The issuing company in discussion with the lead merchant banker (the institutions upon which rests the entire responsibility of managing the issue) decides the price of an IPO. There is no set price formula prescribed by SEBI. However, the company and the lead banker are required to give a full explanation of the key assumptions taken into consideration while deciding the issue price.
In practice, there are two types of issues, one where the company and Lead Merchant Banker fix a price (called fixed price) and other, where there is a price band and rest is left to market forces to determine the final price of an IPO.
Book Building is basically a process used in IPOs for price discovery of an offer. It is a method where, during the period for which the issue is open, different categories of investors apply at various prices based on their judgment, within the price band. The cut off is determined after the bid is closed to public.
In a Book building issue, the company that wishes to tap stock market for fresh funds is required to indicate the price band. The actual discovered issue price can be any price in the price band. This issue price is called ?Cut-Off Price?. The issuer and lead manager, which is managing the issue, decides the cut off price after considering the issue size and the investors? desire for the stocks.
