An Initial Public Offering (IPO) is one of the most important milestones for a company. It is the process through which a private company offers its shares to the public for the first time and becomes publicly listed on a stock exchange - the (NSE) National Stock Exchange or the (BSE) Bombay Stock Exchange.
For investors, an IPO gives a chance to invest in a company as it goes public. For companies, it raises money to grow their operations, pay off debt, or support future growth. However, many investors assume that all IPOs are the same. In reality, there are different types of IPOs, each structured for a specific purpose.
Understanding the types of IPOs can help investors make more informed decisions when exploring IPO investment opportunities in the share market.
Let’s explore the types of an IPO in detail.
1. Fixed Price IPO:
A Fixed Price IPO is the traditional type of IPO where the company sets a specific price for its shares before offering them to investors. Before the IPO opens, the company and its underwriters decide the issue price. Investors then subscribe to the IPO at that fixed price.
Key Features
- The share price is predetermined.
- Investors know the exact price they must pay while applying.
- Demand for shares becomes clear only after the issue closes.
Example: If a company sets its IPO price at ₹200 per share, every investor applying in the IPO must bid at ₹200.
Because of limited flexibility, this method is used less frequently today compared to modern IPO structures.
2. Book Building IPO:
The Book Building IPO is the most common format used in modern IPO markets. Instead of setting a single price, the company provides a price range for investors to submit bids. The final price is determined by investor demand.
How It Works
- The company announces a price band or price range (for example, ₹100–₹120).
- Investors place bids within that range.
- Based on investor demand, the final cut-off price is decided.
Key Features
- Market-driven pricing
- Higher transparency
- Helps discover the fair market value of the company
Because of these advantages, most IPO investment opportunities today follow the book-building method.
Note: Retail Individual Investors (RIIs) have the option to tick a "Cut-off Price" box on their application. This ensures their bid is always considered at whatever final price is discovered.
3. Offer for Sale (OFS):
In an Offer for Sale, current shareholders sell their shares to the public through the IPO. This means the company itself does not receive new funds. Instead, promoters, early investors, or private equity firms reduce their stake.
Key Features
- Shares are sold by existing shareholders
- The company does not raise new capital
- Used for partial exit by promoters or investors
Many well-known companies have used OFS as part of their IPO investment strategy.
Tip: If a promoter is selling 100% of their stake, it might be a red flag. If a Private Equity firm is selling after 10 years, it’s considered a standard exit.
4. Fresh Issue IPO:
A Fresh Issue is when the company creates and issues new shares to raise capital from the public. This is one of the most common reasons companies launch an IPO.
Purpose of Fresh Issue
The funds raised may be used for:
- Business expansion
- Research and development
- Debt repayment
- Working capital requirements
- Infrastructure investment
Unlike OFS, the money raised through a fresh issue goes directly to the company.
5. Hybrid IPO (Fresh Issue + OFS):
Many modern IPOs combine both Fresh Issue and Offer for Sale. This structure of an IPO allows the company to raise funds while also giving existing investors an opportunity to partially exit.
Key Features
- Part of the issue raises new capital
- Part of the issue allows shareholders to sell existing shares
- Common structure in large IPOs
Hybrid IPOs are among the most common types of IPOs seen in the market today.
6. Mainboard IPO vs SME IPO:
IPOs can also be classified by the type of company issuing the public offering.
Mainboard IPO:
A mainboard IPO is issued by larger companies that meet strict regulatory and financial requirements set by the Securities and Exchange Board of India. These companies are listed on major exchanges such as the NSE and BSE.
SME IPOs:
Small and Medium Enterprises IPOs are tailored for smaller companies to access capital markets, though they often entail higher liquidity risks and higher minimum entry costs.
SME IPOs generally:
- Have smaller issue sizes
- Have a minimum investment requirement typically higher than a Mainboard IPO
- Are designed for growing businesses
However, they may also carry a higher risk compared to established companies.
How Investors Can Participate in IPOs?
Today, participating in an IPO has become much easier due to digital investing platforms. Investors can apply for IPOs through:
- Online trading platforms
- Net banking ASBA facilities
- A modern IPO investment app
These platforms allow investors to:
- Track upcoming IPOs
- Place bids quickly
- Monitor allotment status
This convenience has made IPO investment accessible even for first-time investors.
Understanding the different types of IPOs is essential for anyone exploring opportunities in the share market IPO space. Each structure serves a different purpose for companies and investors.
Before applying for any IPO, investors should always evaluate the company’s financials, growth prospects, and valuation. With the help of a reliable IPO investment app, investors can easily research upcoming IPOs and make informed investment decisions.
