What is Cut-Off Price in IPO?

The cut-off price in an IPO is the final price determined after evaluating the bids received through the book-building process. Understanding this IPO pricing mechanism matters for first-time investors because those who apply at or above the cut-off price have a higher chance of allotment.

This article explains the cut-off price in an IPO, how it works, why it matters, and the factors that influence it.

What is a Cut-off Price in an IPO?

The cut-off price in an IPO is the final price at which shares are allotted to investors after the subscription ends. It is determined after considering the bids received during the book-built issue.

When a company goes public and opts for book-building pricing, it sets a price band. The price band contains a floor price and a cap price. The minimum price is considered the floor price, and the maximum price is considered the cap price.

When applying for an IPO, retail investors can either choose a specific bid price or select the cut-off option. By selecting the cut-off option, investors agree to purchase shares at the final issue price the company and its book-running lead managers set based on investor demand.

For example, if an IPO has a price band of ₹100 to ₹120 and the cut-off price is determined at ₹115, investors who selected the cut-off option will be considered for allotment at ₹115, subject to the applicable allotment process.

Also Read: Difference between Fixed Price Issue and Book-building Issue

How is the cut-off price in an IPO determined?

The cut-off price is determined through a SEBI-mandated price discovery process:

Step 1: The company files the DRHP with SEBI, announcing a price band. As per SEBI, the cap price cannot exceed the floor price by more than 20%.

Step 2: Investors submit a bid through their demat account or ASBA. Retail investors may select the “cut-off” option instead of specifying a price.

Step 3: All bids are available for public viewing on NSE/BSE platforms in real time.

Step 4: All bids are evaluated and sorted in descending order of price.

Step 5: The lowest price at which cumulative demand meets total shares offered becomes the cut-off price.

Step 6: The company and book-running lead managers (BRLM) officially declare the cut-off price. IPO allotment proceeds at the cut-off price for valid applications.

Who Can Bid at the Cut-off Price?

• Retail Individual Investors (RII) can bid at the cut-off price with an application value of ₹2 lakh or less.

• Non-Residents of India (NRI) can also apply at a cut-off price under the retail investors category.

Note: Non-institutional investors, HNI and QIB are not allowed to apply in an IPO at cut-off price. They must specify the price while applying.

Importance of Cut-Off Price in an IPO

Here is why cut-off price is important:

• Demand Assessment:

The cut-off price reflects investor demand and helps determine the price at which shares can be successfully issued.

• Allotment Eligibility:

Selecting the cut-off option allows eligible retail investors to participate without predicting the final IPO issue price.

• Price Discovery:

The cut-off price supports transparent price discovery by considering bids submitted by investors across the specified price band.

• Retail Participation:

The cut-off option simplifies IPO applications by allowing retail investors to accept the final price determined through book building.

Cut-off Price vs Bid Price

Here are the main differences between the cut-off price and the bid price

Factors influencing Cut-Off Price in an IPO

Here are some important factors that influence the cut-off price in an IPO.

• Investor Demand:

Strong demand at higher prices can push the final cut-off price toward the upper end.

• Subscription Levels:

Higher subscription levels indicate stronger demand and can contribute to a higher final issue price.

• Company Valuation:

The company’s financial performance, growth prospects and valuation can influence investor willingness to bid.

• Market Conditions:

Overall stock market sentiment and prevailing economic conditions can affect investor demand during an IPO.

• Institutional Participation:

Bids from qualified institutional investors can significantly influence demand patterns and the final price discovery.

FAQs

What is the cut-off price in an IPO?

The cut-off price in an IPO is the final price at which shares are allotted to the investors. This price is determined after evaluating the bids received during the book-building process.

Is it good to buy at a cut-off price?

Yes, applying for the IPO at the cut-off price is considered a good and safe choice for retail investors who want to maximise the chances of getting an allotment.

What happens if I bid below the cut-off price?

If you buy below the cut-off price, your application will get rejected. The full blocked amount in your bank account is unblocked and returned.

Does applying at the cut-off price guarantee allotment?

No. If the IPO gets oversubscribed, the allotment will be done through a lottery system for retail investors. Each valid application has an equal probability per lot.

What is the difference between floor price, cap price and cut-off price?

In an IPO price band, the floor price is the minimum price and the cap price is the maximum price at which investors can place their bids. The cut-off price is the final price determined through market demand.