The cut-off price is the price at which investors are offered shares, which could be any price within the price band. The price range in issue price 72 – 76 for this IPO may be found here. You won’t be able to enter the price individually if you apply for an IPO at the cut-off price.
Meaning of Cut-Off Price in IPO?
Simply put, the cut-off price is the price at which investors are allocated shares. It aids price discovery by assisting underwriters in determining demand for the offering and the appropriate price within the defined range.
Instead of a fixed price method, this is frequently included in a book building issue. The price band, or floor price, is announced in the prospectus, and the actual discovery price is within the price range, or any amount above the floor price, known as the ‘Cut-off’ price.
For example, if a company’s initial public offering (IPO) is priced between INR 100 and INR 105, and you bid INR 103 for ten shares, but the price is determined to be INR 102, you will receive allotment at INR 102 per share, whereas if the price is determined at INR 104, you will not receive any allotment.
By selecting the cut off option, you will be guaranteed allotment regardless of the IPO’s ultimate price, if it does not exceed the stated price range.
The Importance of the IPO Cut-Off Price
The IPO cut-off price is critical for price discovery. It assists underwriters in determining the demand for IPO shares and the appropriate price within the defined range. You indicate that you are ready to file for the IPO at the issue price determined by merchant bankers when you select the cut-off price.
The highest and lowest price for an IPO bid are usually included in the book building problem of an IPO. In its red herring prospectus, the corporation announces the price band. Assume the IPO’s pricing band is between Rs. 350 and Rs. 355. You’ve also applied for 50 shares at a price of Rs. 353.
If the decided issue price is Rs. 353, you will be allocated. If it’s less than Rs. 354, you won’t get anything. By selecting the cut-off price, you become eligible for allotment at any issue price within the range.
Types of IPO Pricing
Let’s look at the two types of IPO pricing now that you know what the cut-off price means. These are they:
Mechanism of Fixed Prices
The IPO price is set in advance by the company. On the issuance day, complete data of investors in all categories are announced. In this method, it is impossible to determine the demand for shares. If a company chooses the fixed price IPO route, it must set aside 50% of the total shares for retail investors.
Book Building Method
The IPO’s final price is not established at the start of the process. While launching the IPO, the company announces price bands or price ranges. Bidders must stay within this price range. The corporation discloses data to investors daily to ensure transparency in this process.
You may also read about: How can we apply IPO with a UPI ID?
How to choose cut-off price while applying the IPO?
You can indicate your readiness to pay for shares within the advertised price range by using the cut-off price in an IPO. It qualifies you for allotment at any issue pricing that is discovered. It implies that you are content with any price within the given range. Choosing the cut-off option boosts your chances of earning a share allocation greatly.
If you do not use this function and bid below the final price, you will not receive any allotment or refund. Those that bid higher than the final amount will be reimbursed for the difference.
Increasing your Chances of Getting Allotment by Cut-off Price
If an IPO is oversubscribed, an investor who bids below the top end of the price range has no chance of securing an allocation. Even if you choose the higher end of the price range, your chances of securing an allotment are limited, especially for popular items.
With the raging IPO markets today, getting an allotment is quite similar to a lucky draw, and opting for a ‘cut-off’ is one way to improve the odds in your favour. Aside from that, you have a few additional possibilities, such as bidding for only one lot or applying using the Demat accounts of friends and family to increase your chances of getting an allotment.
You can also apply on the first day of the IPO or state that you own shares in the parent business, such as SBI, while applying for the SBI Cards IPO. There are a few other techniques to increase your chances of winning. When applying for an IPO that has been oversubscribed many times, there is no way to guarantee allotments.
Qualified institutional investors (QIIs), overseas portfolio investors, and governmental pension funds are also pitted against retail investors. However, SEBI requires that 50% of the securities be reserved for retail investors, which means that individual investors can still participate in hot IPOs.
The book-building method is ideal for setting the IPO cut-off price and offers flexibility, making it ideal for new companies entering the market. A few firms use the partial book building method, in which only qualified institutional investors are invited to submit bids, which are then used to decide the price.
Choosing the ‘cut-off’ option is one of the IPO cut-off prices in the competitive IPO market. While there is no assurance that these methods will help you get an allotment, they are almost as important.