Cut-off Price in IPO Application Explained
If you follow the share market closely, you might have heard of the term “IPO” multiple times, especially in recent times with great marketing done around the Zerodha and Nykaa IPOs. IPO full-form in share market is Initial Public Offering. When a company decides to become a publicly-limited company from a private company, it floats its IPO.
The entire process of floating an IPO and getting listed on the stock market is long and complex. It starts with the company filing a Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) and ends with its shares getting listed on the stock market. In between, the cycle involves the process of book building, bidding, and the allotment of shares to the investors.
The price at which the IPO shares get allotted to the investors is known as the cut-off price of the IPO. In this article, we have explained the cut-off price in IPO in detail. Let’s get started.
What is the Cut-Off Price in IPO?
As mentioned, the price at which a company allots its shares to the investors is the cut-off price in IPO. When a company floats its IPO, it calls for bids from the investors within a price band. Then, they decide a final price known as the cut-off price, and the investors who’ve placed their bids at this price are allotted the shares in their Demat Account.
In case of over-bidding of the IPO at its cut-off price, the allotment of shares is done through a computerised lottery.
How is the Cut-Off Price Decided?
There are two types of IPOs in India – fixed price IPOs and book building IPOs. In the case of a fixed price IPO, the issue price or cut-off price is announced by the company in advance. However, the process of determining the cut-off price for a book building IPO is different.
When a company floats a book building IPO, it announces a price band within which the investors are required to place their bids for the stocks. Investors can bid an appropriate price for a single lot or multiple lots of the stock within the permissible price band.
After the closure of the bidding process, the issuer company decides on a cut-off price or issue price for its shares. This decision is taken by the merchant bankers and book-running lead managers. Then, the investors who have placed their bids at the cut-off price determined by the company are allotted the shares in their Demat account.
Let’s learn this with the help of an example. Suppose there is an IPO with a price band of ₹400 to ₹410, and you have placed your bid at ₹405. Now, you will receive the allocation of shares only if the cut-off price decided by the company would be ₹405 or lesser. Otherwise, you won’t be eligible to receive the allotment of the shares.
Usually, the cut-off price in IPO is the ceiling point of the price band announced by the company. However, in the case of an under-subscribed IPO, the cut-off price can be lower than that.
What Happens After the Cut-Off Price is Finalised?
After the cut-off price of the IPO is determined by the company, the investors who have placed their bids at the cut-off price are allotted the shares in their Demat account. Whereas the investors who have placed their bids at a price below or above the cut-off price are refunded their bidding amount.
So, if you wish to acquire an IPO irrespective of its cut-off price, you can select the option to buy at the cut-off price while applying for it. This will ensure that you remain eligible for the allotment of shares regardless of the cut-off price decided by its issuing company.
Almost all major companies use the book building method to determine the cut-off price for their IPOs. This method has proven to be reliable and effective in most circumstances.
However, before you place your bid for an IPO, do understand the company’s business domain and fundamentals properly.
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Frequently Asked Questions
It’s crucial to understand the IPO meaning in the share market. An IPO or Initial Public Offering refers to the process of converting a private limited company into a public company. An IPO allows the company to raise capital by selling its shares to public investors.
After the completion of the bidding process, the merchant bankers and book-running lead managers decide the cut-off price of an IPO. This decision is taken based on book analysis and market response to the IPO.
If your bidding price does not match the cut-off price decided by the company, you won’t get the allotment of shares. In the case of an over-subscribed IPO, you may fail to get the allotment even after bidding at the cut-off price. In such circumstances, your money will get refunded to your bank account after the finalisation of the allotment.