The process of a company going public is very complex as there are multiple stakeholders involved. While the steps of going public are well defined, the time taken for such a process varies and may take months or even years. But once the IPO is set to be open for the public, there are two ways the company can approach this to set a price for its shares.
Fixed price – This as the name suggests, is when the company sets a fixed price to the shares to be sold. In this case the demand for the IPO is known only after the closure of the issue.
Book building price – In this case, the company does not set a fixed price for the shares offered to the public. Unlike the fixed price method, the price is not announced in advance. Instead the company gives a range for the investors to bid and then the final price is decided once the issue closes. In this case, we deal with two more concepts known as cut-off price and floor price. What is the cut-off price? Let’s understand in more detail.
The offer price for an initial public offering which is set by a company in collaboration with the merchants or managers for the IPO, which could be any amount within the price bracket is known as the cut-off price for IPO stock. This, however, should not be confused with the floor price, which is the lowest rate at which bids can be placed.
The issuer must disclose a price range or a floor price within a book-building offer. The actual discovered issue price could be either above the floor price or anywhere within the pricing spectrum. The issue price is thus referred to as the “cut-off price.”
After assessing the book and investors’ demand for the stock, the issuer and lead managers make that call. When applying for the issue, prospective investors must select the cut-off option, which shows their willingness to subscribe to shares at any price discovered within the trading range throughout the book-building phase.
At the cut-off price, authorized personnel participating in the employee reservation portion and retail individual investors are allowed to bid. Investors who are not QIBs (the qualified institutional buyers which include anchor investors) or non-institutional investors are not allowed to bid at the cut-off price.
Cut-off bids are always legitimate for allotment considerations as opposed to price bids. The price bids imply that a specified price can become invalid if the applicant’s price is lower than that which has been disclosed.
Making bids at the “cut-off price” means that the retail investor receives an allocation along with the quantity of allotment which is based on demand at varying prices.
A cut-off price is, therefore, a price at which shares are issued to investors, to make things simpler for a layman in the field of the stock market investment. An IPO book-building issue begins with a cost range, which includes both a minimum and a maximum limit. An investor can bid for the appropriate amount for any number of stocks at a rate that is within acceptable price limits.
When it comes to IPO pricing in India, there are two methodologies. The first one is the Fixed Price Method and the other is Book Building Method. Let’s look into the details of these two.
While in a fixed-price method, the price is determined early on by the company. It opens up the initial public offering to the general masses. On the date of the issue, the firm hands out the complete information of different investors. There is no way to predict demand for shares before the issue date using this methodology.
However, the price is not predetermined at the commencement of an IPO in the book-building method. Instead, the company declares a price range at the time of the launch. The Investors then start the bidding using this very price range. At this point, it’s crucial to maintain maximum transparency; the company, therefore, publishes investor data on a daily basis.
After evaluating the book and investors’ desire for the stock, the issuer and lead merchant or manager make this decision. Only retail individual investors are allowed to apply at this price, as per the SEBI guidelines.
Let’s suppose that the price bracket of an IPO is determined to be between Rs.100 to Rs.110. You apply for ten shares for Rs.105 each. As you were prepared to subscribe to the initial public offering at approximately Rs.105, you will be allocated shares at the price of Rs.104, if the determined price of issue is Rs.104.
Conversely, if the calculated price of issue is Rs.106, you will not receive an allotment of stock. But if you go for the cut-off, you will be allotted shares at the price of issue.
Investment bankers proceed to work on the price determination towards the final stage of the IPO. But, when no fixed price has been calculated, there is a range of bids that occur at distinct values. The actual price is determined by the merchant bankers by calculating the average of all the bids submitted in total and this is known as the actual cut-off. It is typically the legal price that helps establish the bids for a set of stock.
Once the IPO has reached completion, shareholders who bid below the cut-off will have their money reimbursed because they are not eligible for share allotment. Those who bid higher than the cut-off earn the difference in addition to the stock allotment. Customers who desire to buy an IPO must pick the option to buy at cut-off while completing the registration process. This means that irrespective of the cut-off price, the individual is still entitled to the allotment.
Before applying, examine the IPO prospectus paper to see if you are eligible. Registered Employees under the Employee Reservation Portion, Shareholders Bidding under the Shareholders Reservation Portion, and Retail Individual Bidders are all eligible to apply at the cut-off.
When subscribing, please read the IPO's RHP document to ensure that you are eligible. Anchor Investor, Shareholders Bidding under the Shareholders Reservation, Non-institutional bidders, Qualified Institutional Bidders are all those who cannot participate in an IPO at cut-off.
At TradeSmart we have specialists who have expertise in not just applying for an IPO, and they will guide you at every step of the way with the lowest fees for application and charges.
Yes. A retail investor is eligible to bid in a book-built issue with a maximum value of Rs.1,00,000. Any amount exceeding this will be evaluated for the HNI category. With TradeSmart by your side, you won't have to worry about any of the nitty-gritty details of stock trading since we'll make sure you get the most out of your money.
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