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%.
The company launching the IPO may choose to revise the price band as well, although, there are a few provisions and implications related to this process. The different ways in which a business can be revised include providing timely information to the regulatory bodies including exchanges (BSE, NSE for instance), providing this information on their own website and of course by doing a press release.
Price Band in IPO Basics
Let’s take an example to understand the concept and usage of Price band in IPO on a real-time basis.
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.
The Price band in 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 of 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 range for this particular IPO is ranged between ₹355 and ₹358. Such information will always be available in any IPO listing you would see.
Based on the Price band, a lot of other related financial aspects are calculated that can actually make or break the deal for the business that is launching the IPO. A lot of calculation, quantitative analysis and research go behind the calculation of a rationale price band.
If there is some sort of vagueness in background research, the IPO can be disastrous in its bids and overall subscription.
Who decides the Price Band in IPO?
It is the company that is filing the IPO that decides the price band in 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 in 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 of other things to figure out the right bracket range for the price range and the exact price value. 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 risen.