When it comes to IPOs or FPOs, numerous critical factors require careful consideration, as these offerings represent some of the most pivotal activities for a company. Within an IPO, one notable element to take into account is the “price band.”
The price band in an IPO is the range of prices within which investors can bid for shares. The price band is determined by the issuer company in consultation with its investment bankers. The SEBI ICDR Regulations specify that the price band cannot be more than 20% of the floor price.
The question that often arises is whether a change in the price band is possible and how it affects prospective investors. The answer is that companies can revise the price band, but such revisions must be in favor of shareholders. In other words, if the initial issue is progressing successfully, promoters cannot increase the price and demand more from investors.
The purpose of the price band is to prevent excessive volatility in the share price on the day of listing. The floor price is the minimum price at which the issuer company is willing to sell its shares, while the cap price is the maximum price at which the issuer company is willing to sell its shares.
Investors can bid for shares at any price within the price band. If the demand for shares exceeds the supply, the shares will be allotted to investors at the cut-off price. The cut-off price is the highest price at which all shares are subscribed.
In the context of IPOs in India, the process of raising funds is regulated by SEBI through its ICDR (Issue of Capital and Disclosure Requirements) regulations.
- The price band is disclosed in the red herring prospectus (RHP), which is the document that investors must read before applying for shares in an IPO.
- The price band can be revised before the IPO opens for subscription. However, if the price band is revised, the bidding period must be extended for at least three days.
- The price band applies to all investors, including retail investors, institutional investors, and qualified institutional buyers (QIBs).
- If the demand for shares exceeds the supply, the shares will be allotted to investors on a proportionate basis. This means that all investors will get a share of the shares, even if they have bid at a higher price than the cut-off price.
The price band is an important feature of IPOs in India. It helps to ensure that the IPO is priced fairly and that all investors have an equal opportunity to participate in the issue.
Here is an example of how the price band works:
- An issuer company sets a price band of Rs. 100-120 for its IPO.
- Investors can bid for shares at any price within the price band.
- The demand for shares exceeds the supply, and the shares are allotted to investors at the cut-off price of Rs. 115.
This means that all investors who bid for shares at Rs. 115 or lower will get a share of the shares. Investors who bid for shares at a higher price than Rs. 115 will not get any shares.
The price band is a complex topic, and there is more to it than what has been covered in this brief explanation. If you are considering investing in an IPO, it is important to read the RHP carefully and to consult with a financial advisor.