When companies decide to go public, the Initial Public Offering (IPO) becomes an important event. For many retail investors in India, understanding the IPO bidding process can seem complex. One key term that often arises during IPO subscription is the cutoff price in IPO. Selecting the cutoff price can simplify the bidding process, especially for first-time investors. In this article, we will explore the concept of cutoff price, explain how investors use it in their bids, and relate it to the important factor of IPO lot size. This will provide a clear, easy-to-understand guide for Indian investors who want to make informed decisions during IPO investments.
What is the cutoff price in ipo
The cutoff price in IPO is the maximum price at which an investor agrees to buy shares during an IPO. When a company offers its shares to the public, it provides a price band: a minimum price and a maximum price per share. Investors can either bid at a particular price within this band or select the cutoff price, which is the highest price in the band.
For example, if an IPO price band is Rs. 100 to Rs. 110, the cutoff price is Rs. 110.
Bidding at the cutoff price signals that the investor is willing to pay the highest possible price. This option is useful for those who do not want to set a specific price or worry about the final allotment price. The actual allotment price will be decided after IPO subscription closes, based on demand.
Why investors select cutoff price for ipo bidding
Many investors select the cutoff price to simplify their IPO subscription for these reasons:
Ensures better chance of allotment: When the IPO is highly oversubscribed, bidding at the cutoff price increases the chance of receiving shares. Lower bids may reduce allotment.
Avoids confusion about pricing: Retail investors, especially beginners, may find it difficult to guess the final issue price. Choosing the cutoff price avoids this guesswork.
Protects from missing out: By bidding max price, investors ensure they do not lose the opportunity to get shares if the final price is at the higher end of the band.
Simplifies bidding process: Instead of deciding multiple bid prices, investors can simply select cutoff price and focus on other details.
However, investors should remember that paying the cutoff price means agreeing to pay the highest price in the band, which might be more expensive than what the market eventually deems fair after listing.
The role of ipo lot size in the bidding process
When applying to an IPO, investors must bid in minimum units called the IPO lot size. Lot size is the fixed number of shares allocated per application. This rule ensures uniformity and simplifies the allotment process.
For instance, if the IPO lot size is 15 shares, an investor cannot bid for just 10 shares; the bid must be for 15 shares or a multiple (like 30, 45, etc.).
Having a clear idea of the lot size is important when deciding how much money to allocate for the IPO. For example, if the cutoff price is Rs. 110 and the lot size is 15 shares, the minimum investment per application is Rs. 1,650 (110 x 15).
Many retail investors find the combination of cutoff price and lot size critical since it determines the minimum financial commitment and overall budgeting for an IPO subscription.
How cutoff price affects ipo allotment and refunds
The final price at which shares are allotted is decided after the IPO subscription closes, based on overall demand, and will be anywhere between the minimum and cutoff price. To participate in this process smoothly, investors must open a demat account beforehand, as shares are credited electronically only after allotment. If you have selected the cutoff price, your bid remains valid regardless of the final price. If the final price is lower than the cutoff price, refunds are made for the difference. For example, if you bid at Rs. 110 (cutoff) and the final price is fixed at Rs. 105, you will get a refund for the Rs. 5 difference per share. On the other hand, if you bid below the cutoff price, your bid may be partially or fully rejected if the final price is above your bid. This is why many investors prefer bidding at the cutoff price — it maximises the chance of getting shares.
Key points about IPO lot size to remember
- IPO lot size is fixed by the company issuing shares and SEBI regulations.
- Minimum bid must be for the lot size number of shares or multiples thereof.
- Knowing the IPO lot size helps calculate initial investment and plan finances.
- Allotment of shares is done in multiples of lot size.
- Even if your bid quantity is large, allotment may be fractional but will respect lot sizes.
Advantages and cautions of bidding at cutoff price
Advantages
- Simplifies the bidding process, making it easier for retail investors.
- Recommended for beginners who may not have enough market experience.
- Increases the probability of share allotment during oversubscribed IPOs.
- Avoids the stress of deciding exact bid prices.
Cautions
- Paying cutoff price might mean paying a premium if final price settles lower.
- Investors should still research the company and IPO fundamentals before bidding.
- Blindly bidding at cutoff price without understanding market conditions may lead to overpaying.
- It is important to consider one’s investment goals and risk appetite.
Example of bidding at cutoff price
Suppose an IPO has a price band of Rs. 200 to Rs. 220 and an IPO lot size of 10 shares.
- If you bid at Rs. 210 for 10 shares, your application amount is Rs. 2,100.
- If you bid at cutoff price Rs. 220 for 10 shares, your application amount is Rs. 2,200.
- If the IPO final price is Rs. 215, the investor who bid at 210 may get no allotment or partial allotment.
- The investor who bid at the cutoff price will get allotment at Rs. 215.
- The latter investor will receive a refund of Rs. 5 per share corresponding to the difference.
This example clarifies why many investors find bidding at the cutoff price more certain for successful allotment.
Takeaway for indian retail investors
For an Indian retail investor, who may be new to IPO investing, understanding the relevance of cutoff price in IPO and IPO lot size is crucial. Selecting the cutoff price makes the IPO bidding procedure simpler and increases the chance of allotment. However, always balance convenience with caution: study the company’s fundamentals and marketplace conditions. Calculate the budget by multiplying the cutoff price with the IPO lot size to understand the total financial outlay.
For investors looking for an easy way to participate in IPOs without worrying about price ranges, selecting the cutoff price is a helpful choice.
Conclusion
Investing in IPOs is an exciting way for Indian common investors to enter the stock market and build wealth. The selection of the cutoff price in IPO can greatly simplify the bidding process by eliminating the need for exact price decisions. When combined with knowledge about the IPO lot size, investors can comfortably estimate their investment and chances of getting allotted shares.
While using the cutoff price is common among retail investors for successful allotment, it must be paired with proper research and financial planning. By demystifying these concepts in simple terms, investors can confidently take part in IPOs and make smarter financial decisions.
With this clear understanding of cutoff price and lot size, every Indian investor can approach IPOs with more confidence and clarity. This boosts participation and helps build the habit of investing in India’s growing capital markets.
