What Is the Cut-Off Price in IPOs?

When applying for an IPO, you will want to maximise your chances of getting the share allotted to you. For this, you take measures like double-checking your application details, putting in your bids early and making sure to have a UPI ID for quick payments. In addition, you need to ensure that you put in a bid at or above the cut-off price. 

Now, what is this cut-off price and why is it relevant?

Read through the sections below to get all information on cut-off prices and how they are determined.

What Is Cut-off Price in IPOs?

In simple words, the cut-off price is the minimum share price below which bids are considered ineligible. Cut-off prices are decided within a specified price band. Therefore, it usually applies to book-building issues instead of fixed price issues.

In a book-building type of IPO, the underwriters announce a price band, within which investors have to place their bids. The price band specifies a lower limit and an upper limit. As long as the IPO stays open, typically for 3-5 working days, investors can put in their bids, and the cut-off price is determined based on the number of subscriptions.

What Are the Two Types of IPOs?

The following section discusses book-building and fixed-price methods in detail. 

  • Book-Building Process

In this process, the underwriters assign a price band considering the company’s financial statement. The bidders place their bids within the assigned price band, which contains a floor price and a cap price. The price band is permitted to move up and down to the extent of 20%. In the case of a revision, the IPO period extends by 3 working days.

After the offer period closes, the price at which a company allots shares to eligible subscribers is considered the cut-off price. Bids below the cut-off price are not considered for allotments and are refunded to investors.

  • Fixed Price Process

In this method of IPO pricing, companies announce their share prices in advance. Here, market demand for a share can only be discovered at the end of the IPO session. Furthermore, companies opting for a fixed-price IPO have to reserve 50% of their shares for retail investors.

How Are Cut-off Prices Determined?

As stated earlier, companies hire underwriters to proceed through complex mathematical evaluations to decide on a price band. These price bands have a lower and upper price limit called floor and cap prices. For example, an XYZ company decides to allocate its shares within a price band of ₹100 to ₹120. These are the price limits within which investors can place bids.

Subsequently, underwriters will look for the high price at which the company can allocate all of its offered shares. Accordingly, they decide on a cut-off price, say ₹110  in the above case. 

Hence, investors who placed bids at₹110 or above will be allocated shares, whereas the remaining won’t get shares allocated. In case the bids placed were higher than ₹110, the residual investment will be transferred back to the investors.

How to Improve Chances of Share Allotment?

You can increase your chances of sharing allotment by considering the below-mentioned pointers.

  • Apply for Cut-off Price Option

Suppose you are confident enough in a company or an industry to flourish post-IPO and willing to contribute to its expansion and reap significant benefits from its shares. You may select the cut-off price option.

By selecting the cut-off price option, an investor agrees to whatever price the company comes up with as the cut-off price after the end of an IPO session. Therefore, selecting the cut-off price option while submitting your IPO application can significantly increase your chances of share allotment.

  • Take Shareholder Advantage

If the company you are about to invest in has a listed parent company, you happen to be one of its shareholders. In that case, it considerably increases your chances of sharing allotment. However, this only applies to IPOs that have reservations for shareholders of their respective parent companies.

  • Be Prompt While Applying for an IPO

If you are already determined to invest in a company’s share, do not wait till the last moment. Place your bid on the first or the second day to avoid any discrepancies due to an unresponsive bank account or server lag due to high-volume traffic. This will ensure you take advantage of the opportunity to invest in an IPO.

  • Invest in Prospective Companies

Chances of share allotment can further be analysed by categorising companies as undersubscribed and oversubscribed. Under subscription is when the number of bidders is lesser than the available shares, and vice-versa in case of oversubscription.

Undersubscribed shares have higher chances of getting allocated. In contrast, oversubscribed shares have lower chances of share allocation, even if bids are placed at the higher segment of the price band. It may be tempting to invest in IPOs that are likely to be undersubscribed, but it involves taking on very high market risks. Instead, try investing in IPOs based on the company’s fundamentals.

  • Bid through Multiple Demat Accounts

In case of oversubscription, bidders can only place an application for a maximum of 1 lot of shares of an IPO. However, you could register for multiple bid applications through your family member or friend’s account and increase your chances of share allotment.

Final Word

Most companies listing for IPO opt for a book-building mechanism, determining the cut-off price after the public issue closes. In some cases, companies follow a partial book-building process that exclusively invites Qualified Institutional Buyers to place bids for a company share. These bids determine the cut-off prices.

Selecting the cut-off price option while registering for an IPO application may not guarantee share allotment. However, it significantly increases your chances of getting your desired shares allocated in your name.

Frequently Asked Questions

Can I bid at a price higher than the cut-off price in an IPO?

Yes, to enhance your chances of share allotment, you can place bids on the higher segment of the price band. Furthermore, you will be eligible for a full refund if you don’t receive share allotments.

How many bids can I place in an IPO?

You can either opt for a cut-off price or place bids. As per guidelines, investors can place 3 bids at a time.

Can IPO prices go below the issue price?

An issue price is a price that a company assigns for its stock based on the capital they intend to raise through an IPO. However, post-IPO, the market stabilises and the shares attain their true value based on market supply and demand. Therefore, its prices may be higher or lower than the issue price.

How many lots can be allotted to me while applying for an IPO?

In the case of under-subscription, a bidder might get all the lots they applied for, whereas oversubscribed shares only allow a maximum of 1 lot to the bidders.

Anuj Agarwal - Investments Principal | Wint Wealth
Investments Principal at Wint Wealth

Anuj is an investment professional with a demonstrated history of working in Debt Capital Markets. He has completed his B.Com (Hons) in St. Xavier’s College, Kolkata and holds PGDM (Finance) degree from GIM. He is currently working as Investments Principal at Wint Wealth. He has been working in the debt capital market space for the past 4+ years and is also an NISM certified mutual fund expert.

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