IPO Cut-off Price

IPO cut-off price is an option available to retail investors in a book-built IPO that allows them to apply for shares at whatever price is finally decided by the issuer, rather than specifying a fixed bid price. Selecting the cut-off price option ensures the application is valid regardless of where the final price is set within the price band.

What Is the Cut-off Price in an IPO?

In a book-built IPO, the company announces a price band (e.g., Rs 90 to Rs 100 per share). Institutional and high-net-worth investors bid at specific prices within this band. Retail investors (RIIs) have an additional option: they can tick the “cut-off price” box, which means they agree to buy at whatever final price the company decides, whether it is Rs 92, Rs 97, or Rs 100.

The final IPO price is determined after the book-building process ends, based on demand at different price levels.

Why Cut-off Price Matters for Retail Investors

– If a retail investor bids at a fixed price (say Rs 95) but the final price is Rs 100, their application is rejected
– By selecting cut-off price, their application remains valid for any price within the band
– Most retail investors use the cut-off price option to maximise allotment chances

Process

1. Retail investor fills IPO application with cut-off price option selected
2. Application amount blocked = number of lots x upper end of price band x lot size
3. After book-building, the final price is determined
4. If final price is lower than upper band, excess blocked amount is unblocked
5. If allotment is successful, shares are credited at the final issue price

Practical Example

Ananya applies for 1 lot of an IPO with a price band of Rs 180 to Rs 200. She selects the cut-off price option. Her bank blocks Rs 200 x 10 shares = Rs 2,000. The final IPO price is fixed at Rs 192 per share. Ananya gets allotment. The excess Rs 80 (Rs 200 – Rs 192 = Rs 8 per share x 10 shares) is unblocked from her account.

Key Takeaways

– Cut-off price is an option for retail investors to bid at the final IPO price without specifying a fixed price
– It prevents rejection of retail applications due to a final price being higher than the bid price
– Application money is blocked at the upper end of the price band; excess is refunded after finalisation
– Most retail IPO investors use the cut-off price option to improve allotment chances
– Only retail individual investors (applying up to Rs 2 lakh) are eligible to bid at cut-off price