An Overview of How IPO Prices Are Set

Setting the price for an IPO is a critical strategic decision—one that balances raising sufficient capital for the company with attracting investor interest. Pricing determines the value investors will pay and directly impacts the success of the listing. While complex, the process often involves systematic methods, regulatory guidelines, and investor sentiment.

IPO pricing is generally done through two primary methods:

Fixed‑Price Offering

In this traditional method, the company and its underwriters determine a single price at which shares are offered. Investors must subscribe at that exact price. This method is more straightforward but doesn't account for real-time demand.
Use case: Typically used when clarity or urgency is needed—though less common in dynamic markets.

Book‑Built Offering

This is the more modern and popular method, widely used in India and global markets. The company, working with investment banks (bookrunners), sets a price band—a range within which investors can place bids during the subscription period. The actual price (cut-off price) is finalized based on the volume and value of these bids at the end of the process.
Use case: Ideal for achieving fair price discovery by incorporating real investor demand.

Here’s how the book-building process unfolds:

• Price Band Announcement
  

  • The issuer, alongside underwriters, sets a floor price and cap price—e.g., ₹75 to ₹80.
    

  • SEBI regulations typically cap the band's width at 20%.
    

  • This band must be disclosed publicly—at least two working days before the issue opens.
    

• Bidding Period
  

  • Investors—retail and institutional—place bids within the specified band. Retail investors may choose to bid at the cut-off price, which is the price where most shares are eventually allotted.
    

• Book Closure & Review
  

  • Once bidding ends, underwriters evaluate demand across price points.
    

  • If a price is highly subscribed, it becomes the final issue price.
    

  • Underwriters may engage a greenshoe option (over-allotment) to stabilize price post-listing.

Underwriters rely on several qualitative and quantitative factors:

• Company Valuation: Based on financials, growth potential, industry position, and comparable companies.
  

• Market Conditions and Sentiment: Prevailing trends in capital markets.
  

• Investor Demand: Gauged through pre-IPO roadshows and ongoing book-building response.
  

• Issuer Objectives: Balancing capital requirements with desire to underprice for listing-day gains.
  

• Regulatory Guidelines: Compliance with norms such as price band limits and disclosure requirements.

IPO prices are often set conservatively to ensure full subscription. A modest first-day price rise is commonly observed and indicates positive market reception. Companies that overprice risk undersubscription, while those that underprice may raise less capital than potentially achievable.

Other pricing approaches used globally include:

• Auction Methods (e.g., Dutch or French Auction)
  

  • Prices are set based on competitive bidding by investors, sometimes used in markets like the U.S.
    

  • Aligns pricing strictly with investor demand but is rarely used in India’s IPO mechanism.
    

• OpenIPO / Modified Auction
  

  • Similar to Dutch auction, where all winning bidders pay the same clearing price.
    

  • Used occasionally in select Western offerings as an alternate to book-building.

IPO pricing blends art and science. The fixed-price method offers simplicity, while the book-building process ensures more equitable pricing by balancing company goals and investor demand. Multiple factors—valuation, market conditions, investor interest, and regulatory norms—feed into this crucial phase, ultimately influencing how the IPO performs both on launch day and beyond.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.