The “Cut-off Price” is a specific price at which you can bid for shares during the IPO process without specifying a particular price. You can choose the cut-off price option if you are willing to buy shares at whatever price determined through the book-building process.
Opting for the cut-off option ensures that you will receive an allotment of shares regardless of the final IPO price.
Let’s understand what is Cutoff Price in IPO With an Example
Let us say ABC Technologies is one of the upcoming IPOs in India. The IPO process will start with IPO announcement.
#1. IPO Announcement
ABC Technologies announces its IPO and set a price band of INR 1000 to INR 1200 per share. This means that you can bid for shares at any price between INR 1000 to INR 1200 per share.
#2. Bidding Process
During the IPO period, you have the option to place bids for ABC Technologies’ shares at any price within the price band or opt for the Cut-off Price.
Let’s look at how different investors bid:
- Investor A: Places a bid for 100 shares at INR 1100 per share.
- Investor B: Places a bid for 50 shares at INR 1050 per share.
- Investor C: Chooses the Cut-off Price option, indicating a willingness to buy shares without specifying a particular price.
#3. Book-Building Process
The book-building process continues throughout the IPO period, during which ABC Technologies and the lead managers collect bids from various investors. The bids are compiled to determine the demand for shares at different prices.
#4. Final Issue Price
At the end of the IPO period, the book-building process concludes, and the final demand for shares at various prices is evaluated.
Let’s assume the following demand at different price points
| Demand at INR 1000 | 200,000 shares |
| Demand at INR 1050 | 300,000 shares |
| Demand at INR 1100 | 500,000 shares |
| Demand at INR 1150 | 250,000 shares |
| Demand at INR 1200 | 150,000 shares |
#5. Determining the Cut-off Price
Based on the demand for shares at different prices, ABC Technologies determine that the most appropriate price to set for the IPO is INR 1100 per share. Because at this price the demand for shares is the highest.
#6. Allotment of Shares
Investor A, who bid at INR 1100 per share, will be allotted 100 shares at INR 1100 each.
Investor B, who bid at INR 1050 per share, will be allotted NIL shares because the cut-off price is INR 1100. His bid price is lower than the cut-off price.
Investor C, who chose the Cut-off Price option, will be allotted shares at the final issue price of INR 1100 per share, as he indicated a willingness to buy at whatever price is determined through the book-building process.
So, all investors who chose the Cut-off Price option will be allotted shares at the final issue price of INR 1100.
Note that this is a simplified example of what happens in a book-building IPO. In a real IPO scenario, there can be many more investors and varying bid quantities, leading to a more complex book-building process.
In case the IPO is heavily subscribed then the company may follow the lottery system to allocate shares in IPO. You can check the IPO subscription status on NSE and BSE websites.
What Will Happen if You Bid Lower Than the Cut-off Price in an IPO
If you bid lower than the cut-off price set by the company, your bid will automatically become ineligible for allotment.
Your IPO application will be rejected and no shares will be allotted to you and the blocked money in your account will be released.
In case you want to cancel your IPO application then you can cancel before the closing of the IPO date.
What Will Happen if You Bid Higher Than the Cut-off Price in an IPO
If your bid is higher than the cut-off price in an IPO, then you will be allotted shares at the cut-off price.
An amount equal to the cut-off price will get debited from your bank account and the excess amount will be released to you after allotment.
FAQs
The Cut-off Price option in an IPO allows investors to bid for shares without specifying a particular price. It enables investors to participate in the IPO and get allotted shares at the final issue price determined through the book-building process.
The Cut-off Price is determined based on the demand for shares at different prices collected through the book-building process. The price at which the highest demand exists becomes the final issue price, which is then set as the Cut-off Price.
Yes, if you choose the Cut-off Price option, you will be allotted shares at the final issue price, as long as your bid falls within the predetermined price band in a book-built issue.
In case of a heavily subscribed IPO, the company may choose a lottery system to allot shares which may result in allotment to selected investors.
The advantage of opting for the Cut-off Price is that you can participate in the IPO without having to specify a bid price. However, the disadvantage is that you won’t have control over the final issue price, which could be higher than expected.
Yes, SEBI only allows retail investors can choose the Cut-off Price option in an IPO.
NIIs investors need to specify the price at which they are bidding in an IPO.
Yes, during the IPO period, you can revise your bid within the price band before the bidding process ends.
Before making a decision, consider factors like your risk appetite, confidence in the company’s prospects, and market conditions.
If you are uncertain about the fair value, the Cut-off Price option might be suitable, while if you have a particular price in mind, you can bid within the price band.
