How is the IPO price band decided? How does it relate to face value?
Ashleigh asks:
For e.g Reliance came out with a price band, and then through book building method a cut off price is decided. But how do companies come out with a price band at the first place?
For e.g Reliance came out with a price band, and then through book building method a cut off price is decided. But how do companies come out with a price band at the first place?
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The companies don’t set the price, the underwriting investment bank is charged with setting the price and they’re supposed to set a FAIR price based on their evaluation of the value of the company not a price that maximizes the capital raised. They adjust the final price slightly to reflect the demand from subscribers.
This duty of the underwriter to set a fair price is part of the reason you’ll sometimes see IPOs rocket on the open.
They take a look at their company, how successful and large it is, and they can form a pretty good estimate of what people would be willing to pay for it (fair value.) That’s all it is, basically they just set it at whatever they want. Then once people start making bids it will work out to be a single price which adjusts to meet demand.