When applying for an Initial Public Offering (IPO) in India, investors often come across terms such as price band, bid price, and cut-off price. Understanding these terms is important because the price entered while applying can affect whether an IPO application is considered for allotment.
In a book-built IPO, the company generally announces a price range called the price band. Investors can place bids within this range, while eligible retail investors may also have the option to select the cut-off price.
This article explains the difference between IPO price band and cut-off price, how bidding works, and what investors should know before submitting an IPO application.
What Is an IPO Price Band?
The IPO price band is the range of prices within which investors can submit their bids for shares in a book-built IPO.
For example, suppose a company announces the following price band:
₹100 – ₹110 per share
Here:
- ₹100 is the lower price of the band.
- ₹110 is the upper price of the band.
- Investors can generally place bids within the announced range, subject to the applicable IPO rules.
The company and its advisors use the book-building process to assess demand at different prices before determining the final issue price.
What Is the Floor Price?
The floor price is the lower end of the IPO price band.
For example, if the price band is:
₹100 to ₹110
then ₹100 is the floor price.
For a book-built issue, investors generally cannot place a bid below the announced floor price.
What Is the Cap Price?
The cap price is the upper end of the IPO price band.
In the same example:
₹100 to ₹110
₹110 is the cap price.
An investor generally cannot place a bid above the announced cap price.
The difference between the floor price and cap price creates the bidding range for the IPO.
What Is the Cut-Off Price in an IPO?
The cut-off price is an option available to eligible retail investors in a book-built IPO.
When an investor selects the cut-off option, they are effectively agreeing to purchase shares at the final issue price determined through the book-building process, rather than specifying a particular price within the band.
For example, suppose the IPO has a price band of:
₹100 – ₹110
After the bidding process, the final issue price is determined at ₹108.
A retail investor who selected the cut-off option would have their bid considered at ₹108, subject to the applicable allotment process.
IPO Price Band vs Cut-Off Price
| Factor | IPO Price Band | Cut-Off Price |
| Meaning | Range within which investors can bid | Option to bid at the final discovered issue price |
| Example | ₹100–₹110 | Final price could be ₹108 |
| Who determines it? | Company/issuer announces the price band | Final issue price is discovered through book building |
| Investor action | Select a specific bid price or applicable cut-off option | Selects “Cut-Off” while applying |
| Purpose | Defines the permitted bidding range | Allows eligible retail investors to participate without choosing a specific price |
| Availability | Applies to the IPO’s bidding process | Generally available to eligible retail investors in book-built issues |
| Final price | Not necessarily the final issue price | Investor agrees to the final issue price |
How Does IPO Bidding Work?
Let’s understand the process with an example.
Suppose ABC Limited launches an IPO with:
- Price band: ₹100–₹110
- Lot size: 100 shares
- IPO application: 1 lot
An investor can generally choose a bid price within the announced price band.
For example, the investor could bid at:
- ₹100
- ₹105
- ₹110
Alternatively, if eligible, the investor could select Cut-Off.
If the final issue price is determined at ₹108:
- A bid at ₹110 can be considered because it is above the final issue price.
- A cut-off bid is considered at ₹108.
- A bid at ₹105 may not be considered for allotment because it is below the final issue price.
This is why choosing the appropriate bidding option is important.
What Happens When You Select Cut-Off?
When an eligible retail investor selects the cut-off option, the investor does not need to predict the final issue price.
Suppose the price band is ₹200–₹220.
If the final issue price is:
- ₹205 → cut-off bid is considered at ₹205
- ₹215 → cut-off bid is considered at ₹215
- ₹220 → cut-off bid is considered at ₹220
The investor agrees to pay the final price discovered through the IPO book-building process.
However, selecting cut-off does not guarantee share allotment. Allotment depends on the demand for shares and the applicable basis of allotment.
Why Do Retail Investors Use the Cut-Off Option?
One reason is simplicity.
An investor selecting a specific bid price needs to consider where the final issue price might be determined. A bid below the final issue price may not be considered for allotment.
With the cut-off option, an eligible retail investor agrees to the final issue price within the announced price band.
For this reason, the cut-off option can be useful for retail applicants who do not want to select a specific bidding price.
Can Retail Investors Select Any Price?
Generally, retail investors can submit bids within the announced price band, subject to the issue’s bidding rules.
For example, if the price band is ₹150–₹160, an investor cannot normally submit a bid at ₹140 because it is below the floor price.
Similarly, a bid above ₹160 would generally not be permitted.
Investors should check the specific IPO’s offer documents and application platform for the applicable bidding conditions.
What Happens to the Blocked Amount?
When applying through ASBA or the applicable UPI process, the required application amount is generally blocked rather than immediately transferred to the company.
Suppose an investor applies for 100 shares at ₹110 per share.
The application amount would be:
100 × ₹110 = ₹11,000
If the investor selects the cut-off option, the amount required for the application is generally calculated using the upper end of the price band for the purpose of blocking funds.
If the final issue price is lower than the cap price, the excess amount is released or unblocked according to the applicable process after allotment.
The exact timing of the fund release can depend on the IPO process, bank, intermediary, and applicable regulations.
Price Band vs Cut-Off: Simple Example
Consider this hypothetical IPO:
| Particular | Details |
| Price Band | ₹90–₹100 |
| Lot Size | 120 shares |
| Maximum application amount for one lot | ₹12,000 |
| Final Issue Price | ₹98 |
An eligible retail investor has two basic choices:
Option 1: Bid at ₹95
The bid is below the final issue price of ₹98. It may therefore not qualify for allotment.
Option 2: Select Cut-Off
The investor agrees to the final issue price of ₹98. The application can therefore be considered at the discovered issue price, subject to the allotment process.
The example is simplified for explanation; investors should follow the specific IPO’s application and allotment rules.
Is Cut-Off Price Available for Every IPO?
The cut-off option is associated with book-built IPOs and is available to eligible retail investors under the applicable rules.
It should not be assumed that every public issue will have exactly the same bidding structure.
Before applying, investors should check the IPO’s offer document and the application platform for:
- Price band
- Minimum bid quantity
- Cut-off availability
- Investor-category limits
- Payment requirements
- Application deadlines
Common Mistakes While Bidding for an IPO
Investors can make several avoidable mistakes when applying for an IPO.
Bidding Below the Final Price
A bid below the final issue price may not qualify for allotment.
Entering the Wrong Quantity
IPO applications are generally made in multiples of the specified lot size. Entering an incorrect quantity can result in application issues.
Missing the UPI Mandate
For applications using UPI, investors need to approve the mandate within the applicable time period.
Assuming Cut-Off Guarantees Allotment
Selecting cut-off only determines the bidding price mechanism. It does not guarantee that shares will be allotted.
Ignoring the Price Band
Investors should verify the floor price, cap price, lot size, and other issue details before submitting an application.
Price Band and Cut-Off Price: Key Takeaway
The IPO price band defines the range within which bids can be submitted. The cut-off option allows an eligible retail investor to participate at the final issue price discovered through the book-building process.
For example, if an IPO has a price band of ₹100–₹110 and the final issue price is ₹108, a cut-off bid is considered at ₹108.
Understanding this distinction can help investors complete their IPO applications correctly and avoid common bidding mistakes.
However, selecting cut-off does not guarantee allotment or investment returns. Investors should also examine the company’s financials, valuation, business model, and risk factors before applying.
Disclaimer: This article is for educational purposes only and does not constitute investment advice or a recommendation to invest in any IPO.
