Cut-off Price in IPO

The cut-off price in an IPO refers to the final price at which shares are allotted to investors in a book-built issue. It plays a vital role in the IPO application process, especially for retail investors, who can select the cut-off price option without specifying a bid amount.

The cut-off price is the final price decided by the issuer after evaluating all investor bids during the book-building process.

• Retail investors can choose the cut-off option to ensure they remain eligible for allotment, even if they don’t quote a specific price.
  

• The actual cut-off is typically determined after the IPO closes, based on demand and available shares.

There are two primary types of IPO pricing:

1. Fixed Price Issue
   

   • Price is pre-determined and disclosed in advance.
     

   • No bidding; investors apply at that fixed price.
     

2. Book-Built Issue
   

   • A price band is offered (e.g., ₹100–₹120).
     

   • Investors bid within this band.
     

   • Final price is decided based on demand—this is the cut-off price.
     

Cut-off price applies only to book-built IPOs.

Several market and company-specific factors influence the cut-off price:

• Investor demand and bid volume
  

• Company’s fundamentals and valuation
  

• Prevailing market sentiment
  

• Price band range
  

• Subscription levels (retail, QIB, HNI categories)
  

• Timing of the IPO
  

These dynamics shape how high or low the final price settles within the band.

The cut-off price is derived through a book-building process. Here’s how it works:

• Step 1: Issuer announces a price band (e.g., ₹100–₹120).
  

• Step 2: Investors place bids at or above the floor price.
  

• Step 3: Bids are recorded and demand is mapped.
  

• Step 4: Issuer matches demand with the number of available shares.
  

• Step 5: The price at which the maximum shares can be allotted is set as the cut-off.

This price ensures fair allocation across categories and helps optimise fundraising.

Here’s why the cut-off price matters:

• It helps achieve broad subscription by aligning with market demand.
  

• Encourages retail participation with simple “cut-off” bidding.
  

• Helps in price discovery by gauging investor sentiment.
  

• Plays a crucial role in fair and efficient share allocation.

To opt for cut-off price while applying via ASBA/UPI:

1. Choose “cut-off price” in the price field of the IPO application.
   

2. Leave the actual price blank if prompted.
   

3. Enter your desired lot size and payment mode.
   

4. Submit before the IPO closing date.

This may improve the likelihood of allotment.

Let’s say a company announces an IPO with a price band of ₹100–₹120.

• Bidders place various bids:
  

  • 10% at ₹100
    

  • 20% at ₹110
    

  • 70% at ₹120
    

After analysing cumulative demand, the issuer decides that ₹120 allows optimal allocation. Hence, ₹120 becomes the cut-off price, and allotments happen at that level for eligible bidders.

The cut-off is calculated by:

• Sorting bids from highest to lowest.
  

• Calculating cumulative demand at each price point.
  

• Identifying the price where total demand meets available shares.
  

• Finalising that as the cut-off price.
  

This helps underwriters ensure transparent, market-driven pricing.

The cut-off price mechanism in IPOs serves both issuers and investors by enabling efficient fundraising and accurate price discovery. For retail investors, selecting the cut-off option streamlines the process and may enhance the likelihood of allotment without requiring extensive price evaluation. For retail applicants, the cut-off option simplifies the application process and keeps them eligible for allotment within the final issue price.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.