A price band is a value-setting method in which a seller indicates an upper and lower price limit, between which buyers are able to place bids. The price band’s floor and cap provide guidance to the buyers. This type of auction pricing technique is often used with initial public offerings (IPOs).
The price band is used during the price discovery stage of an initial public offering (IPO). When a company decides to issue shares in the primary market, it hires the services of one or more investment bankers to act as under writers .The bottom band is the lower limit and the top band is known as the upper limit. Determining the price band is a critical step in book building, as it enables a firm to understand how much money investors are willing to pay for an ownership stake in the firm. Once a price band is formulated, the underwriter starts the process of building its books, which it opens by sending a draft prospectus with the price band to potential investors, such as institutional investors, retail investors and High Net Worth Individuals (HNWI). The book is open for a predetermined period of time during which investors can submit and revise their offers on the number of shares they are willing to purchase at a price that falls within the band. After the book is closed, the underwriters evaluate the bids in order to ‘discover’ the fair price of the IPO.