Last Updated on December 26, 2023 by BFSLTeam BFSLTeam
An Overview
Novices and seasoned investors are drawn to the bustling Indian stock market for investment opportunities. Thanks in part to an IPO, companies can go public and raise capital, which is why it has become so well-liked. Public investment opportunities exist for businesses through IPOs, though not all are equally created. Let us begin by establishing the fundamentals before delving into the different types of IPOs.
By issuing shares of its stock to the public, a privately-owned company becomes publicly traded through the IPO process. To underwrite the offering, a company hires investment banks and other financial institutions when going public. The role of these institutions includes setting the IPO price, marketing the offering, and facilitating the sale of shares to the public. Exploring the various types of IPOs in India, now let’s proceed.
Also Read: IPO investment strategy: Tips for investing in an IPO
- Mainstream IPOs
Mainstream IPOs, also known as Regular IPOs or Public Issue IPOs, are the most common types of IPOs in India. Companies going for a mainstream IPO issue shares to the public with the aim of raising capital for their growth and expansion. These IPOs are open to all types of investors, including retail investors, institutional investors, and high-net-worth individuals.
- Book Building IPOs
Book Building IPOs are another popular type of IPO in India. In this type of IPO, the company doesn’t fix a specific price for its shares before the issue date. Instead, it sets a price range within which investors can bid for shares. During the IPO subscription period, investors submit their bids specifying the number of shares they want and the price they are willing to pay. After the subscription period ends, the final IPO price is determined based on the bids received. The price is usually set at the point where demand and supply meet. Book Building IPOs are considered more dynamic as they allow for market forces to play a significant role in determining the IPO price.
- Fixed Price IPOs
Unlike Book Building IPOs, Fixed Price IPOs have a predetermined price at which shares are offered to the public. The company decides the price at which it will issue its shares and discloses it in the IPO prospectus. Investors can subscribe to the IPO at the specified price per share. Fixed Price IPOs are often favoured by smaller companies or those with less market visibility, as they provide a clear and straightforward pricing structure. Retail investors find Fixed Price IPOs accessible as they know the exact price they’ll pay for the shares.
- Rights Issue IPOs
Rights Issue IPOs are unique in that they are not open to the general public. Instead, they are offered exclusively to existing shareholders of the company. Companies choose Rights Issue IPOs when they want to raise additional capital from their existing investors without diluting their ownership. In a Rights Issue, shareholders are given the opportunity to purchase additional shares at a discounted price compared to the market price. This encourages current investors to increase their stake in the company.
- Follow-on Public Offer (FPO)
While an IPO marks a company’s initial entry into the stock market, a Follow-on Public Offer (FPO) is a subsequent offering of shares to the public by a company that is already listed. FPOs are typically used by companies to raise additional capital after their IPO or to fulfil regulatory requirements. FPOs are open to both existing shareholders and new investors, and the proceeds from the offering can be used for various corporate purposes, including debt reduction, expansion, or funding new projects.
Also Read: How does an IPO work?
Wrapping Up
In India, the world of IPOs is diverse, offering different avenues for companies to tap into the capital market and expand their horizons. Whether it’s a mainstream IPO, a Book Building IPO, a Fixed Price IPO, or one of the specialised types like Rights Issue or FPO, each serves a unique purpose and caters to various business needs. Risk appetite and investment goals are factors that determine how investors can participate in IPOs. The importance of grasping diverse IPO categories lies in making astute investment choices.
Frequently Asked Questions (FAQs)
The type of IPO to buy depends on your investment goals and risk tolerance. Mainstream IPOs are common and suitable for most investors, while Book Building IPOs offer more dynamic pricing. Rights Issue IPOs are for existing shareholders, and Follow-on Public Offers (FPOs) are for companies already listed.
The number of IPOs available varies over time. Many companies go public each year, so there isn’t a fixed number. You can check stock market news and IPO calendars for current offerings.
Predicting the most profitable IPO is challenging. Profitability depends on various factors, including market conditions, company performance, and the timing of your investment. Conduct thorough research and consult financial experts to make informed choices.
The most common type of IPO is the Mainstream IPO (Public Issue IPO). Companies issue shares to the public to raise capital for growth. It’s accessible to all types of investors and follows a fixed or book building pricing structure.
