Fixed price method – A comparison with Book building (All Detail)
Fixed price method: In an Initial public offering (IPO), if the shares are offered at a fixed price, such is issue is known as Fixed price issue. This is the second most preferred way of Initial public offering. In the offer document, the issuer has to give the reasoning and proper justification for the price fixed. Generally, companies go for fixed price issue only when the management is of the opinion that a fair price can be decided among them without having tested in the market like in the case of book building.
Fixed price method Vs Book Building
Comparison between Fixed price method and Book building:
|Specifications||Fixed price method||Book building|
|Pricing||Securities are issued in the IPO at a pre-determined price. The issue price will be made public before the issue.||Final issue price is not known in advance. A price range with a lower and an upper band is announced by the issuer. After receiving the bids from the investors, final price will be decided to offer the shares.|
|Assessment of Demand||Demand for the securities can be known based on the subscriptions received. And this is only after the issue is over.||Demand for the securities can be known every day based on the bids received during the period for which the bidding is open for public.|
|Payment||At the time of application, 100% advance payment is required to be made by the investors||10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application. After the issue price is determined, any excess amount if exists will be refunded to the investors.|
|Effectiveness||The chances of fixing a fair price for the company’s shares are very rare. At times, it may lead to undervaluing of the issuing company as the price of the company’s shares at IPO could be lower than a fair market price driven by the demand.||Book building method is seen as better way of pricing the shares as the demand for the issuer’s shares in the market is the driving force behind the prospective shareholder’s bids. The chances of determining the fair price are very high.|
|Preference||This method has gradually been becoming less opted in view of the limitations associated with it.||Majority of the issuers in the developed markets such as US, UK and EU; this method has become very popular.|
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