beneficial before you decide to invest:

• Fixed price issue: In this type of IPO, the company sets the share price in advance. You know exactly what you will be paying per share when you apply. The demand for shares is only known after the IPO closes. If demand is more than the available shares, the company will allot shares proportionally, and any unused application money will be refunded.
• Book building issue: In this popular type of IPO, the company provides a price range (minimum price and maximum price) instead of a fixed price. You can bid at any price within this range, and the final price is decided after the bidding process, based on demand. When demand is high, the price is usually close to the higher end of the range. Investment banks and underwriters help market the IPO.
• Offer for sale (OFS): In an OFS, existing shareholders (like company promoters or early investors) sell their shares directly to the public. The company doesn’t raise any new funds because it’s not issuing new shares. OFS helps early investors or venture capitalists sell their investments.
• Follow-on public offer (FPO): Companies that are already listed can use an FPO to issue more shares. This can involve new shares being issued, shares being sold by existing shareholders, or a combination of both. FPOs help companies raise more capital for growth, expansion, or paying off debt.
• Rights issue: In a rights issue, companies offer shares to existing shareholders based on how many shares they already own, usually at a discounted price.
• SME IPO: These are IPOs for small and medium-sized enterprises (SMEs) that allow them to access capital markets. The eligibility requirements for SME IPOs are more relaxed compared to regular IPOs.

Each of these types also reflects the difference between traditional vs modern IPO types.

Difference between a fixed price issue and a book building issue

When comparing a fixed price IPO vs book building IPO, there are several key distinctions that you should be aware of:

Also Read - How to apply for an IPO online?

Which IPO to choose?

Before choosing the type of IPO, it is important to understand the process of different IPO types and also the difference between retail vs institutional IPO participation. Choosing the right type of IPO depends on various factors, such as the company's size, how much funding it needs, market conditions, and its goals.

For well-established companies with a clear value and strong brand, a fixed-price IPO is often the best choice. This method is straightforward and reliable, making it easier for you to subscribe. It's usually preferred when the market is stable and the company is confident about its value and expects good demand.

On the other hand, a book-building IPO offers more flexibility, allowing the market to set the price based on demand. This type is useful for companies with unclear valuations and is especially beneficial in unstable market conditions, as it reflects real-time investor sentiment. For companies seeking to raise additional capital after going public, FPOs and rights issues are viable options. Rights issues, in particular, help existing shareholders maintain their ownership while allowing the company to raise funds.

For investors, particularly those new to the market, it's advisable to open a Demat Account with a trusted institution like Axis Bank. It allows you to hold and manage securities electronically. It features a 3-in-1 integration with Savings and Trading Accounts, enabling smooth transactions. You can access equities, Mutual Funds, IPOs, bonds, and more through online and offline platforms. The account offers research support, advisory services, and ensures regulatory security. Account opening is often free, with applicable annual maintenance charges based on usage and service plans.

Conclusion

The different types of IPOs available in the Indian market offer flexibility to both companies and investors. Understanding these options is crucial for making informed investment decisions and capitalising on opportunities in the primary market. By analysing the structure and pricing methods, you can better assess risks, align with your strategies, and maximise potential returns.

Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.