Every year, thousands of Indian investors eagerly wait for upcoming IPOs, hoping to grab the next big multibagger stock. But when you open a company’s IPO prospectus, you often come across two terms — Book Building vs Fixed Price IPOs.
For a beginner, these terms may sound like complicated financial jargon. But if you want to invest smartly, understanding the types of IPOs is just as important as picking the right company.
In this article, we’ll break down the difference between Book Building vs Fixed Price IPOs, how they work, their advantages, disadvantages, and which one suits different types of investors.
By the end, you’ll know exactly how to make sense of IPO pricing methods and take informed decisions.
What is an IPO? (Quick Refresher)
An Initial Public Offering (IPO) is the process through which a private company sells its shares to the public for the first time and gets listed on a stock exchange.
Through an IPO, the company raises funds to expand its business, repay debt, or improve operations. Investors, on the other hand, get a chance to become shareholders in a growing business.
But here’s the twist — companies don’t just throw a random price for their shares. They decide it through either a Fixed Price Method or a Book Building Process.
Types of IPOs in India
Broadly, there are two types of IPOs:
- Fixed Price IPO – The company fixes a set price for the shares in advance.
- Book Building IPO – The price is discovered based on investor demand within a given range (price band).
Let’s explore both in detail.
Fixed Price IPO: Simple but Traditional
In a Fixed Price IPO, the company announces a pre-determined price per share before the subscription begins.
For example:
If a company decides to issue its shares at ₹150 each, every investor has to pay ₹150 per share while applying. There’s no negotiation, no bidding, and no price range.
Key Features of Fixed Price IPOs
- Pre-determined price: Investors know the exact price before applying.
- Retail-friendly: Often preferred by small investors who like clarity.
- Full payment upfront: Investors must pay the entire amount while applying.
- Demand revealed later: Subscription numbers (oversubscription or undersubscription) are known only after the IPO closes.
Advantages of Fixed Price IPOs
- Transparency – Easy to understand for retail investors.
- Simplicity – No complex bidding process.
- Clarity – You know exactly how much you are paying.
Disadvantages of Fixed Price IPOs
- No price discovery – The company may underprice or overprice shares.
- Risk of poor listing – If overpriced, the stock may list below issue price.
- Less popular – Companies prefer book building for large fund-raising.
Book Building IPO: Modern and Market-Driven
A Book Building IPO is a more flexible and widely used method, especially for large companies. Instead of a fixed price, the company provides a price band — for example, ₹450 to ₹500 per share.
Here, investors place bids within the band. Based on demand, the final price — called the cut-off price — is decided.
Key Features of Book Building IPOs
- Price band system: Investors can choose a price within the range.
- Bidding process: Institutional, HNI, and retail investors participate.
- Cut-off price: Final price is determined by demand and bids received.
- More transparency for companies: Helps in fair price discovery.
Example of Book Building
Suppose the price band is ₹100–₹120.
- Investor A bids for 100 shares at ₹110.
- Investor B bids for 200 shares at ₹115.
- Investor C bids for 300 shares at ₹120.
If the demand is high, the cut-off price may be set at ₹118. Allotments are then made accordingly.
Advantages of Book Building IPOs
- Efficient price discovery – Demand-driven pricing ensures fairness.
- Higher chances of good listing – Helps balance supply and demand.
- Investor flexibility – You can bid at different prices.
Disadvantages of Book Building IPOs
- Complex for beginners – Bidding can confuse retail investors.
- Uncertainty – Final price not known during application.
- Higher competition – Institutional investors dominate bidding.
Book Building vs Fixed Price IPOs: Key Differences
| Factor | Fixed Price IPO | Book Building IPO |
|---|---|---|
| Pricing Method | Pre-determined fixed price | Price band with cut-off price based on demand |
| Transparency | Investors know price upfront | Final price decided after bidding |
| Investor Base | Popular among retail investors | Favored by institutional & large investors |
| Allotment | Based on applications received | Based on demand and cut-off price |
| Popularity in India | Less common | Most IPOs today use book building |
Which IPO Type is Better for Investors?
There’s no one-size-fits-all answer. It depends on your investing style:
- If you’re a beginner or conservative investor, Fixed Price IPOs offer clarity and simplicity.
- If you’re a seasoned investor, Book Building IPOs provide better opportunities for fair price discovery and potential listing gains.
However, in India, most large IPOs today follow the Book Building process because it attracts institutional investors and ensures fairer pricing.
Why Companies Prefer Book Building Over Fixed Price IPOs
- Better valuation through demand-driven pricing
- Wider investor participation (FIIs, DIIs, HNIs, retail)
- Flexibility to adjust based on demand
- Higher fund-raising potential
This is why companies like Zomato, Paytm, LIC, and Nykaa all chose Book Building IPOs instead of Fixed Price.
Tips for Retail Investors in IPOs
- Read the RHP (Red Herring Prospectus): Understand the company’s financials and risks.
- Check the price band: Compare valuations with listed peers.
- Look at subscription numbers: High QIB (Qualified Institutional Buyer) demand is usually a positive sign.
- Apply at cut-off price in Book Building IPOs: It increases your chances of allotment.
- Don’t chase hype blindly: Focus on fundamentals, not just grey market premium (GMP).
Final Thoughts
IPOs are exciting opportunities, but the pricing method matters as much as the company itself.
- Fixed Price IPOs are simple, but risky if the company overprices.
- Book Building IPOs are modern, transparent, and widely preferred.
As an investor, the smart strategy is to understand both methods and choose IPOs not just for listing gains but for long-term wealth creation.
FAQ
Q1. What is the main difference between Book Building IPO and Fixed Price IPO?
In a Book Building IPO, the price is determined through investor bids within a price band, and the final cut-off price is set based on demand. In a Fixed Price IPO, the company decides a pre-determined price per share before the subscription starts, and investors must apply at that price.
Q2. Which type of IPO is more common in India today?
Book Building IPOs are more common in India today. Most large and popular IPOs, such as Zomato, Nykaa, and LIC, have used the Book Building method because it ensures better price discovery and attracts institutional investors.
Q3. Is it better to apply at the cut-off price in a Book Building IPO?
Yes, applying at the cut-off price in a Book Building IPO increases your chances of allotment. It means you are willing to pay the final price decided after the bidding process, giving you flexibility compared to choosing a fixed bid price.
Q4. Are Fixed Price IPOs safer for retail investors?
Fixed Price IPOs are simpler and easier for retail investors to understand since the price is known upfront. However, they are not necessarily safer because if the company overprices its shares, investors may face listing losses. Book Building IPOs generally provide fairer valuation through demand-driven pricing.
Q5. Can an IPO use both Fixed Price and Book Building methods?
Yes, some IPOs in India can be offered through a combination of both methods. However, this is less common. In most cases, companies prefer Book Building for large offerings and Fixed Price for smaller issues targeted at retail investors.
Disclaimer
This article is for educational purposes only and should not be considered financial advice. Investing in IPOs and the stock market involves risks, including the potential loss of capital. Always consult with a SEBI-registered financial advisor before making investment decisions.
