The price at which the shares get issued to the investors is referred to as the ‘cut off price’ in an IPO. It is called ‘issue price’. If an investor is applying at the cut off price, he/she will have to pay the highest price while placing the bid. The cut off price is decided by the company after consulting the book running lead managers (BRLMs). The cut off price falls within the price band.
Eligibility for bidding at the cut off price
Those eligible to bid at the cut off price include Eligible Employees under the Employee Reservation Portion, Retail Individual Bidders (RII) and Shareholders Bidding under the Shareholders Reservation Portion (subject to the Bid Amount being up to ₹200,000).
Anchor investors, Non-institutional bidders (NII), Shareholders Bidding under the Shareholders Reservation Portion (for the bid amount above ₹200,000) and Qualified Institutional Bidders (QIB) are not eligible for bidding at the cut off price.
However, it is advised to read the IPO prospectus document in order to check the eligibility criteria before bidding.
READ MORE: What are the risk factors involved in applying for an IPO?
Let’s understand cut off price with an simple example:
When an investor selects to bid at the cut off price, it implies that he/she is willing to bid at the issue price which is determined by the Merchant bankers after receiving all the applications.
Explaining it with an example, suppose the price range for an IPO is fixed between Rs. 200 and Rs. 205. Now, an individual applies to bid 10 shared at Rs. 202. Further, the determined issue price by the company turns out to be Rs. 201, the individual shall receive the allotment at Rs. 201 since he/she was willing to avail the issue up to Rs. 202.
However, if the determined price of the issue turns out to be Rs. 204, then he/she will not receive the allotment of the shares. On the other hand, if an individual selects ‘cut off price’ while applying, then he/she will be eligible for allotment at any price determined for the issue.
To conclude, to bid at "cut-off" will ensure that the retail investor gets allotment. The allotted quantity will depend upon the demand made at various price points.