Floor Price

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Prateek Biyani (Querist)
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05 December 2007 What is Floor Price and Cap Price (both in respect of issue of shares through book-building process) ? One of our expert state that the difference between both of the above should not be more than 20%. Please clarify this point also.

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R.V.RAO (Expert)
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05 December 2007
FLOOR PRICE AND CAP PRICE:
An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price. The issuer company can mention a price band of 20% (cap in the price band should not be more than 20% of the floor price) in the Draft Offer Documents filed with Sebi and actual price can be determined at a later date before filing of the final offer document with Sebi/RoCs.
the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover price for securities.
The Red Herring Prospectus may contain either the floor price for the securities or a price band within which the investors can bid. The spread between the floor and the cap of the price band shall not be more than 20%. In other words, it means that the cap should not be more than 120% of the floor price. The price band can have a revision and such a revision in the price band shall be widely disseminated by informing the stock exchanges, by issuing press release and also indicating the change on the relevant website and the terminals of the syndicate members. In case the price band is revised, the bidding period shall be extended for a further period of three days, subject to the total bidding period not exceeding thirteen days.
Cut Off Price
In Book building issue, the issuer is required to indicate either the price band or a floor price in the red herring prospectus. The actual discovered issue price can be any price in the price band or any price above the floor price. This issue price is called ?Cut Off Price?. This is decided by the issuer and LM after considering the book and investors' appetite for the stock. Sebi (DIP) guidelines permit only retail individual investors to have an option of applying at Cut Off Price.
SOURCE:www.bigshareonline.com
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