Question

Explain Pricing methods to offer shares to the public.

Answer 1

Public Issue or Public offer of Shares: Public Issue or offer means offering the shares to the public. This is the most common method used by companies. The company invites the public to subscribe to its shares by issuing a prospectus.

A company can use two pricing methods to offer shares to the public:

1. Fixed Price Issue Method: Under this method, the company states in its prospectus, the quantity and the price at which the shares are offered to the public. The subscribers/investors are asked to pay a certain portion of the face value of shares or the entire issue price along with the application. The company comes to know the demand for its shares only after the subscription period ends. The company can issue shares at par or premium. The fixed Price method is used for all types of issues, i.e. Public Issues, Right Issues, ESOS, etc.
2. Book-Building Method: Under this method, the issuer company determines the number of shares and the issue price at which its shares will be sold by the bidding process. The company issues a Red Herring Prospectus which contains the price range or price band and asks the investors to bid on it The lower end of the price band is called as 'floor price' while the highest end is called as 'cap price' or 'ceiling price'. The final price at which shares are offered ta the investors is called a 'cut-off' price. Investors can bid on any number of shares that they are willing to buy at any price within the price band. Bidding is kept open for 5 days. The bids along with the application money are to be submitted to the Lead Merchant Bankers called 'Book Runners' who enter the bids in a book. After bidding is over, the company fixes the 'cut-off price' based on the highest or best price at which all shares on offer can be sold. The company issues a Prospectus that contains the final price. BookBuilding Method is used for Public issues, i.e. IPO and FPO.