What is Price Band in IPO?
In this article, we are going to discuss “How is the Price Band of an IPO Decided?“. Before we go deeper, let’s look at “what is price band in IPO?”.
In general price band refers to the highest and the bottom price which the seller decides.
And let the buyer bid for the security during an IPO Launch. Let’s take a recent example of Zomato IPO wherein it ranges between Rs.72 to Rs. 76. However, the face value of the share is hardly Rs.1 per share.
Just to understand Zomato IPO we say the company wants to issue 10000 shares and their underwriter team has decided on a price band of Rs.72 to Rs 76. And investors bid as below described in the table:
|Bid Price||Numbers of Shares||Cumulative shares||Cumulative % of the shares|
As Zomato wants to issue only 10000 shares however the IPO was over subscribing up to 16600 shares.
So as per the bidding company will only allocate shares for Rs.75s and above.
Rest investors will get a refund back. Rs. 75 will be the cutoff price as all shares got allocated on this mark-up price.
Determining the price band is a critical step in deciding the share price as it enables a company to understand how much money investors will be willing to pay for an ownership stake in their organization.
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How is the Price Band of an IPO Decided?
The price band is decided by the company owners in consultation with investment bankers who are involved in IPO launch. And the factors they consider in deciding the price band is listed below:
- The quality of stocks currently being sold in an IPO
- The organizational or management set-up of the private company
- The current market prices of the stocks of similar companies in the same sector
- Company’s future growth potential
- Financial effectiveness of Company’s business model
- The demand from the potential customers for company’s shares
- General overall market trend
- Sometimes, any positive news like the company’s recent achievements, success story, or products they offer may also affect pricing
As we have taken an example of food giant Zomato let’s get into their financials and fundamentals which the underwriter team has considered while selecting a price band to assess the suitable issue price for the company shares.
Zomato’s IPO has done well given the company’s strong growth over the years.
The company has generated tremendous revenue across all its business verticals over the past few months but due to the pandemic encountered a loss in FY21.
However, the company closed revenues of Rs 1,367 crore for the initiative’s quarters of FY21, higher expenses led to a loss of Rs 684 crore.
Zomato’s revenue increased sharply by 96 percent from Rs 1,398 crore in FY19 to Rs 2,743 crore in FY20.
Its business got slowed down during covid but it’s not only their business that got impacted as we all know.
Hence, analysts were positive about the company’s future, given that it is one of the most dominant players in the food delivery segment along with rival Swiggy.
By the end of 2020, the company offered its delivery services in approximately 525 cities across the country with more than two lakh delivery partners and over 3.6 lakh active restaurants under its network.
How is Band Price Calculated?
A lot of calculation, quantitative analysis, and research goes behind the calculation of a rationale price band that we have discussed above.
To decide the price band company go for the book-building process.
In which securities are offered to various bid processes to assess the demand of the security in the market and accordingly the price is discovered for the shares.
The price under the book-building process is the price that the market can bear. And usually the same would be higher than the price under the fixed pricing method.
Lower Band and Upper Band
This year lot many IPOs have been launched using a book-building process, where a price band is decided by company issuers and their bankers. The highest limit is called the upper band and the lowest limit is the lower band.
On the basis of bidding received from the investor issue price would be decided.
And accordingly, the shares would be allocated to only those investors who bid equal and above the issue price.
As in Zomato’s example Rs 72 is the lower band and Rs 76 is the upper band.