Initial Public Offerings (IPOs) are a popular option for retail investors who want to benefit from listing gains and long-term growth. Whether you are applying for a mainboard IPO or looking into IPO investment opportunities, it is important to understand pricing mechanisms.
One of the most important but often misunderstood concepts is the cut-off price in IPO. Many investors are unsure if they should choose it or place a specific bid price.
This guide explains what is cut-off price in IPO, how it works, and how to use it effectively.
What is the Cut-Off Price in IPO?
The cut-off price in an IPO refers to the final allotment price that will be applicable to investors after the bidding process is completed in a book-built issue.
In simple terms, when you apply for an IPO and select the cut-off price, you are agreeing to buy the shares at whatever price is finally decided within the given price band.
Understanding It with an Example
For instance, an IPO has a price band of ₹100 to ₹120:
- You apply by selecting the cut-off price
- After the bidding process, the final price is determined at ₹118
- You will receive shares at ₹118, not ₹120
Key Points to Remember
- The cut-off price is not a fixed number at the time of application.
- It is decided through the book-building process based on demand.
- It is only accessible to retail investors during book-built Initial Public Offerings.
- Choosing the cut-off price makes sure your bid stays valid, no matter what the final price is.
How is the Cut-Off Price Decided?
The cut-off price in IPO is determined through a systematic process called book building, where investor demand plays the most important role in price discovery.
Let's understand how the cut-off price is decided:
1. Price Band is Announced:
Before the IPO opens, the company (along with its investment bankers) sets a price band, which includes:
- Lower price (floor price)
- Upper price (cap price)
This is the range within which investors can place their bids.
2. Investors Place Bids:
Bids are submitted by various categories of investors:
- Qualified Institutional Buyers (QIBs)
- Non-Institutional Investors (HNIs)
- Retail Investors
Each bid includes:
Number of lots
Bid price (within the price band) OR selection of cut-off price
3. Demand is Collected at Different Price Levels:
All bids are recorded in a system called the order book. This creates a demand curve showing how many shares are requested at ₹100, ₹105, ₹110, ₹120, etc.
4. Price Discovery Happens:
The cut-off price is decided based on the highest price at which maximum shares can be allotted, strong demand from institutional investors, and overall subscription levels.
In simple terms, the price at which the company can sell all its shares efficiently becomes the final issue price (cut-off price).
5. Final Price (Cut-Off Price) is Declared:
After the IPO closes:
- The final price is announced
- All successful applicants receive shares at this price
6. Allotment Happens at Cut-Off Price:
- Investors who selected the cut-off price remain eligible
- Investors who bid below the cut-off price are rejected
Should I Select the Cut-Off Price in the IPO?
A common question investors ask is: Should I select cut-off price in IPO?
Why It’s Recommended (Especially for Retail Investors):
- Maintains your application's validity
- Improves your chances of allocation
- Removes any guesswork with regard to valuation
- Suitable for a quick T+3 IPO process
When You Might Avoid It:
- You only want to invest below a specific valuation
- You are confident about price discovery
- You prefer full control over your bid
Key Insight:
For most retail investors, selecting the cut-off price is a safer and smarter choice.
Cut-Off Price vs Bid Price
Let’s understand the difference between the cut-off price and the bid price:
| Parameter | Cut-Off Price | Specific Bid Price |
| Definition | Final price decided after the book-building process | Price selected by the investor within the band |
| Allotment Chance | Highest (valid at any final price) | Depends on bid (invalid if below cut-off) |
| Funds Blocked | Always at the upper price band | Based on your selected bid price |
| Refunds | Excess amount (if final price is lower) is refunded | Refund only if the bid is rejected or lower |
| Control Over Price | No control (accept the final discovered price) | Full control over the maximum price you pay |
| Risk Level | Lower risk of rejection | Higher risk if the bid price is too low |
| Best For | Retail & beginner investors | Experienced / valuation-focused investors |
How to Select a Cut-Off Price While Applying for an IPO?
Step-by-Step Process:
- Log in to your trading app or net banking (ASBA)
- Navigate pr browse to the IPO section
- Choose the IPO you want to apply for
- Enter the number of lots you wish to bid for
- Select the “Cut-Off Price” option
- Review and submit your application
Pro Tip: Understanding Blocked Funds
When you select the cut-off price, your bank blocks funds based on the upper price band.
If the final price is lower, the difference is automatically unblocked. Refunds are processed quickly after allotment.
This ensures your application remains valid without needing price adjustments.
Common Mistakes to Avoid
1. Not Selecting Cut-Off Price:
Bidding below the final price can lead to rejection.
2. Confusing Lots with Shares:
Always apply in lots, not individual shares.
3. Ignoring the Price Band:
Understand both lower and upper limits before applying.
4. Trying to Predict the Final Price:
Even experts cannot always predict price discovery accurately.
5. Ignoring Company Fundamentals:
Don’t rely only on hype; evaluate the business before investing.
