What is cut-off price in IPO?

 

What is cut-off price in IPO?

Nowadays, the term IPO is heard a lot in our regular lives. You will read about it in newspapers, hear about it in television ads and it will also be part of the TV news. For companies, whenever they want to raise funds, they will opt for the route of Initial Public Offerings. It will list the company on a different platform. It can be an NSE IPO or listed in other stock exchange. While going for IPO, the company will inform in the red-herring prospectus, the need for it and how the funds are going to be utilised and they also mention the floor price or price range and the number of shares per lot.

IPO is of two types – Book Building Method and Fixed Price Method:

Fixed Price Method

In the Fixed price type, you will know in advance the price at which the shares will be allotted to the investors. In this method, the details of the subscription level by retailers or High net worth or institutional investors are not known on daily basis and are declared only after the IPO comes to a closure.

Book Building Method

This method is quite different from the first one in terms of process and price. First, the company will appoint a lead merchant banker which after conducting due research with diligence will present before the company, the size of the issue and the price band in which the shares can be offered to the public. When the company accepts, it will be mentioned in the prospectus. The higher limit is called the ceiling price while the lower limit is called the floor price.

What is the cut-off price and how it works?

In India, the IPO’s are usually kept open for a bid for three days and one bid as per their wish. The price is not in advance and it is made available only after the closure of the IPO. After considering the price on which the bids are received and the BRLM’s will declare the issue price which is known as the cut-off price.

In case if you have subscribed for a price above the cut-off price, the excess amount will be refunded to you during allotment. While you apply for IPO, you can also tick the “Cut-off” price option which gives a declaration to the company to accept the bid at any amount finally decided by the company. This subscription of the cut-off price is available only for eligible retail investors and employees of the organization. If you have selected the cut-off price option and you have quoted a price below than it, your bid will not become invalid and you will get an allotment but only the quantity may vary.