What is cut off price in ipo?
An investor may be aware of an Initial Public Offering (IPO) and its valuation, but he or she may be unaware of what constitutes the entire offering. One of the most significant parts of an IPO is the cut-off price.
A cut-off price is the price at which shares are issued to investors, which may appear to be a difficult term to a newcomer in the field of stock market investment.
An IPO book-building trouble starts with a price range, which includes both a minimum and a maximum price. An investor can bid for the desired quantity in multiples of the lot size at a price that is within the acceptable range.
When it comes to IPO pricing in India, there are two types of pricing mechanisms. Let us break it down for you so you can better understand the cut-off price.
In a fixed-price mechanism, the IPO price is set in advance by the firm. It makes the initial public offering (IPO) open to the general public. On the day of the issuance, this mechanism declares the entire details of investors belonging to various categories. In this approach, there is no means of determining the demand for shares before the issuance date.
If the firm chooses to undertake an IPO using a Fixed-Price Mechanism, SEBI regulations mandate it to set aside 50% of total shares for retail investors.
The IPO price is not determined at the start of the book-building mechanism. The corporation announces price ranges when it launches an IPO. Investors bid using a price range that falls between these pricing bands.
The issuer is expected to identify the price band or a floor price in the red herring prospectus in the case of a book building method.
The “Cut off price” refers to the actual identified issue price, which might be any price within the price band or any price over the floor price.
After examining the book and investors’ desire for the shares, the issuer comes to a decision. Only retail individual investors are allowed to apply at the cut-off price, according to SEBI regulation.
Let’s understand it with an example.
For instance, if an IPO’s price range is Rs. 200 to Rs. 210, you can apply for 10 shares at Rs. 205. Since you were willing to subscribe to the issue up to Rs. 205, you will be allotted shares at Rs. 202 if the decided issue price is Rs. 202.
However, if the decided issue price is Rs.206, you would not be eligible for a share allotment. If you choose cut-off, you will be eligible for allotment at any issue price.
What is the role of the cut-off price in IPO?
When an IPO is approaching the end of its closure, investment bankers begin the process of price discovery. However, because no set price has been established, there are a variety of bids that occur at various values.
The bankers decide on the final price by taking a weighted average of all the offers received. The cut-off price is the ultimate price that is established. The cut-off price is usually the ceiling price in the event of popular issues that generate bids in excess of the number of shares on offer.
After the Cut-Off price has been set,
Investors who placed bids below the cut-off price will be reimbursed their whole money since they will not be allotted the IPO now that we have reached the last leg and the cut-off price has been set.
Adani Enterprises Share Price
Reliance Share Price
ITC Share Price
HDFC Bank Share Price
Infosys Share Price
Adani Ports Share Price
TCS Share Price
ICICI Bank Share Price
Usually companies going for an IPO adopt the ‘book building process’. Here, the entity sets a price band and investors wanting to invest in the public issue are required to submit applications specifying the price at which they wish to purchase the shares.
The investors can choose the lowest, the highest, or any price within the price band. The book-building process is essentially a price discovery mechanism that gives investors the freedom to choose the price of the shares.
Once the public issue is closed, the company along with the Book Running Lead Managers (BRLMs) review the bids received from the investors. After a thorough consultation with the BRLMs, the company announces the cut-off price, which is the price at which the shares are allotted to the investors. Usually, in the case of most IPOs, the cut-off price tends to be the highest price in the price band. However, it need not always be so.
To be eligible for allotment, investors are required to bid for the shares at a price that’s not lower than the cut-off price. Seeing as the cut-off price is only announced after the issue is closed, how then do investors ensure that they get shares allotted to them? Fortunately, there’s something that can be done to improve the chances of allotment.
At the time of IPO application, investors are given the option to select ‘cut-off price’ as their desired price. Selecting this option essentially means that the investor agrees to whatever price that the company and its Book Running Lead Managers come up with as the cut-off price after the closure of the IPO. Choosing the cut-off price at the time of submission of your IPO application can significantly increase the chances of ipo allotment.
In the case of your bid being lower than the cut-off price set by the company, you will automatically become ineligible for allotment. However, if you bid higher than the cut-off price in an IPO, the excess amount will be refunded to you after allotment.
A cut-off price in an IPO is referred to the price at which a company issues its shares to investors. After evaluating the investors' requirements for the shares and the book, the company makes a decision. It is the real identified issue price, which could be any in the given price band.
