Pricing Strategies of Indian Initial Public Offering - Essay Example

The costs of undertaking an IPO are very large and as such companies prefer using another method herein referred to as private placements. This is partly because the costs of a placing are far lower than an offer for sale, and partly it is because in 1996 the Stock Exchange scrapped its rule requiring that new issues worth more than £50m should offer a proportion to the public(Global-Investor 2008). With the introduction of the book-building process, and the scrapping of the concept of par value for shares, the pricing process has become more open.

It is now possible to follow the fixed price route or the book-building route for an issue. In case of the book-building process, the price is not fixed, but a price band is suggested. The investors can bid for any price between the cap and the floor, and the quantum of subscription. One of the lead managers will work as the book-runner. The final issue price is determined as the cut-off, at which the issue is fully subscribed. The book-building could be used for 75% of the issue, which could be subscribed by institutions and high net worth individuals, and the balance 25% could be issued to individual investors as a fixed price issue, the price being the cut-off determined via book-building.

It is also possible to have 100% book-built issues, where the individual investors also take part in the book-building process. The book-building process can be completely automated (online) using the systems of the stock exchanges. This process is known as e-IPO. The price band at present is 20% i.e. the cap could only be 20% higher than the floor. The price band could be revised during the bidding period, to a maximum of 20% on either side. The public issue should be open for a minimum of five days, and a maximum of ten days.

The post-issue promoter holding should be at least 20%, whereas earlier it was 50% in the case of premium issues. If the price band is revised, the bidding period