IPO – Methods of Pricing

Once the registration gets approved by the regulator and the completion of meetings with potential investors the company and investment bank together decide on issue date, issue price and the minimum lot quantity that an investor should subscribe to. The maximum quantity (amount) that an investor can subscribe to depends on the category (eg; retail investor, Mutual Fund etc) that the investor falls into. This limit and categorization are provided by the regulator. However the exact price is decided by one of the following methods.

Fixed Price Method
Book Building method

Fixed Price Method: In this method of pricing the investment bank in consultation with the firm fixes the price at which an investor can subscribe to. This price could be at par value or at a premium above the par value.

Book Building Method: In this method of pricing a price band is fixed instead of a fixed price. The lowest price in the price band is called as ‘floor price’ and the highest price is called as ‘cap price’. An investor can subscribe at a price anywhere in the price band. An investor who wants to subscribe at any price can mention the ‘cut-off price’. This cut-off price is decided once the bid period is over. Once the issue is closed a book with descending order of prices is prepared. Cut-off price is the price at which the entire issue gets subscribed.  This is the most commonly used method.

 

Related posts

December 21, 2008 | Filed Under Stocks 

Comments

Leave a Reply





Add to Technorati Favorites