In an initial public offering, you would have come across the term “cut-off price“. Simply put, the cut-off price is the offer price at which investors allocate shares. It plays a significant part in price discovery, assisting underwriters in determining the appropriate price from within the planned range and the level of demand for the offering. The cut-off price is a crucial component of an IPO.
According to SEBI’s regulations, only the retail individual investors are permitted to apply at the cut-off price in IPO. Brokers allow investors to choose the “cut-off” option when submitting an IPO application, indicating their ability to pay any share price within the stated price range. You will be qualified for allocation at any found issue price by choosing a cut-off option.
By choosing the cut-off option, you indicate that you are comfortable with any price falling between the specified ranges, including the prospectus’s maximum price. The likelihood of receiving an allotment can be considerably increased by doing this, particularly in popular issues.
This is a fantastic option to utilize if you are confident in a specific corporation or IPO and would like to obtain an allocation of the shares at any price within the range.
Types of IPO
Let’s explore the two kinds of IPO pricing now that you are familiar with the cut-off price definition.
Book Building Offering
Under this, the IPO’s final price is not predetermined from the start. While launching the IPO, the company offers price bands or pricing levels. Investors must make their offer within this price range. The corporation provides investors with regular data releases to preserve openness in this system.
Here, the IPO price is set by the corporation. Full information about investors from different categories is disclosed on the issue date. In this mode, it is impossible to determine share demand. A company must reserve 50% of its total shares for retail investors if it chooses the fixed pricing method for its IPO.
Role of Cut-off Price in IPO
The cut-off price in an IPO is significant for price discovery. It aids underwriters in determining the appropriate price within the set range and the demand for the shares in an IPO. By selecting the cut-off price, you declare that you are prepared to register for the initial public offering (IPO) at the issue price selected by merchant bankers.
The banks use the weighted average of the entire bids received in total to determine the ultimate price. The cut-off price refers to the final price that has been selected. The ceiling price is frequently the cut-off price for popular offerings that draw bids over the number of shares offered.
How to improve the chances of getting an IPO Allotment?
It might be challenging to get an allocation in an IPO. However, choosing a cut-off greatly improves your odds. Other methods involve:
Limit your applications
In the SEBI allotment procedure, retail applications (those for less than Rs 200,000) are all treated similarly. In the event of oversubscription, there is no purpose in submitting a large application. One should use numerous accounts to place minimum bids on oversubscribed IPOs. This will make it easier to invest any extra funds in several IPOs.
Use multiple Demat accounts
Using numerous accounts to apply can undoubtedly boost your chances of getting an IPO allotment. If you submit numerous applications, it is likely to increase your chances of getting an allocation. You can file an IPO application and open multiple Demat accounts. Although it seems challenging, this is simple.
Avoid subscribing at the last minute
There can be a few obstacles if you submit your application on the last day, like the bank account not replying because of the high demand from the QIB and HNI investors or other technical glitches. Additionally, you may be too late to submit the IPO application because most banks don’t approve applications after 4 p.m. So don’t wait until the very last minute to apply.
Fill out your IPO paperwork correctly
When filling out the IPO application form, you must be attentive. Applications for the IPO have been turned down due to errors and false information. As a result, thoroughly fill out IPO paperwork.
Bid at the Cut-Off Price
Companies frequently employ a book-building process to determine the ideal stock price. Investors are required to submit bids that fall within the range they designate. When you submit your application at the “cut-off price,” you place the highest offer. The surplus money is returned if the price is less than what was paid.
Overall, investors should not rely only on these factors. Although these methods boost your odds, they do not ensure allotment. Additionally, obtaining an allocation becomes more challenging if an IPO is oversubscribed.
The versatility of the book-building process makes it ideal for companies entering the stock market and selecting the cut-off price in IPO. A few businesses also employ the partial book-building method, in which only accredited institutional investors are asked to submit bids, subsequently used to set the price.
Selecting the “cut-off” option represents part of the IPO cut-off prices in the competing IPO market. Although there is no assurance, strategies for changing the odds are almost as crucial to stand any opportunity of receiving an allocation.