How is an IPO Priced? Who Decides the IPO Price for a Company

When a company launches an Initial Public Offering (IPO), the first question investors ask is simple:

Is the IPO priced fairly or is it expensive?

Understanding how an IPO is priced, who decides the IPO price, and what valuation methods are used is critical for retail investors. IPO pricing is not guesswork—it is a structured process involving valuation, market demand, and regulatory frameworks.

This article explains:

• How IPO pricing actually works in India
• Who has control over IPO pricing
• IPO valuation methods with simple examples
• How retail investors should evaluate IPO pricing before investing

IPO pricing determines:

• Listing gains or losses
• Long-term return potential
• Downside risk post listing

An overpriced IPO may deliver short-term excitement but poor long-term returns. An underpriced IPO may give listing gains but leave money on the table for the company.

For investors, IPO pricing is the first valuation test.

What is IPO Pricing? (Basic Concept)

IPO pricing is the process of deciding the price at which shares are offered to the public before listing on the stock exchange.

A company cannot randomly choose an IPO price. The price is influenced by:

• Company fundamentals
• Earnings and growth potential
• Industry valuation benchmarks
• Market demand
• Regulatory disclosures

In simple terms, IPO pricing is a balance between valuation and demand.

Who Decides the Price of an IPO?

This is the most misunderstood aspect of IPO investing.

Role of the Company & Promoters

• Decide how much capital to raise
• Decide how much equity to dilute
• Approve the valuation range suggested by bankers

 Promoters do not unilaterally fix the IPO price.

Role of Merchant Bankers / Investment Bankers

• Act as lead managers to the IPO
• Perform company valuation
• Recommend price band
• Market the IPO to institutional investors

 Merchant bankers play a central role in IPO pricing.

Role of Institutional Investors (QIBs)

• Participate during the book building process
• Submit bids indicating demand at different prices
• Their response strongly influences final pricing

Strong QIB demand supports higher pricing.

Role of Market Demand

• Demand determines the cut-off price
• Oversubscription signals pricing acceptance
• Weak demand forces conservative pricing

Final Conclusion:
 IPO price is discovered by the market, not dictated by a single entity.

How is an IPO Priced in India?

1. Fixed Price Issue

• IPO price is fixed in advance
• Investors apply at a single price
• Less common in large IPOs today

2. Book Building Issue (Most Common)

• A price band is announced (e.g., ₹90 – ₹100)
• Investors bid within the band
• Final price = cut-off price

What is a Price Band?

• Lower end = conservative valuation
• Upper end = aggressive valuation
• Reflects valuation comfort zone

SEBI’s Role in IPO Pricing

• SEBI does not decide IPO prices
• Ensures:
  • Transparent disclosures
  • Fair bidding process
  • No misleading projections

IPO Valuation: How Companies Decide the Right Price

IPO pricing is rooted in IPO valuation, not speculation.

Valuation answers one question:
What is the company worth today based on earnings, assets, and growth?

IPO price = Valuation ÷ Number of shares offered

6. IPO Valuation Methods Used in India
7. Relative Valuation (Most Common IPO Valuation Method)

Companies compare themselves with listed peers.

P/E-based valuation:

• Industry average P/E = 25
• Company EPS = ₹10
• Implied IPO price = ₹250

Used mainly for:

• Mature businesses
• Stable earnings companies

1. Absolute Valuation (DCF Method)

• Future cash flows are estimated
• Discounted to present value
• Growth assumptions play a key role

Used mainly for:

• Growth companies
• Tech and new-age businesses

Limitation: Highly assumption-driven.

1. Minimum Valuation Methods (Floor Valuation)

• Asset-based valuation
• Net worth as a base
• Used as a pricing floor

Common in:

• PSU IPOs
• Capital-intensive industries

How to Calculate IPO Share Price (Retail-Friendly Explanation)

Retail investors can use a simplified framework.

Step-by-Step Example:

• Company EPS: ₹12
• Industry P/E: 20
• Fair value: ₹240

Adjustments:

• Growth premium: +10% → ₹264
• Risk discount: -5% → ₹250

Likely IPO price band: ₹230 – ₹260

This is how IPO share price is calculated in practice.

Why IPO Prices Often Look Expensive

IPO prices appear high due to:

• High growth expectations
• Limited share supply
• Heavy institutional demand
• Bull market sentiment

This explains why many IPOs see post-listing volatility.

How Retail Investors Should Evaluate IPO Pricing

Before investing:

• Compare valuation with listed peers
• Check P/E, P/B, and growth metrics
• Avoid hype-driven narratives
• Decide:
  Listing gains vs long-term investing

Sometimes, buying in the secondary market post listing offers better risk-reward.