Floor Price

In a book-built IPO, the company and its merchant bankers do not fix a single price. Instead they announce a price band, and the floor price is the bottom of that band, the lowest figure at which investors may place bids. Bids below the floor are simply not accepted.

How it works

The band has two ends: the floor price (lower limit) and the cap price (upper limit). SEBI norms keep the cap within a defined range above the floor, so the band stays reasonably narrow.

During the bidding window, investors bid at any price within the band. Demand at different price points builds the book, and the final issue price, the cut-off price, is discovered from where demand clusters. Retail investors can simply bid "at cut-off" to accept whatever final price emerges.

In India

Every mainboard IPO that uses book building publishes a floor and cap in the Red Herring Prospectus filed with SEBI. You will see this band in the IPO advertisement and on the BSE and NSE platforms.

Applications through ASBA block funds at the cap price, so money equal to the upper end is held until allotment, even if the final price lands lower; the difference is then unblocked.

In a fixed-price issue, by contrast, there is no band, a single price is set upfront, so the floor-price concept applies only to book-built offers.

Why it matters

The floor price anchors how the issue is valued. Reading it against the company's earnings and peers helps you judge whether the IPO is priced attractively or richly. A high floor relative to fundamentals can signal an aggressive valuation.

Because funds are blocked at the cap, the band also tells you exactly how much liquidity an application will tie up.

Common mistakes

Confusing the floor price with the final allotment price is common, you may pay less than the cap. Another error is assuming a low floor means a cheap stock; valuation depends on price relative to earnings and growth, not on the rupee figure alone.