Learn about book building vs fixed price IPOs — Stock-Market notes

WHY does this choice even exist?

So there are two philosophies to solve this:

	Fixed Price	Book Building
Price	One fixed price announced upfront	A price band (floor–cap), final price discovered from bids
Who sets it	Company + merchant banker (guess)	The market (demand curve of bids)
Demand known before?	No (only after issue closes)	Yes (visible daily on exchange website)
Price band width	—	Cap ≤ 1.2× floor (SEBI rule)
Investor pays	Full amount at application	Bids at/above band, pays cut-off
Common today?	Rare, small issues	Standard for most IPOs

Fixed Price IPO — WHAT & HOW

HOW it works (step by step):

Company + merchant banker estimate a fair value (using financials, peers).
They print one price, e.g. ₹100/share, in the offer document.
Public applies, paying full ₹100 × (number of shares).
If oversubscribed → shares allotted on a proportionate (pro-rata) basis within each investor category; excess money refunded.

Worked example Fixed Price worked example

TechCo offers 1,00,000 shares at a fixed ₹100.

Ravi applies for 500 shares → he pays $500 \times 100 = ₹50{,}000$ upfront.
Why upfront full? Because there is no uncertainty about price — the price is already fixed, so the full amount is known.
Suppose total applications = 3,00,000 shares → 3× oversubscribed. Allotment is done proportionately within Ravi's category: roughly $\frac{1}{3}$ of what he applied (≈167 shares), rest refunded.
Why proportionate, not lottery? SEBI mandates a fair pro-rata split so every applicant in a category gets an allotment scaled to demand (subject to minimum lot rules), rather than a random win-or-lose draw.
Why this step? Demand ( $3\times$ ) was only revealed after closing — the company had no early signal.

Book Building IPO — WHAT & HOW

HOW it works (step by step):

Company + book runner announce a band, e.g. floor ₹95, cap ₹100.
Over the open days, investors bid: (quantity, price ≥ floor). Retail may bid "cut-off" (agree to accept whatever final price).
The book is built; demand at each price is aggregated (visible live).
The cut-off price is fixed = highest price at which the whole issue is subscribed.
Allotment at that single cut-off; higher bidders get refund of the difference.

DERIVING the cut-off price from first principles

Say the company offers $Q = 1000$ shares, band ₹95–₹100. Bids arrive:

Price bid	Shares bid at this price	Cumulative (at ≥ this price)
₹100	400	400
₹99	300	700
₹98	500	1200
₹97	400	1600

Logic: A bidder at ₹100 also accepts any price ≤ ₹100. So demand "at ₹98 or higher" = everyone willing to pay ≥ ₹98 = $400+300+500 = 1200$ .

We want the highest price where cumulative demand ≥ supply (1000):

At ₹99: cumulative $= 700 < 1000$ ❌ (not enough buyers)
At ₹98: cumulative $= 1200 \ge 1000$ ✅

$\text{Cut-off} = \max\{p : \text{CumDemand}(p) \ge Q\} = ₹98$

Why the highest such price? Because the company wants the most money while still selling every share. Everyone who bid ≥ ₹98 pays ₹98 (uniform price). Those who bid ₹97 get nothing.

Figure — Learn about book building vs fixed price IPOs

The Subscription Curve (Dual Coding)

Think of it as a downward-sloping demand curve: as price falls, more shares are demanded. The cut-off is where the horizontal supply line (fixed $Q$ shares) crosses that demand curve.

$\text{Oversubscription ratio} = \frac{\text{Total valid bids (shares)}}{\text{Shares offered}}$

If ratio $= \frac{1600}{1000} = 1.6\times$ at the band's floor, the issue is 1.6× subscribed overall.

When is each used? (80/20 takeaway)

Recall The 20% that gives 80%

Book building dominates: used for almost all sizeable IPOs because it discovers the true market price → less mispricing.
Fixed price survives for small issues / SME IPOs where estimating demand precisely isn't worth the effort.
Key differentiator to remember: who sets the price — company (fixed) vs market/bidders (book building), and when demand is known — after (fixed) vs during (book building).
Oversubscription in either method → proportionate allotment within category (not a random draw, except the special retail min-lot case).

Forecast-then-Verify

Recall Predict before revealing

Offer = 2000 shares, band ₹50–₹55. Bids: ₹55→800, ₹54→500, ₹53→900, ₹52→600. Forecast the cut-off, then check below.

Cumulative ≥ price: ₹55:800, ₹54:1300, ₹53:2200, ₹52:2800. Need cumulative ≥ 2000. Highest such price: ₹53 (2200 ≥ 2000; at ₹54 only 1300 < 2000). ✅ Cut-off = ₹53.

Flashcards

What is an IPO?

A company selling its shares to the public for the first time, in the primary market.

In a Fixed Price IPO, when is the price known?

