Understanding What Is The IPO Cut Off Price: An initial public offering (IPO) is a procedure that allows a company to make a public offer to investors for the first time in order to attract investment. The trade in this case is between investors and the original issuer.
Investors must become acquainted with the terminology used during the IPO. Price band, floor price, issue price, cut-off price, and other basic terms are used when companies launch their initial public offerings (IPOs).
What Is the IPO Cut-Off Price?
When companies go public, you may have heard the term "cut-off price." This is a critical aspect of the IPO. The cut-off price is the lowest price at which investors can purchase stock.
Following consultations with book-running lead managers, the company finalises the price (BRLMs). In an IPO, the cut-off price can be any price within the price band. Investors must be aware that this price differs from the floor price.
Different Types of IPO Pricing in India
To understand what the cut-off price in an IPO is, it is necessary to first understand the two types of pricing mechanisms used in India. We've broken it down so that types can be better understood.
1. Fixed-Price Mechanism
An organisation determines the IPO price in advance in a fixed-price mechanism. It allows the general public to participate in an IPO. This type of mechanism declares the entire details of investors and the categories to which they belong at the time of issuance.
There is no requirement in a fixed-price mechanism to determine a demand for the shares prior to the issuance date. If the company decides to use a Fixed-Price Mechanism, SEBI requires it to reserve 50% of total shares for retail investors only.
2. Book Construction Method
The IPO pricing is not determined at the start of the book-building method. When launching an IPO, the company announces price ranges in this method. Investors later tend to bid using a price range that falls between pricing bands.
The issuer must identify the price band or a floor price in its red herring prospectus when using the book-building method. The actual identified issue price is referred to as the "cut-off price." Any price within the announced price range or any price higher than the floor price qualifies.
Role Of Cut-Off Price In IPO
Now that we've established what the IPO cut-off price is, it's time to examine its significance. When an IPO is nearing completion, investment bankers typically begin the process of price discovery. However, because no fixed price has been established, there are several bids that occur at various values.
How Is Cut Off Price Calculated?
Investment bankers determine the final price by taking a weighted average of all bids received. When IPOs are popular, the cut-off price is often referred to as the ceiling price. These IPOs generate bids that exceed the number of available shares.
Should We Bid IPO At Cut Off Price
After the cut-off price has been set, investors who decide to place their bids below the cut-off price will get their money back. This is because the IPO will not be allotted to them. Investors who have placed their bids higher than the cut-off price and got the allocation will be reimbursed for the excess difference. If an investor believes in the financial position of the company and he/she intends to acquire an IPO at any cost, they are required to choose the option to buy at the cut-off when they fill out an application form. This helps in ensuring that a person is eligible regardless of the cut-off price.
To summarise
We hope that the most frequently asked question, "what is the cut-off price in an IPO," has been addressed. Nowadays, most companies choose the book-building method to determine the cut-off price of their shares. The book-building method has proven to be adaptable, efficient, and effective in a variety of situations.