What is cut off price in IPO?

11 January, 2025

Synopsis

• The cut-off price in an IPO is the price point at which the shares are issued to investors.
• The cut-off price is determined once the bidding process closes.
• The cut-off price is influenced by market demand, investor appetite and company financials.
  
  

The cut-off price in an IPO plays an important role in price discovery by determining the final issue price based on demand and supply dynamics. Investors opting for the cut-off price are typically assured of receiving shares, contributing to efficient allocation during the book-building process.

What is Cut-Off Price in IPO?

The cut-off price in an IPO is the price point, set within the price band, at which the shares are issued to investors. During the IPO process, a price band is provided to the public.

Prospective investors then bid for shares at various prices within this band. In short, the cut-off price can be defined as the minimum price, at or above which the shares issued through an IPO can be allotted to potential investors.

The cut-off price is determined once the bidding process closes. Investors can place a bid for any price, or they can choose the "cut-off" option, which means they are willing to pay any price to obtain the shares.

After all the bids are received, the final issue price (cut-off price) is decided by the arrangers of the IPO, based on these bids. If an investor has chosen the "cut-off" option, they agree to buy the shares at this finalised price.

It's crucial to understand that the cut-off price can only be used by retail investors in their applications. Qualified Institutional Buyers (QIBs) and Non-Institutional Investors (NIIs) cannot bid at the cut-off price. They need to place a bid within the price band.

So it is important to remember, the cut-off price is determined by the demand for the shares, with the goal to procure the greatest possible capital for the company issuing the IPO, alongside ensuring fair share allocation.

Significance of the Cut-off Price in IPOs

When a company decides to go public, it introduces an IPO as an avenue to raise capital from the public. The price at which these shares are offered plays a pivotal role in attracting investors, and this is where the concept of “cut-off price” comes into play.

Influential Factors in Determining the Cut-off Price

The cut-off price is influenced by the following factors.

• Market Demand- Higher demand for the IPO can lead to a higher cut-off price.

• Investor Appetite- The willingness of investors to pay a certain price for the shares significantly affects the cut-off price.

• Company Financials- The financial standing of the company determines investor sentiment and consequentially, the cut-off price.

• Industry Trends- Current trends in the industry also have an impact on the cut-off price.
  
  

What is Bid price in IPO?

In an IPO, the bid price is the price at which investors are willing to buy shares of the company from the issuing company or from other investors in the market. The bid price is typically determined by supply and demand factors and can fluctuate based on market conditions.

By understanding the cut-off price is integral for both investors and companies venturing into the public markets. It offers a balance between company aspirations and investor expectations and is a reflection of market sentiment.

Discover everything about IPOs and invest in them with HDFC Sky.

*Disclaimer: This article is only for educational/ informational purpose. It does not make any recommendation to act or invest.