Book Building vs Fixed-Price Offer: Detailed Comparison

Understanding the difference between a fixed-price issue and a book-building issue in IPOs is important for investors. Book building involves investors bidding with a price band, and the final price is determined by price discovery/demand. On the other hand, fixed-price offers a fixed price with greater simplicity in the process.

Book building is suitable for market-driven and larger offerings, while fixed prices are more common for smaller entities seeking lower costs and greater certainty. Let us learn more about the two methods below.

Key Takeaways?

• Fixed-price and book-building issues are two IPO pricing methods.
• In a fixed-price issue, the issuer decides and discloses the final issue price before the offer opens.
• In a book-built issue, the issuer discloses a floor price or price band, investors bid within that range, and the final issue price is determined after analysing demand.
• In India, IPO applications are generally made through ASBA or UPI-ASBA, where funds are blocked and debited only on allotment.
• Only eligible retail individual investors can choose the cut-off option in regular book-built IPOs. This option is not available to all categories and is not available in the revised SME IPO process.
• Fixed price and book building are pricing methods; fresh issue and OFS are offer structures. Do not mix the two.

What is a Fixed-Price Offer

The fixed-price offer is an IPO method in which a company sets a single, predetermined price for its shares before they are issued to the general public. Investors thus know the exact cost (per share) when they apply, thereby simplifying the process in comparison to book building. However, demand is revealed only after the issue is closed. It is often applicable to stable, smaller company listings.?

Here are some of its major aspects:?

• The exact issue price is declared in advance for higher transparency.?
• Unlike book building, investors are unable to bid within a price range. They have to pay the single, fixed price, often called the issue price, set by the company and its management.?
• Demand for the shares is known only after the IPO closes, rather than during the bidding process.?
• If demand exceeds the number of available shares, the shares will be allocated proportionally to the applicants.?
• It is usually used by SMEs (small and medium enterprises) and smaller entities seeking a transparent and affordable way to list, often resulting in a shorter process.?

Some examples include:?

• Direct Subscription: A company issues a set number of shares at a fixed price to raise a specific amount of money.?
• SME IPO: SMEs (small and medium enterprises) often opt for this method owing to lower administrative costs and greater transparency for retail investors.?

Do not confuse pricing method with offer structure. Fixed price and book building are pricing methods. Fresh issue and offer for sale are issue structures. An IPO may include a fresh issue, an OFS, or both, and the pricing method will be disclosed in the offer document.

Read more: Fresh Issue vs OFS: Key Differences Explained

What is a Book Building Issue

The book-building mechanism enables price discovery, in which the company sets a price band (say, ?100-?120). This allows investors to bid on price and quantity rather than offer a fixed rate. The final price will be determined after the bidding period, depending on demand, thus enabling more efficient allocation and fair valuation.?

The price band, in this case, comprises a floor price (minimum) and a cap price (maximum). The final issue price is established, after analysing demand at various price points within the price range. Once bidding period ends, the issuer and Book Running Lead Manager determines the price.?

Examples:?

• Institutional/Retail Bidding: Suppose an investor wants 500 shares. Instead of a set price, they will submit a bid for 500 shares at ?90 within a ?85-95 band.?
• Cut-Off Price: An investor wishes to buy at the final, agreed-upon price, regardless of the band. They will then bid at the cut-off price, ensuring their eligibility for allocation if the price remains within the band.?
• Accelerated Book-Building: Companies that require fast-track, immediate funding can use this method to raise capital swiftly.?

This method is usually preferred for its transparency and for ensuring that the IPO price reflects market demand. It is often used to combat underpricing.?

Book Building vs Fixed-Price Offer: Side-by-Side Comparison

Here is a thorough comparison of fixed-price and book-building issues for your perusal.?

Investor-Category Reservation

For regular voluntary book-built IPOs under the profitability route:

For compulsory book-built issues under the QIB route:

For fixed-price issues:

How Pricing Works in Both Methods

Here’s how pricing works in both book building and fixed price methods -

Book Building Method:?

• Price Band: Companies set a price band, such as ?501- ?550.?
• Bidding: Investors bid for shares, specifying the price and quantity within the band.?
• Final Price Discovery: The final price is determined once the bidding process closes, depending on the demand.?
• Visibility: Real-time demand is mostly available, enabling valuation adjustments.?

Fixed-Price Offer:?

• Fixed Price: The price is set and announced upfront in the company prospectus.?
• Demand Insights: The total demand is known only after the IPO closes.?
• Payment: Investors must pay 100% of the price when applying.?

As you can see, book building uses a more dynamic price range, while fixed-price offers use a single, fixed price. Book building is market-driven and ensures greater accuracy, whereas fixed-price methods may not reflect actual demand until after the close.?

How Does Investor Bidding Work

Here’s how investor bidding usually works:?

