Cut-Off Price Meaning in IPO (SEBI Definition)
Introduction
This document explains the Cut-Off Price concept in IPOs as defined and regulated by SEBI (Securities and Exchange Board of India). The cut-off price is a key element of the book building process used in most Mainboard IPOs in India.
Understanding the cut-off price helps investors know at what price shares are finally allotted and how retail applications are treated during oversubscription.
What Is Cut-Off Price?
As per SEBI regulations, the cut-off price is the final issue price determined after the IPO bidding closes, based on total demand received at various price levels within the price band.
Shares are allotted to investors at this price, regardless of the exact bid price (provided the bid is equal to or above the cut-off price).
Cut-Off Price in Book Building IPOs
In a book building IPO, the company announces a price band instead of a fixed price. Investors submit bids at different prices within this band.
After the issue closes, the price at which total demand equals or exceeds the number of shares offered is identified as the cut-off price.
Who Can Apply at Cut-Off Price?
As per SEBI rules, only Retail Individual Investors (RIIs) are allowed to apply at the cut-off price in a book building IPO.
- Retail Investors – Can select the cut-off option
- NII / QIB – Must bid at a specific price; cut-off option is not allowed
What Does Selecting Cut-Off Mean for Retail Investors?
When a retail investor selects the cut-off option, it means:
- The investor agrees to buy shares at the final discovered price
- The application remains valid irrespective of the final issue price
- The investor increases chances of eligibility for allotment (not probability)
Numerical Example of Cut-Off Price
Consider an IPO with the following details:
- Price Band: ₹90 – ₹100
- Total Shares Offered: 1,00,000
Bids received:
- ₹90 – 20,000 shares
- ₹95 – 30,000 shares
- ₹100 – 70,000 shares
At ₹100, cumulative demand becomes 1,20,000 shares, which exceeds supply. Therefore, ₹100 is fixed as the cut-off price.
Cut-Off Price vs Cap Price
In many IPOs, the cut-off price is often equal to the cap price (upper end of the price band), especially when the issue is heavily oversubscribed.
However, in weakly subscribed IPOs, the cut-off price may be lower than the cap price but never below the floor price.
Impact of Cut-Off Price on Allotment
Only bids at or above the cut-off price are considered for allotment. Bids below the cut-off price are rejected in full.
For retail investors, allotment (if any) is done at the cut-off price regardless of the bid price selected above it.
Common Misconceptions About Cut-Off Price
- Cut-off selection does not guarantee allotment
- Cut-off price is not known before IPO closure
- Cut-off price is not applicable to fixed price IPOs
Important SEBI Notes
SEBI mandates that the cut-off option must be clearly disclosed in the offer document and bidding interfaces to avoid investor confusion.
The final cut-off price is published along with the basis of allotment after completion of the IPO process.
Important Notice
This content is for educational purposes only and does not constitute investment advice. Investors should always refer to the IPO prospectus and SEBI regulations for authoritative guidance.