A book-building issue is based on the concept of a price band. It functions on the bidders bidding for a price. After this bidding, companies calculate the number of bids and then decide the share’s final or cut-off value.
Thus, price bands and cut-off prices become crucial in a book-building issue and IPO stock market.
So, let’s understand these terms in detail.
What is a Price Band?
The price band value system is a value-setting system of the book-building system. A price band has an upper limit called the cap value, and a lower limit called the floor value.
For example, a company is offering its shares in its Initial Public Offering (IPO) and is using a book-building issue. The company would then decide on a price band or price range. Let’s assume the company decides to sell its share ranging from Rs. 250 to Rs. 300. Then, 250 would be the floor value, and 300 would be the cap value of the share offered.
After the declaration of the price band, investors start their bidding. Generally, this period is of three days. In these three days, interested investors can bid on the price of shares and the number of shares.
The cut-off price in IPO is the final share price that the company decides. It lies in between the price band. It is decided after the bidding process completes. If the IPO has performed well, the cut-off price is usually the cap price.
Now, three scenarios rise after the cut-off price declaration.
- Scenario 1
When your bid is lower than the cut-off price, for example, if the price range is Rs. 250-300 and the cut-off is Rs. 280. If you bid for Rs. 250, you’d not receive the share and would be refunded the amount.
- Scenario 2
When your bid is higher or equal to the cut-off price, in the above example, if you bid Rs. 281 or above, your application would be considered for the share allotment.
- Scenario 3
When you do not put any price in your application and are ready to pay the cut-off price, in this case, your application would still be considered for the allocation.
Price bands and cut-off prices are essential aspects of a book-building issue. First, it gives the company an idea of its worth. Investors also get to choose the price they want to pay for the company’s shares.
Cut-off price also gives one an idea about the total applications a company has received. It gives us an idea of how much the shares of that company are in demand.
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