Price Band is basically a range of price at which the IPO is bid for. This information is generally contained in the Red Herring Prospectus published by the company filing for the IPO. The price band contains a floor and a cap price and the difference (or spread) between the two cannot be more than 20%.
For instance, if a company ALPHA-BETA files for an IPO, their price band can potentially be ₹1000 to ₹1200. This also means the minimum bidding by the buyers for the IPO must be ₹1000. If they fail to do so, their application will be outrightly rejected.
Price band of an IPO gives an idea to the potential buyers about the prospected value of the company to go along with an ideation of their possible returns. You must perform a comprehensive analysis about the IPO keeping the price band in mind so as to take a final judgement on whether to go ahead with the IPO investment plan or not.
You must have noticed such notices in the business newspapers:
You can observe that the Price Band for this particular IPO is ranged between ₹355 and ₹358. Such information will always be available in any IPO listing you would see.
Who decides the Price Band of an IPO?
It is the company that is filing the IPO that decides the price band of the IPO. However, they do take professional assistance from lead managers or merchant banks.
Some users believe that SEBI has a role to play in deciding the price or price band of an IPO. However, this is incorrect. SEBI has nothing to do when it comes to pricing. SEBI is a regulatory body and focuses on validating the content of the IPO prospectus.
Furthermore, lead managers perform a detailed market study, competitive analysis within the industry, launch road shows and do a lot other things to figure out the right bracket range for the price band. This is a crucial step.
Simply because, if the price band is put higher than the investor expectations, then the IPO may go under-subscribed as the investor might feel it to be expensive and less lucrative for future returns. Otherwise, if the price band is lower than the expectations, then yes, there will be over-subscription but the company filing the IPO may lose out on potentially much higher capital that it could have rose.