Initial public offerings, or IPOs, have become the most sought-after ways for companies across verticals to raise money by offering their shares to the public for the first time. Cut-off price is among the several things you need to understand in an IPO. If you, too, are wondering about it and its importance, this blog can be your handy guide.
Meaning of Cut-off Price
The cut-off price in an IPO is the price at which investors get shares. Decided by the company and its underwriters after evaluating the bids received during the book-building process (discussed below), when you, as an investor, select the cut-off price, it means you are ready to pay the final issue price of shares determined by the company.
Opting for the cut-off price enhances your chances of securing an allotment in popular closed IPOs or heavily subscribed ones.
Types of IPO Pricing
To better understand the concept of the cut-off price, you need to understand the types of IPO pricing. There are two main types of IPO pricing, namely:
Fixed Price IPO
Share prices are predetermined in this IPO, and you will get the information in the offer document. Here, you need to apply for shares at this set price. For example, if the fixed price is ₹500 per share, you need to pay this amount, regardless of the demand.
Book Building IPO
In this type of IPO pricing, the company provides a certain range, for example, ₹450-₹500, instead of a fixed price. You can place bids within this range, and the final price is arrived at as per the demand.
The cut-off price is the final price within this range at which the company allocates its shares. As a retail investor, you can choose the cut-off price to simplify your application.
Example of Cut-Off Price
Suppose a company in the IPO process offers shares in the price range of ₹400 to ₹410. You’ve placed your bid at ₹405. You’ll receive the allotment only if the cut-off price set by the company is ₹405 or less. If not, you will not get any allotment. In other words, the cut-off price is the ceiling point of the price band announced by the company.
Benefits of Opting for the Cut-off Price
The benefits of opting for the cut-off price are:
Chances of Higher Allotment
The biggest benefit is that applying for shares at the cut-off price increases your chances of receiving an allotment, more so in an oversubscribed IPO. When you choose this price, it means you are ready to pay the final price as determined by the company. This makes your application more flexible and mitigates the risk of underbidding.
Convenience
Retail investors, particularly those participating in an IPO for the first time, find it challenging to decide the right bid price. The cut-off price eliminates guesswork and simplifies the entire process.
All you need to do is check the cut-off price option in your IPO application after you open Demat account, and you’ll automatically put the final issue price. This convenience boosts confidence in investing in IPOs without worrying about price fluctuations.
Assurance of Refund
Applying for an IPO at the cut-off price makes the payment based on the highest price in the price band. If the final issue price is below the highest price, you will get back the excess amount. This ensures you don’t lose money even if the cut off price is lower than the minimum price. The money is credited to your bank account directly in a secure manner.
No Need to Predict Price
Predicting final issue prices in a book-building IPO can be complex and challenging, especially for retail investors who aren’t aware of the market’s dynamics. By selecting the cut-off price, you relieve yourself of analysing trends and guesswork, making IPO participation stress-free and transparent.
Gives You a Chance to Compete With HNIs and Institutional Investors
High-net-worth individuals (HNIs) and institutional investors, thanks to their resources, are better placed to receive shares in a company. The cut off price allows retail investors to compete with HNIs and institutional investors better. Also, if HNIs and institutional investors bid incorrectly, it limits their chances of receiving shares, significantly.
Steps to Apply for an IPO at the Cut-Off Price
To apply for the IPO at the cut off price:
- Open a Demat account. You can get yourself a Demat account online in a few easy steps where you can hold your shares digitally. This account with a stock broker gives you information about closed, ongoing and upcoming IPOs.
- Choose the IPO whose shares you want to subscribe to from the list of IPOs.
- Choose the cut off option in the price section.
- Complete the payment based on the highest price range. If the cut off price happens to be low, you get back the excess amount.
Conclusion
The cut-off price plays a pivotal role in the IPO application process, making participation simpler for retail investors. So, the next time you want to bid for an IPO and enhance your chances of securing allotment, go for the cut-off price.
HDFC SKY is one of the reputed brokerage platforms through which you can invest in a range of IPOs. A Demat account with HDFC SKY allows you to access all information on IPOs, including upcoming IPOs, in one place, including mainboard and SME IPOs. You can choose to invest in the one that best aligns with your needs and risk tolerance.
