Introduction to Cut-Off Price
In simple terms, the cut-off price is the offer price at which shares get allotted to investors. It plays an important role in price discovery, helping underwriters gauge the demand for the offering and the right price from within the predetermined range.
This is usually involved in a book building issue instead of a fixed price mechanism. The company announces the price band or the floor price in its prospectus, and the actual discovered price is within the price range, or any figure above the floor price, called the 'Cut-off' price.
For example, if a company's IPO is priced between INR 100 and INR 105, and you bid INR 103 for ten shares, but the price is determined to be INR 102, you will receive allotment at INR 102 per share, whereas, if the price is determined at INR 104, you will fail to receive any allotment.
By selecting the cut off option, you stand to gain allotment no matter what the final price of the IPO is, so long as it doesn't extend beyond the established price range.
Cut-Off Price Meaning In An IPO
Without a fixed price in place, lead managers of an IPO determine the final price based on the weighted average figure of all the bids received. The final price determined through this process is the cut-off price.
In the case of popular offerings that often get oversubscribed many times over, the cut-off price is almost always the ceiling price of the price band, which usually results in significant gains following the listing.
Selecting Cut-off Price While Applying
Brokerages allow investors to select the 'cut-off' option while applying for the IPO, through which investors can indicate their willingness to pay any amount for the shares within the price-band advertised. You will be eligible for allotment at any discovered issue price by selecting a cut-off option.
By selecting the cut-off option, you say that you are okay with any price within the respective ranges, even the ceiling price offered in the prospectus. This can significantly increase the chances of getting an allotment, especially in popular issues.
If you are confident about a particular company or IPO and would like to get an allotment of the stock at any price within the range, this is a great feature to make use of. Without opting for this feature, investors who bid lower than the final price fail to receive any allotment and refund their amount. In contrast, investors who bid an amount higher than the final price receive a refund of the difference amount.
Improving The Chances of Getting An Allotment
If an IPO is oversubscribed, there are no chances of getting an allotment if an investor bids anything lower than the top end of the price range. Even after selecting the higher end of the price range, the chances of getting an allotment are still slim, especially with popular offerings.
With the raging IPO markets today, getting an allotment is quite similar to a lucky draw, and opting for a 'cut-off' is one way to improve the odds in your favour. Apart from this, there are a few other options, such as only bidding for one lot or using the Demat accounts of friends and family to apply, increasing your chances to get an allotment.
You can also try applying on the first day of the IPO or stating that you own shares in the parent company, such as being a shareholder of SBI while applying for the SBI Cards IPO. These are a few other ways of improving the odds in your favour. Overall, there is no way to guarantee allotments when applying for an IPO that has been oversubscribed multiple times over.
Retail investors are also stacked against qualified institutional investors (QIIs), foreign portfolio investors, and public pension funds. But SEBI requires 50% of the securities to be reserved for retail investors, still leaving individual investors with an opportunity to get in on hot IPO opportunities.
The book-building process is perfect for determining the cut-off price IPO and comes with flexibility that makes it perfect for companies stepping onto the bourses. A few companies also follow the process of partial book building, where only qualified institutional investors are invited to send bids, which are then used to determine the price.
In the competitive IPO market, selecting the 'cut-off' option is one of the IPO cut-off prices. The ways of shifting the odds are no guarantee but are almost as essential to stand any chance of getting an allotment.