Fixed Price Issue vs Book Building Issue: What Are Their Differences?

What are the different ways of issuing IPO in Nepal?

In Nepal, there are two ways of issuing IPO (Initial Public Offering), which are as follows:

  1. Book Building Method: The Book Building method is a market-driven approach that determines the issue price based on investor demand. In this method, the company issues a preliminary prospectus that outlines the terms of the IPO, including the number of shares to be issued, the price range, and other relevant information. Investors then submit bids for the shares they want to buy, and the price is determined based on the demand and supply for the shares.
  2. Fixed Price Method: The Fixed Price Method is a traditional approach in which the company issues a prospectus that states the number of shares to be issued and the fixed price at which the shares will be offered to the public. Investors then apply for the shares at the fixed price, and the allotment is made based on the oversubscription of the issue.

In Nepal, both methods are regulated by the Securities Board of Nepal (SEBON) and require companies to follow certain guidelines and regulations to ensure transparency and fairness in the issuance process.

What is meant by fixed price method if IPO issue and what are its procedures?

The Fixed Price Method is a traditional approach for issuing IPO (Initial Public Offering). In this method, the company issues a prospectus that states the number of shares to be issued and the fixed price at which the shares will be offered to the public. Investors then apply for the shares at the fixed price, and the allotment is made based on the oversubscription of the issue.

The following are the procedures involved in the Fixed Price Method of IPO issuance:

  1. Drafting of Prospectus: The company issuing the IPO prepares a prospectus that includes details such as the number of shares to be issued, the fixed price of the shares, the objective of the issue, and other relevant information.
  2. Submission of Application by Investors: Investors interested in buying shares in the IPO submit an application for a specified number of shares at the fixed price. The application is submitted to the designated bank or financial institution, which acts as the collection agent for the IPO.
  3. Allotment of Shares: Once the IPO subscription period is over, the company allots shares to investors based on the oversubscription of the issue. If the issue is oversubscribed, the allotment is made through a lottery system, and investors receive their shares accordingly.
  4. Listing of Shares: After the allotment of shares, the company applies for listing of its shares on the stock exchange. Once the shares are listed, they can be traded freely in the secondary market.

The Fixed Price Method is a simple and straightforward approach for IPO issuance, and it is commonly used by companies in Nepal. However, the pricing of the shares is fixed, which means that it may not reflect the true market value of the shares, and investors may not receive a fair price for their investment.

What is meant by book building method of IPO in Nepal? What are the procedures?

The Book Building Method is a market-driven approach for issuing IPO (Initial Public Offering) in Nepal. In this method, the company issuing the IPO sets a price range for the shares, and investors bid for the shares within that range. The final price of the shares is then determined based on the demand and supply for the shares.

The following are the procedures involved in the Book Building Method of IPO issuance in Nepal:

  1. Appointment of Book Running Lead Manager (BRLM): The company issuing the IPO appoints a Book Running Lead Manager (BRLM) who is responsible for managing the IPO issuance process. The BRLM conducts due diligence on the company, prepares the offer document, and coordinates with various stakeholders involved in the process.
  2. Preparation of Offer Document: The offer document is prepared by the BRLM, which includes details such as the number of shares to be issued, the price range, the objective of the issue, and other relevant information.
  3. Publication of Red Herring Prospectus: The company issues a Red Herring Prospectus (RHP) that includes the preliminary details of the IPO, excluding the final issue price. The RHP is published to generate investor interest in the IPO.
  4. Bidding by Investors: Investors bid for the shares within the specified price range during the bidding period. The bids can be revised within the bidding period, and the highest bid is considered for allotment of shares.
  5. Determination of Issue Price: The final issue price is determined based on the demand and supply for the shares. The issue price is set at the bid price at which the shares are subscribed up to the minimum offer size. If the issue is oversubscribed, the price is set at the highest price at which the shares are subscribed.
  6. Allotment of Shares: Once the IPO subscription period is over, the company allots shares to investors based on the demand and supply for the shares. The allotment is made at the final issue price.
  7. Listing of Shares: After the allotment of shares, the company applies for listing of its shares on the stock exchange. Once the shares are listed, they can be traded freely in the secondary market.

The Book Building Method is a popular approach for IPO issuance in Nepal as it helps to determine the true market value of the shares and ensures that investors receive a fair price for their investment.

