As an investor, it is important for you to be aware of and understand the various terms used in the Initial Public Offering of a company. With proper awareness, you will be able to make much better financial decisions. One such term that’s often associated with an IPO that we’re going to be looking into in this article is the cut-off price. Wondering what the cut-off price in an IPO is? Continue reading to find out.
Usually companies going for an IPO adopt the ‘book building process’. Here, the entity sets a price band and investors wanting to invest in the public issue are required to submit applications specifying the price at which they wish to purchase the shares.
The investors can choose the lowest, the highest, or any price within the price band. The book-building process is essentially a price discovery mechanism that gives investors the freedom to choose the price of the shares.
Once the public issue is closed, the company along with the Book Running Lead Managers (BRLMs) review the bids received from the investors. After a thorough consultation with the BRLMs, the company announces the cut-off price, which is the price at which the shares are allotted to the investors. Usually, in the case of most IPOs, the cut-off price tends to be the highest price in the price band. However, it need not always be so.
To be eligible for allotment, investors are required to bid for the shares at a price that’s not lower than the cut-off price. Seeing as the cut-off price is only announced after the issue is closed, how then do investors ensure that they get shares allotted to them? Fortunately, there’s something that can be done to improve the chances of allotment.
At the time of IPO application, investors are given the option to select ‘cut-off price’ as their desired price. Selecting this option essentially means that the investor agrees to whatever price that the company and its Book Running Lead Managers come up with as the cut-off price after the closure of the IPO. Choosing the cut-off price at the time of submission of your IPO application can significantly increase the chances of ipo allotment.
In the case of your bid being lower than the cut-off price set by the company, you will automatically become ineligible for allotment. However, if you bid higher than the cut-off price in an IPO, the excess amount will be refunded to you after allotment.
With this, you must now be aware of what the cut-off price in an IPO is. So, the next time you apply for an upcoming IPO, make sure to select the ‘cut-off price’ option before submitting your application. That said, to invest in an IPO, you’re required to have an active Demat account in your name. Simply visit Motilal Oswal to open a demat account quickly through an online account opening process.