• Price Band Announcement: The company sets a cap price and a floor price in a book-building issue.?
• Bidding Period: Investors, including both qualified institutional buyers (QIBs) and retail investors, bid for shares in this price range, choosing both the price per share and the number of lots.?
• Bid Modification: Investors may modify their bids during the bidding period.?
• Final Pricing: Once bidding closes, the underwriters and issuer will review the overall demand to set the final cut-off price.?
• Allotment: Investors bidding at/above the cut-off price will be eligible for allotments.??

Demand Visibility

Once you’ve understood the role of the price band in book building issues and how it differs from the fixed price method, it’s time to understand demand visibility. Here’s a comparison of the same across the book-building and fixed-price issue methods -?

In book building, demand is visible during the issue. The company does not set an exact share price but offers a price band (floor and cap prices). Investors, companies, and analysts can thus track the daily bidding trends by NIIs (non-institutional investors), QIBs, and RIIs (retail individual investors).

If demand is high early on, it is visible and often indicates robust listing gains. The company may revise the price band while the issue is open, depending on the demand that it sees.

The final price (cut-off price) is determined based on demand across multiple price levels after the bid closes.?

In a fixed-price IPO, the company sets the price in advance based on its prior financial performance. Investors apply at a fixed price without knowing whether others are interested.?

The true demand/subscription level is known only once the IPO closes and the registrar announces the final results.?

Payment Timing in Fixed Price vs Book Building

In a fixed-price IPO, the share price is predetermined. You will pay the entire amount when you submit the bid. If the shares are not allotted, the refund will be processed later. In a book-building IPO, investors will bid within the price band. Funds will be blocked at the maximum price at the time of the application, but they are not deducted immediately.?

Retail investors typically apply through ASBA or UPI-ASBA for both fixed-price and book-built IPOs. The investor's bank account has the application amount blocked. Only when shares are allotted is it debited. If shares are not allotted or there are still excess funds, it is unblocked.

Floor Price, Cap Price and Cut-Off Price in Book Building

In a book building IPO, the floor price is the minimum bid price, and the cap price is the maximum bid price.

The final issue price discovered following the bidding process is known as the cut-off price.?

Retail individual investors may choose the cut-off option in standard book-built IPOs, meaning they commit to purchasing whatever final price discovered within the price range.

NIIs and QIBs are typically required to place a bid at a particular price.?

For SME IPOs, the latest exchange process removes the cut-off option for all categories.

Which Method Offers Better Price Discovery

So, ultimately, which method offers better price discovery? Book building may offer superior price discovery. This is because the companies set a price band, and demand is captured via bids over many days.

Demand is also evident during the bidding process, and the final price is determined by actual market demand. This leads to fairer valuations, thereby making the system better suited to fast-growing, volatile, or larger companies, where valuation is a complex affair.?

In the fixed-price method, the price is set in advance and publicly announced for investors to apply for.

Yet demand is only known after the issue closes; hence, price discovery in this method is less efficient. The company sets a price that may not always align with market sentiment. It thus works only for stable or small companies whose valuations are relatively easier to calculate.?

Book building is usually considered a better method for optimal price discovery. Fixed-price methods are simpler by comparison, although they do not provide the same market feedback and are less suitable in dynamic market environments.?

Which Method Is Better for Investors

To understand which method is better, you have to look at some key points.?

Book building generally holds the upper hand for price discovery as it captures demand at different price levels before the final issue price is decided. However, that does not automatically make an IPO attractive.

A highly subscribed IPO can still list weakly if valuation is stretched or market sentiment turns negative.

Fixed-price issues are simpler as investors know the exact price before applying for a particular IPO. However, they offer less demand visibility before closure and could carry a higher mispricing risk.

For investors, the better question is not ‘Which method is better?’ but ‘Is this IPO priced attractively relative to its financials, peer valuations, growth prospects, risks, and market conditions?

Are Fixed-Price IPOs Still Relevant

Now, you may wonder, as an investor, whether fixed-price IPOs still hold relevance. It could be said that they are still relevant, particularly for smaller companies and SMEs (small and medium enterprises). This is because they ensure lower costs, greater simplicity, and greater transparency for new investors.

Yet for mainstream and large-scale IPOs, book-building methods have largely replaced traditional methods, helping determine market demand and enabling more efficient pricing.?

Less well-known and smaller companies with simpler capital structures usually prefer this method. Also, the investors will get to know the exact price (per share) upfront, thereby keeping confusion at bay.

Major companies usually prefer book building for optimal price discovery, and this makes fixed price IPOs less common if you consider the main stock exchanges.

However, some entities skip this method because of higher mispricing risks, i.e., being priced excessively high (low demand) or low (over-subscription). This is why fixed-price IPO numbers may be comparatively lower than those of book-building IPOs these days.

Conclusion

As you can see, there are several differences between fixed-price and book-building issues that you should know more about. These give you an idea of how both methods function and which you should choose for the best possible outcomes. The core differences result from the pricing mechanism and subsequent processes. That is what you have to deeply understand before finalising your decision.