How does fixed price method of ipo issue advantageous and disadvantageous in context of Nepal

The Fixed Price Method of IPO issuance in Nepal involves fixing the price of the shares before the issue and offering them to the public at a predetermined price. Here are some advantages and disadvantages of the Fixed Price Method of IPO issuance in Nepal:

Advantages:

  1. Certainty of Fundraising: The company knows how much money it will raise from the IPO before the issue, making it easier to plan for its financial future.
  2. Simplicity: The Fixed Price Method is a simple and straightforward process. It is easy to understand for investors, and the issue can be completed quickly.
  3. Easy to market: The Fixed Price Method is easy to market to investors as the price is fixed, and investors can easily calculate their expected returns.

Disadvantages:

  1. Undervaluation: There is a risk of undervaluation of the shares as the price is fixed before the issue. If the market price of the shares increases after the issue, the company may have missed out on potential revenue.
  2. Inefficiency: The Fixed Price Method does not consider the demand and supply for the shares, which may result in inefficiency. If the issue is oversubscribed, investors may not receive their desired number of shares.
  3. Limited Participation: The Fixed Price Method may limit participation from investors as the price is fixed. Investors who believe that the share price is overvalued may not participate in the issue.

In conclusion, the Fixed Price Method of IPO issuance in Nepal has its advantages and disadvantages. It provides certainty of fundraising and is easy to market, but there is a risk of undervaluation and limited participation. Companies should consider their specific circumstances and the prevailing market conditions before deciding on the IPO issuance method to use.

How does book building method of IPO issue advantageous and disadvantageous in context of Nepal

The Book Building Method of IPO issuance in Nepal involves determining the IPO price based on the demand and supply for the shares from investors. Here are some advantages and disadvantages of the Book Building Method of IPO issuance in Nepal:

Advantages:

  1. Price Discovery: The Book Building Method enables the company to determine the true market value of its shares through the bidding process, ensuring that investors receive a fair price for their investment.
  2. Efficient: The Book Building Method is an efficient process as it considers the demand and supply for the shares, ensuring that the issue is not oversubscribed or undersubscribed.
  3. Flexibility: The Book Building Method provides flexibility to the company in determining the IPO price within a price range. The company can revise the price range based on the demand and supply for the shares.
  4. Higher Participation: The Book Building Method allows a higher participation of investors as it does not limit the price of the shares. Investors who believe that the share price is undervalued can participate in the issue.

Disadvantages:

  1. Complexity: The Book Building Method is a complex process compared to the Fixed Price Method. It requires more resources and time to complete the issue.
  2. Volatility: The IPO price may be volatile as it is determined by the demand and supply for the shares. The IPO price may fluctuate depending on the market conditions, which may result in uncertainty for investors.
  3. Lower Certainty of Fundraising: The Book Building Method provides less certainty of fundraising compared to the Fixed Price Method. The company may not know how much money it will raise from the IPO until the bidding process is complete.

In conclusion, the Book Building Method of IPO issuance in Nepal has its advantages and disadvantages. It provides price discovery and flexibility, higher participation of investors, but it is more complex and volatile, and provides lower certainty of fundraising. Companies should consider their specific circumstances and the prevailing market conditions before deciding on the IPO issuance method to use.

What are the roles of issue manager in IPO issue by fixed price in context of Nepal

The Issue Manager plays an important role in an IPO issuance by Fixed Price in Nepal. Here are the key roles of the Issue Manager:

  1. Preparation of Prospectus: The Issue Manager is responsible for preparing the prospectus, which contains all the necessary information about the company, including its financial performance, future plans, and details of the IPO.
  2. Price Fixation: The Issue Manager determines the price of the shares to be issued and ensures that the price is fair to both the company and the investors.
  3. Regulatory Compliance: The Issue Manager ensures that the company complies with all the regulatory requirements of the Securities Board of Nepal (SEBON), Nepal Stock Exchange (NEPSE), and other relevant authorities.
  4. Distribution of Application Forms: The Issue Manager is responsible for distributing the application forms to investors and ensuring that the investors receive the forms in a timely manner.
  5. Collection of Applications: The Issue Manager collects the applications from investors and ensures that the applications are complete and comply with the regulations.
  6. Allotment of Shares: The Issue Manager is responsible for allotting the shares to investors and ensuring that the allotment process is fair and transparent.
  7. Listing of Shares: The Issue Manager applies for the listing of the shares on the Nepal Stock Exchange (NEPSE) and ensures that the shares are listed on the exchange in a timely manner.
  8. Post-IPO Activities: The Issue Manager provides post-IPO services to the company, including investor relations, stock market analysis, and other advisory services.

