Fixed price issue
A public issue in which the company, with its lead manager, sets the issue price in advance and discloses it, so investors know exactly what they will pay when they apply — the alternative to a book built issue.
In plain language
SEBI allows a company to decide the price of a public issue of shares in one of two ways. It can fix the price itself, in consultation with the managers of the issue — or it can let investors bid and discover the price. The first is a fixed price issue; the second is a book built issue.
In a fixed price issue, the company and its lead manager (the merchant banker in charge of the issue) decide the price. The company justifies the price on the basis of its expected performance and the consequent increase in its share price. That price is made available to investors when the issue is announced, so an applicant knows at the time of applying the price at which shares will be allotted.
No price band, no bids at different prices, no cut-off price to wait for. The only unknown for the investor is how many shares they will get.
How it works
Side by side with a book built issue:
| Fixed price issue | Book built issue | |
|---|---|---|
| Who sets the price | Company with the lead manager, before the issue | Discovered from bids within a floor price or price band |
| When investors know it | At announcement, before applying | After the issue closes |
| Offer document | Prospectus | Red herring prospectus (price or band may not be final) |
| Underwriting | Discretionary | Mandatory by lead managers and syndicate members |
| Allocation in net offer | Minimum 50 per cent to retail individual investors; remainder to other individuals and to other investors including corporate bodies or institutions | Depends on eligibility — e.g. not less than 35 per cent retail where the issuer meets the profitability criteria |
Underwriting. An issuer making an IPO other than through book building may, if it desires, have the issue underwritten — by SEBI-registered merchant bankers or stock brokers.
Minimum subscription. An issue must receive at least 90 per cent of the net offer to the public, failing which the entire subscription is refunded not later than 4 days from closure. For an underwritten issue, the 90 per cent includes subscription by the underwriters.
Issue period. A public issue is open for a minimum of 3 and a maximum of 10 working days. In case of force majeure, banking strike or similar circumstances, the issuer may extend the issue period disclosed in the prospectus of a fixed price issue by a minimum of 1 working day, within that maximum.
A worked example
Illustrative issue. Nilgiri Organics makes a fixed price IPO of 40,00,000 shares at Rs 125 — Rs 50 crore. The price appears in the prospectus.
Allocation. At least 50 per cent is for retail individual investors:
Retail portion ≥ 50% × 40,00,000 = 20,00,000 shares (Rs 25 crore)
Remainder ≤ 20,00,000 shares, for other individuals and other investors
An applicant. Sunita applies for 1,200 shares. She knows her maximum outlay before applying:
Amount blocked = 1,200 × Rs 125 = Rs 1,50,000
That is within Rs 2 lakh, so she applies as a retail individual investor.
Minimum subscription test. The net offer is 40,00,000 shares; 90 per cent is 36,00,000.
| Applications received | Outcome |
|---|---|
| 34,00,000 shares, not underwritten | Below 36,00,000 — entire subscription refunded within 4 days |
| 34,00,000 shares, underwriters take up 2,00,000 | 36,00,000 including underwriters — meets 90 per cent |
| 60,00,000 shares | Oversubscribed — allotment on a proportionate basis |
In every case Sunita's price was Rs 125. In a book built issue she would have bid within a band and learned the price only after the issue closed.
Why NISM asks about it
Chapter 3 (Primary Markets), section 3.9 "Pricing a Public Issue of Shares", sets fixed price (3.9.1) against book built (3.9.2). The contrast recurs in the underwriting rules (discretionary versus mandatory), the prospectus versus red herring prospectus, the allocation pattern for issues other than book-built, and the issue-period extension clause. Expect a "who decides the price?" question and a pair question on underwriting.
Common exam traps
- Underwriting is discretionary for fixed price, mandatory for book built. Swapping them is the classic error.
- Prospectus for fixed price; red herring prospectus for book building, because the book built price is unknown until the issue closes.
- The price is known before applying — investors do not bid a price.
- Retail allocation: minimum 50 per cent in an issue other than book-built; the book-built patterns (35 per cent / 10 per cent) are different rules.
- 90 per cent minimum subscription applies to both, with refund within 4 days of closure if not met.
- The company must justify the price on the basis of expected performance; it is not set by SEBI.
Check yourself
1.What distinguishes a fixed price issue from a book built issue?
- a)In a fixed price issue, the price is discovered from investor bids after the issue closes
- b)In a fixed price issue, the company and the lead manager decide the price in advance, so investors know it when they apply
- c)In a fixed price issue, SEBI fixes the price of the shares
- d)In a fixed price issue, retail investors bid within a price band
Show the answer
Answer: (b) In a fixed price issue, the company and the lead manager decide the price in advance, so investors know it when they apply
"In a fixed price issue of shares to the public, the company in consultation with the lead manager (who is the merchant banker in-charge of the issue) would decide on the price... This information is made available to the investors when the issue is announced so that investors know the price at which the shares will be allotted to them at the time of making the application."
- Options A and D describe book building, where investors bid above a floor price or within a price band and a cut-off price is decided.
- Option C is wrong. SEBI regulations allow the issuer to decide the price. SEBI does not set it.
Where this is taught
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
- Series XII · Chapter 3: Primary Marketsintroduced here
Related terms
- Retail Individual InvestorUnder the SEBI ICDR Regulations, 2018, an individual investor who applies or bids for specified securities for a value of not more than Rs 2 lakh.
- Initial Public OfferThe first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
- Minimum subscriptionThe least an issue must raise to go ahead — at least 90% of the fresh issue offered through the offer document; if it is not received, all application money is refunded within four days of closure.
- Red Herring ProspectusThe offer document used in a book-built public issue, containing every disclosure a prospectus carries except the final price or number of shares, filed with the Registrar before the issue opens.
- ProspectusThe offer document a company issues when it raises money from the public. It sets out the company, its promoters, finances, risks, purpose of the issue and terms, so investors can decide.
- Book built issueA public issue in which the price is discovered from investor bids inside a price band, rather than fixed by the issuer in advance, with allotment made at the cut-off price.
- UnderwriterAn institution that agrees, under an underwriting agreement, to subscribe to the part of a public issue that investors do not take up — and is paid a commission for standing behind the issue.
- Basis of allotmentThe process of deciding how many shares each applicant in a public issue gets — all they applied for if the issue is not oversubscribed, otherwise a proportion worked out separately for each investor category.