Learn about book building vs fixed price IPOs

1.3.3 · Stock-Market › Primary vs Secondary Market & IPOs

YEH choice exist hi kyun karti hai?

Toh is problem ko solve karne ke do philosophies hain:

	Fixed Price	Book Building
Price	Ek fixed price pehle se announce	Ek price band (floor–cap), final price bids se discover hoti hai
Kaun set karta hai	Company + merchant banker (guess)	Market (bids ka demand curve)
Kya demand pehle pata hai?	Nahi (sirf issue close hone ke baad)	Haan (daily exchange website pe visible)
Price band ki width	—	Cap ≤ 1.2× floor (SEBI ka rule)
Investor kya pay karta hai	Application mein full amount	Band par/upar bid, cut-off pay karta hai
Aaj common hai?	Rare, chhote issues	Standard zyaatar IPOs ke liye

Fixed Price IPO — KYA & KAISE

KAISE kaam karta hai (step by step):

Company + merchant banker ek fair value estimate karte hain (financials, peers use karke).
Woh offer document mein ek price print karte hain, jaise ₹100/share.
Public apply karti hai, full ₹100 × (shares ki number) pay karke.
Agar oversubscribed → shares har investor category mein proportionate (pro-rata) basis par allot hote hain; extra paisa refund hota hai.

Worked example Fixed Price worked example

TechCo fixed ₹100 par 1,00,000 shares offer karta hai.

Ravi 500 shares ke liye apply karta hai → woh $500 \times 100 = ₹50, 000$ pehle se pay karta hai.
Pehle full kyun? Kyunki price mein koi uncertainty nahi hai — price already fix hai, toh full amount pata hai.
Maano total applications = 3,00,000 shares → 3× oversubscribed. Allotment Ravi ki category mein proportionately hoti hai: roughly $\frac{1}{3}$ jo usne apply kiya tha (≈167 shares), baaki refund.
Proportionate kyun, lottery nahi? SEBI ek fair pro-rata split mandate karta hai taaki har applicant ko category mein ek allotment mile jo demand ke hisaab se scale ho (minimum lot rules ke saath), random win-or-lose draw ki jagah.
Yeh step kyun? Demand ( $3 \times$ ) sirf closing ke baad reveal hui — company ko koi early signal nahi tha.

Book Building IPO — KYA & KAISE

KAISE kaam karta hai (step by step):

Company + book runner ek band announce karte hain, jaise floor ₹95, cap ₹100.
Open days mein, investors bid karte hain: (quantity, price ≥ floor). Retail "cut-off" bid kar sakta hai (jo bhi final price ho, us par accept karne ko ready).
Book build hoti hai; har price par demand aggregate hoti hai (live visible).
Cut-off price fix hoti hai = woh highest price jis par pura issue subscribed ho jaata hai.
Us single cut-off par allotment; jo zyada bid kiye unhe difference ka refund milta hai.

Cut-off price first principles se NIKALNA

Maano company $Q = 1000$ shares offer kar rahi hai, band ₹95–₹100. Bids aate hain:

Price bid	Is price par shares bid	Cumulative (≥ is price par)
₹100	400	400
₹99	300	700
₹98	500	1200
₹97	400	1600

Logic: ₹100 par bidder koi bhi price ≤ ₹100 bhi accept karta hai. Toh "₹98 ya usse zyada par demand" = woh sab jo ≥ ₹98 pay karne ko ready hain = $400 + 300 + 500 = 1200$ .

Humein highest price chahiye jahan cumulative demand ≥ supply (1000) ho:

₹99 par: cumulative $= 700 < 1000$ ❌ (buyers kaafi nahi)
₹98 par: cumulative $= 1200 \geq 1000$ ✅

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

Sabse zyada woh price kyun? Kyunki company chahti hai maximum paisa mile while har share bhi bik jaaye. Jo bhi ≥ ₹98 mein bid kiya, woh sab ₹98 pay karte hain (uniform price). Jo ₹97 bid kiya unhe kuch nahi milta.

Figure — Learn about book building vs fixed price IPOs

Subscription Curve (Dual Coding)

Ise ek downward-sloping demand curve ki tarah socho: jaise price girta hai, zyada shares demand hote hain. Cut-off wahan hai jahan horizontal supply line (fixed $Q$ shares) us demand curve ko cross karti hai.

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

Agar ratio $= \frac{1600}{1000} = 1.6 \times$ band ke floor par hai, toh issue overall 1.6× subscribed hai.