In summary, the Issue Manager plays a critical role in ensuring the success of an IPO issuance by Fixed Price in Nepal. The Issue Manager is responsible for various activities, including price fixation, regulatory compliance, distribution and collection of application forms, allotment of shares, listing of shares, and post-IPO activities.

What are the roles of issue manager in ipo issue by book building in context of nepal

The Issue Manager plays a critical role in an IPO issuance by Book Building in Nepal. Here are the key roles of the Issue Manager:

  1. Preparation of Offer Document: The Issue Manager is responsible for preparing the Offer Document, which contains all the necessary information about the company, including its financial performance, future plans, and details of the IPO.
  2. Price Discovery: The Issue Manager is responsible for conducting the book building process to determine the price of the shares to be issued. The Issue Manager sets the price range and collects bids from investors.
  3. Regulatory Compliance: The Issue Manager ensures that the company complies with all the regulatory requirements of the Securities Board of Nepal (SEBON), Nepal Stock Exchange (NEPSE), and other relevant authorities.
  4. Distribution of Application Forms: The Issue Manager is responsible for distributing the application forms to investors and ensuring that the investors receive the forms in a timely manner.
  5. Collection of Applications: The Issue Manager collects the applications from investors and ensures that the applications are complete and comply with the regulations.
  6. Allotment of Shares: The Issue Manager is responsible for allotting the shares to investors and ensuring that the allotment process is fair and transparent.
  7. Listing of Shares: The Issue Manager applies for the listing of the shares on the Nepal Stock Exchange (NEPSE) and ensures that the shares are listed on the exchange in a timely manner.
  8. Post-IPO Activities: The Issue Manager provides post-IPO services to the company, including investor relations, stock market analysis, and other advisory services.

In summary, the Issue Manager plays a critical role in ensuring the success of an IPO issuance by Book Building in Nepal. The Issue Manager is responsible for various activities, including price discovery, regulatory compliance, distribution and collection of application forms, allotment of shares, listing of shares, and post-IPO activities.

Which method of IPO issue is more advantageous for Nepalese people?

It is difficult to say which method of IPO issuance is more advantageous for Nepalese people, as both Fixed Price and Book Building methods have their own advantages and disadvantages.

Fixed Price method provides certainty of the issue price to the investors and reduces the risk of under-subscription. It is also easier to understand for small retail investors who may not be familiar with the book building process. On the other hand, the price may not reflect the true market demand and the company may leave money on the table if the issue price is set too low.

Book Building method allows for price discovery through a bidding process, which may result in a fairer price for both the company and the investors. It also enables wider participation of institutional investors, who can bid for larger quantities of shares. However, the process can be complex and may not be easily understood by small retail investors.

Ultimately, the choice of IPO method depends on various factors, including the company’s size, industry, financials, and investor base. The company and its advisors should carefully consider the pros and cons of each method before making a decision.

Here’s a table highlighting the differences between Fixed Price Issues and Book Building Issues in the context of Nepal:

ParametersFixed Price IssueBook Building Issue
MeaningThe prospectus mentions the fixed issue price for shares. Investors need to buy shares at that price only.A bidding process determines the IPO’s price. Investors receive a price band and have to bid at a price within this band.
Price of sharesThe price of shares is known in advance and mentioned in the prospectus.The minimum and maximum price range is known in advance, but the exact issue price of shares is not known.
Determination of demandA company becomes aware of public demand for its shares only after the fixed price issue is closed.A company comes to know about public demand for its shares on a daily basis, as bids are registered in the book until the issue closure date.
ProspectusA prospectus containing the details of the fixed issue price and the total number of shares offered is required.A Red Herring Prospectus is issued by the company which contains the total size of the issue along with its price band.
Payment of application moneyInvestors have to pay in advance the purchase price for applied lots while submitting the application for shares.Investors’ amounts will be blocked in the bank account for the amount applied, and the final amount will be collected once the issue price has been determined.
ReservationsA certain percentage of shares offered by a company are reserved for retail investors.A certain percentage of shares are reserved for Qualified Institutional Buyers (QIBs), Non-Resident Nepalis (NRN), and mutual funds.
UsageFixed price issue method is used for any issue including IPOs, Rights Issues, Public Issues, ESOS, etc.Book Building issue is primarily used for Public Issues, i.e., IPO and FPO.

Note: The information provided in the table is based on the regulatory framework and practices followed in Nepal and may be subject to change over time.

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