Before the issue opens — one single price is printed in the prospectus.

In a Book Building IPO, who effectively sets the final price?

The market — via aggregated investor bids within the price band (price discovery).

What is the SEBI limit on the price band width?

The cap can be at most 1.2× the floor (≤20% band).

Define the cut-off price.

The highest price at which the full issue gets subscribed (cumulative demand ≥ shares offered).

In book building, does the highest bidder pay the most?

No — everyone allotted pays the same uniform cut-off price; high bids only improve allotment chance.

When is demand for the issue visible to the market?

In book building it's visible live during the offer; in fixed price only after closing.

How are oversubscribed shares allotted under SEBI rules?

On a proportionate (pro-rata) basis within each investor category — not by random lottery (retail min-lot draw is a special high-demand case).

What happens if you bid above the cut-off and get allotted?

You get shares at the cut-off and are refunded the difference.

Why might a company underprice an IPO?

To ensure it fully sells and lists with a pop — but it leaves money on the table.

Which method is standard for large IPOs today?

Book building.

Formula for oversubscription ratio?

Total valid bids (shares) ÷ shares offered.

Does "fixed" price stay fixed after listing?

No — post-listing, the share trades freely in the secondary market.

Recall Feynman: explain to a 12-year-old

You're selling 10 identical toy cars. Fixed price: you write "₹100 each" on a board and sell them. Easy, but maybe you could've charged ₹120 (you lose money) or nobody buys at ₹100 (you're stuck). Book building: you say "I'll take offers between ₹90 and ₹108." Friends whisper their offers. You line them up highest to lowest, and pick the price where all 10 cars just sell out — say ₹98. Cool part: everyone who wins pays ₹98, even the kid who offered ₹108. He's happy (paid less!) and got his car. And if 30 kids want the 10 cars, you don't pick randomly — you give each group a fair share of what they asked for. That "just-sells-out" price is how the market figures out the true worth.

Connections

Primary vs Secondary Market — IPO happens in primary; trading after listing is secondary.
Types of Investors in an IPO — Retail, HNI/NII, QIB categories and their bidding rules.
Cut-off Price and Allotment — how shares are distributed proportionately when oversubscribed.
SEBI Regulations for IPOs — the 1.2× band rule, disclosure norms, pro-rata allotment.
Underpricing and Listing Gains — why IPOs often pop on day one.
Demand and Supply Curves — the economic backbone of price discovery.

Concept Map

Hinglish (regional understanding)

Intuition Hinglish mein samjho

Dekho, jab koi company pehli baar public ko apne shares bechti hai (IPO), toh sabse bada sawaal hota hai — price kya rakhein? Kyunki abhi tak yeh share kabhi trade hi nahi hua, iska koi market price nahi hai. Isko solve karne ke do tareeke hain. Pehla Fixed Price — company pehle se ek single price fix kar deti hai, jaise "₹100 per share, le lo ya chhod do". Simple hai, lekin risk yeh ki price galat set ho gaya toh ya shares bikenge nahi, ya bahut sasta bech ke company loss mein rahegi.

Doosra tareeka hai Book Building — yeh ek chhoti si auction jaisa hai. Company ek price band deti hai, jaise ₹95 se ₹100. Investors us band ke andar bid lagate hain — kitne shares, kis price pe. Sabhi bids ka collection "book" kehlata hai. Fir jahan pe saare shares exactly bik jaate hain us highest price ko cut-off price bolte hain. Yahi hai price discovery — market khud decide karta hai sahi keemat.

Sabse important twist yaad rakhna: chahe tumne ₹100 ki bid lagayi ho aur cut-off ₹98 nikle, tum ₹98 hi pay karoge, ₹2 refund aa jaayega. Matlab sabko same cut-off price milta hai. Isliye zyada high bid lagane se tum zyada paise nahi doge — bas tumhare allotment ke chances badhte hain, kyunki tum cut ke upar reh jaate ho. Ek aur rule: cap kabhi bhi floor ka 1.2 guna se zyada nahi ho sakta (SEBI ka niyam).

Aur allotment ka ek myth clear kar lo: agar issue oversubscribe ho jaaye, toh shares proportionate (pro-rata) basis pe milte hain har category ke andar — matlab jitna zyada demand, utna hi scale down. Yeh random lottery nahi hai; lottery sirf tab aati hai jab retail demand itni zyada ho ki sabko ek minimum lot bhi nahi mil sakta. Aaj kal bade IPOs mein book building hi standard hai kyunki yeh sahi price nikaalta hai. Fixed price sirf chhote ya SME issues mein use hota hai. Bas yeh yaad rakho — kaun price set karta hai (company vs market) aur demand kab pata chalti hai (baad mein vs live during offer) — yahi dono methods ka asli farak hai.

Test yourself — Primary vs Secondary Market & IPOs

Connections