Types of IPO: Fresh Issue, OFS, Fixed Price and Book Building

Initial Public Offerings are the first steps for the private limited organisations to get into the Secondary market. Via this IPO Process, companies will raise capital by issuing new shares or by using the offer for sale option. These IPO are mostly come up with Book Building Process and rarely comes with Fixed Price.

In this article, let's understand deeply about the types of ipo and how the price will be determined.

Types of IPO

IPO will come up with mostly two things, such as Fresh Issue and Offer for Sale.

Fresh Issue:

A fresh issue in the Initial Public Offering (IPO) states that the entire issue of the shares is newly offered to the public without selling the stake of the promoters. In this process, the companies issue the new shares to the public for the first time to get listed in the exchanges like NSE & BSE and get their first entry into the secondary market.

A fresh issue states that the promoters are strong on their company business, so they are not willing to sell their shares and are willing to dilute their stake by offering the new shares to the public.

The funds raised via this IPO are used for their expansion, reducing their debt, acquiring other companies, or research and development (R&D) for the company, or for general operational purposes, which will be mentioned in the offer document clearly. 

Sometimes, a portion of the funds may also be used to pay fees to underwriters, registrar, book running managers and other service providers involved in the IPO process. In this Fresh Issue, the IPO bidding process can be of two types: neither Fixed Price nor Book building process, where the company fixes a certain price band so that investors can bid in that price range.

Offer For Sale (OFS):

An offer for the sale is quite a common process in the Initial Public Offering(IPO), which clearly states that the shares in the IPO are being sold by the company promoters and not going to issue additional shares to the public, and gets listed in Exchanges and secure a spot in the secondary market.

OFS might be considered as their promoters are willing to sell their stake and want to exit from the company. The funds raised from the OFS will directly go to its promoters who sell their stake, hence the company won't get any funds for its use.

NOTE: In some cases, the IPOs sometimes come up with a combination of FRESH ISSUE & OFS. These decisions are taken by the company management to maintain the proper diversification of stake among the public and promoters for the company’s well-being.

Fixed Price vs Book Building

Fixed Price:

• Fixed price in the IPO is a process of offering the shares to the public at a particular fixed price. 
• The company will contact the Investment Banks and their underwriters, fix the price for the IPO, and ask the Investors to bid for shares at the predetermined fixed price.

Book Building Process:

• The book-building process is the most common and most widely used IPO pricing process for companies. 
• In this process, the company approaches its underwriters(investment banks) and fixes a certain price range for its IPO, where investors will go and bid in the given price range.

Conclusion

IPOs are the first step for private organisations to become public limited companies and enter the secondary market by offering shares to the general public via Fresh Issue and OFS on a fixed and book-building basis. Investors can participate in the IPO by bidding for the company's shares at a given price.

Related IPO Articles:
1. How to Apply for an IPO?
2. How to Check IPO Allotment Status Online?
3. How to Download IPO Form Online from NSE and BSE?
4. What is Pre IPO and How to Buy Pre IPO Shares?
5. SME IPO - Full Form, Eligibility, Listing Process & How to Apply
6. What is Grey Market Premium (GMP) in IPO?
7. IPO vs FPO: Key Difference Between FPO and IPO
8. What is FPO in Stock Market? - Full Form, Meaning, How to Apply