Price BandUnderstanding the Maximum and Minimum IPO Bid Prices
What is a Price Band?
Price Band is a pricing auction method that sets a maximum and minimum amount of bid prices, usually done in an Initial Public Offering (IPO).
It serves as a guide for bidders to place their bids.
Understanding Price Band
During IPO, a price band is agreed upon between the issuer and the underwriters.
Upon the company’s decision to offer its shares to the primary market, they ask for an underwriter’s service (usually investment bankers) to help them evaluate factors that may affect the setting of the share’s current value.
There are many factors underwriters consider in determining the most relative price ranges with which the security can be traded.
These factors include the following:
- A forecast of the company’s growth, the economy, or the industry it belongs to
- The net worth of the company
- Earnings Per Share (EPS)
- Other factors that could be relevant to the evaluation
Upon the agreement of the issuer company and the underwriter of the price range, the price band is set.
The significance of the price band is that it provides an insight into the investor’s bid prices which is a vital step in book building.
Book building is a process that determines how much investors are willing to pay for an ownership stake in a company during the IPO.
With the generated price band, the underwriters then proceed to send a draft prospectus that includes the price band to prospective investors.
Usually, they are sent to retail & institutional investors, and high-net-worth individuals.
This whole process is the start of a company’s book building.
The book will stay open for a specified time period to accommodate submissions or any revisions of the investor’s bid.
The evaluation of all the bid prices starts after the closing of the books, at which point the fair price is “discovered” and will be issued at the Initial Public Offering.
Example of a Price Band
GOT Company wants to issue 15,000 shares in its IPO with a price band between $22 to $32.
The information below shows the bids of the interested investors.
| Bid price | Number of shares | Cumulative shares | Cumulative % of total shares |
| $32.00 | 1,500 | 1,500 | 10% |
| $30.50 | 4,500 | 6,000 | 40% |
| $29.00 | 5,250 | 11,250 | 75% |
| $28.50 | 2,250 | 13,500 | 90% |
| $28.00 | 1,500 | 15,000 | 100% |
| $27.00 | 3,500 | 18,500 | 123% |
| $26.00 | 2,500 | 21,000 | 140% |
The company only issued 15,000 shares but bid shares of 21,000 shares were also submitted.
The highest bid price a company may sell its shares is $28. Investors who bid at a price lower than $28 will be refunded.
The bid prices above $28 will have the same investment price per share as the highest recognized bid price.
In international trade, a price band can also be a price-setting technique for a particular country.
It implements an upper and lower price for specific goods, and if the price falls below the bottom price set, the country may impose a tax on the goods until its price falls within the price band again.
A variable import levy is applied to the imported good to give protection, raising the cost to the reference price of the importer.
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Monash University "Price Band" Page 1 . October 10, 2022