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IPO Cut-Off Price

What is Cut-Off Price in an IPO?

If you are planning to apply for an IPO, you need to know the key terms and phrases associated with an Initial Public Offering. One such term is cut-off price. The meaning of the cut-off price is quite simple — it is the price at which shares are allotted to you after you have applied for an IPO successfully. Once the bids for an IPO have been received between the opening and closing dates of the offering, the company calculates the IPO cut-off price based on the bid prices. This price is typically within the price band set for the IPO. According to SEBI’s guidelines, retail investors have the option to apply for an IPO at the cut-off price itself. Furthermore, each investor has the option to bid up to three times for an IPO.

Types of IPO Pricing in India

IPO pricing in India is done in one of two ways - Fixed Price mechanism and Book Building method.

  • Fixed Price Mechanism

    As the name indicates, the price of the shares is fixed in this type of IPO pricing. The demand for the company’s shares is not known till the issue date, which is when the company reveals the information about the demand from different categories of investors. However, the share price is fixed by the company beforehand, so you don’t have to bid at different prices for the shares being issued.

  • Book Building Method

    Here, the price of the shares is not fixed. Instead, the company sets a price range called a price band. You will have to bid for the company’s shares at prices within this range. It is in this kind of IPO pricing that the cut-off price comes into play. This cut-off price is then decided based on the weighted average of the bids received during the subscription phase of the IPO.

Role of Cut-Off price in IPO

The price discovery process begins as the IPO approaches the closing date. Lead managers evaluate the bids received and calculate the weighted average of all the bid prices to arrive at the IPO cut-off price. Generally, when an IPO is popular and has been largely oversubscribed, the ceiling price or the highest price in the price band is often set as the cut-off price. After the cut-off price, here’s how shares are allotted or funds are reimbursed to investors.

  • If an investor bids below the cut-off price:

    No shares will be allotted to these investors, and the entire amount they used to bid in the IPO will be refunded to them.

  • If an investor bids above the cut-off price:

    Shares will be allotted to these investors at the IPO cut-off price, and any excess amount they paid will be refunded to them.

How to improve chances of getting an IPO allotment?

Although IPO allotment is not guaranteed, there are some strategies that you can use to increase the chances of being allotted the shares of the company you’re bidding for. Here are the top tips you can

follow:

  • Bid for a single lot
  • Use multiple demat accounts to apply for the IPO
  • Apply for the IPO early in the subscription phase, preferable on the opening date itself

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Frequently Asked Questions

The cut-off price in an IPO is only decided after bidding for the IPO has closed. So, when you are bidding for an IPO, you will not know what the cut-off price is going to be. This means you can only presume the potential cut-off price and place bids accordingly. However, when you apply for an IPO, you will have the option of bidding at the cut-off price (whatever it may be fixed at).

Bidding for an IPO at the cut-off price significantly improves the chances of allotment. So, experts recommend applying for an IPO at the cut-off price.

The IPO cut-off price is calculated as the weighted average of all the bids received during the subscription phase of the IPO.

No, IPO allotment does not happen on a first-come, first-serve basis. SEBI has laid out clear guidelines for allotment of shares at the IPO cut-off price. In case an IPO undersubscribed, investors will get complete allotment of whatever they have bid for. In case the IPO is oversubscribed, allotment occurs on a proportionate basis or through a computerised lucky draw process.

You can make a maximum of three bids when you apply for an IPO. This means you can bid at three different prices, including the IPO cut-off price.

The bidding for an IPO occurs in a given price band. The lowest price in this price band is the lower limit, while the highest price is the upper limit.

The cut-off price in an IPO is often higher than the face value of the shares, because the company factors in other aspects to decide the issue price. These factors include the company’s growth prospects, the interest of investors in the company, the general demand and supply, etc.

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