Kab kaunsa use hota hai? (80/20 takeaway)

Recall Woh 20% jo 80% deta hai

Book building dominant hai: almost sab bade IPOs ke liye use hota hai kyunki yeh true market price discover karta hai → kam mispricing.
Fixed price chhote issues / SME IPOs ke liye bachta hai jahan demand precisely estimate karna worth it nahi.
Yaad rakhne wala key differentiator: price kaun set karta hai — company (fixed) vs market/bidders (book building), aur demand kab pata chalti hai — baad mein (fixed) vs during (book building).
Kisi bhi method mein oversubscription → category mein proportionate allotment (random draw nahi, special retail min-lot case chhod kar).

Forecast-then-Verify

Recall Reveal karne se pehle predict karo

Offer = 2000 shares, band ₹50–₹55. Bids: ₹55→800, ₹54→500, ₹53→900, ₹52→600. Cut-off forecast karo, phir neeche check karo.

Cumulative ≥ price: ₹55:800, ₹54:1300, ₹53:2200, ₹52:2800. Cumulative ≥ 2000 chahiye. Highest aisi price: ₹53 (2200 ≥ 2000; ₹54 par sirf 1300 < 2000). ✅ Cut-off = ₹53.

Flashcards

IPO kya hota hai?

Ek company ka primary market mein pehli baar public ko shares bechna.

Fixed Price IPO mein price kab pata hoti hai?

Issue khulne se pehle — ek single price prospectus mein print hoti hai.

Book Building IPO mein effectively final price kaun set karta hai?

Market — aggregated investor bids se price band ke andar (price discovery).

Price band width par SEBI ki limit kya hai?

Cap zyada se zyada floor ka 1.2× ho sakta hai (≤20% band).

Cut-off price define karo.

Woh highest price jis par full issue subscribed ho jaata hai (cumulative demand ≥ shares offered).

Book building mein kya highest bidder sabse zyada pay karta hai?

Nahi — har allotted person same uniform cut-off price pay karta hai; high bids sirf allotment chance improve karte hain.

Issue ki demand market ko kab visible hoti hai?

Book building mein offer ke dauran live visible hoti hai; fixed price mein sirf closing ke baad.

SEBI rules ke under oversubscribed shares kaise allot hote hain?

Har investor category mein proportionate (pro-rata) basis par — random lottery se nahi (retail min-lot draw ek special high-demand case hai).

Agar tum cut-off se upar bid karo aur allotment mile toh kya hota hai?

Tumhe cut-off par shares milte hain aur difference refund ho jaata hai.

Ek company IPO underpriced kyun kar sakti hai?

Taaki woh fully sell ho aur pop ke saath list ho — lekin isse money on the table choot jaata hai.

Aaj bade IPOs ke liye standard method kaunsa hai?

Book building.

Oversubscription ratio ka formula?

Total valid bids (shares) ÷ shares offered.

Kya "fixed" price listing ke baad bhi fixed rehti hai?

Nahi — post-listing, share secondary market mein freely trade karta hai.

Recall Feynman: 12 saal ke bacche ko explain karo

Tum 10 identical toy cars bech rahe ho. Fixed price: tum board par "₹100 each" likhte ho aur bechte ho. Easy hai, lekin shayad tum ₹120 charge kar sakte the (paisa gaya) ya ₹100 par koi nahi kharidta (phans gaye). Book building: tum kehte ho "Main ₹90 aur ₹108 ke beech offers lunga." Dost apne offers dheerey se dete hain. Tum unhe highest se lowest tak line mein lagaate ho, aur woh price choose karte ho jahan saari 10 cars sell ho jayein — maano ₹98. Cool part: jo bhi jeetata hai woh ₹98 pay karta hai, chahe usne ₹108 offer kiya ho. Woh khush hai (kam pay kiya!) aur uski car mili. Aur agar 30 bacche 10 cars chahte hain, tum randomly nahi choose karte — tum har group ko unke maange hue ka ek fair share dete ho. Woh "just-sells-out" price hi woh hai jisse market true worth figure out karta hai.

Connections

Primary vs Secondary Market — IPO primary mein hota hai; listing ke baad ki trading secondary hai.
Types of Investors in an IPO — Retail, HNI/NII, QIB categories aur unke bidding rules.
Cut-off Price and Allotment — oversubscribed hone par shares proportionately kaise distribute hote hain.
SEBI Regulations for IPOs — 1.2× band rule, disclosure norms, pro-rata allotment.
Underpricing and Listing Gains — IPOs day one par pop kyun karte hain.
Demand and Supply Curves — price discovery ki economic backbone.