Price Band
A price band is the range between a floor price and a cap price within which investors can bid for shares in a book-built IPO, with the final issue price (cut-off price) determined by demand aggregated across all bids.
The price band was central to the book-building mechanism used in the vast majority of Indian IPOs. SEBI's ICDR Regulations specified that the cap price of the price band could not exceed 120 percent of the floor price — in other words, the spread could not be wider than 20 percent of the floor. A typical IPO might announce a price band of, for example, Rs 450 to Rs 500, giving bidders a Rs 50 range within which to express their price preference.
The price band was announced at least five days before the IPO opening date and was fixed for the entire subscription period (typically three days for most categories, or one additional day for QIBs and anchor investors). Retail investors had the option of bidding at the cut-off price — a special option that signified willingness to accept whatever price the book-building process ultimately determined — rather than specifying a particular price within the band. SEBI mandated that at least one lot of retail bids had to be made available at the cut-off price option, and the overwhelming majority of retail applications used this option in practice.
The floor price and cap price were determined by the company and lead investment banks through a pre-IPO valuation exercise that benchmarked the company against listed peers on relevant valuation multiples such as P/E, EV/EBITDA, Price-to-Book, or sector-specific metrics. The floor price represented a conservative valuation scenario and the cap price a more aggressive one. The distance between floor and cap gave investment banks flexibility to gauge demand and set the final price at or near the cap if books were oversubscribed.
Once the subscription period closed, the registrar to the issue tabulated all bids across categories. If the book was fully subscribed across all price points within the band, the cap price was typically set as the issue price. If demand was concentrated at lower price points, the cut-off might be set below the cap. In extremely rare cases of weak subscription, the issue price could be set at the floor. The price discovery function of the price band ensured that IPO pricing reflected actual investor demand rather than a single arbitrary price imposed by the issuer.
The IPO price band also influenced grey market premium (GMP) dynamics in the unofficial pre-listing market. Speculators tracked whether GMP quoted in the informal market was trading at a premium or discount to the cap price as a loose — and unreliable — indicator of expected listing performance. Price bands set aggressively at the upper end of valuation ranges were associated with higher GMP pre-listing but also higher risk of post-listing correction if earnings growth did not justify the premium.