Launching an IPO to raibi investment is a daunting task. Some numerous rules and regulations need to be followed by a company before it can launch an IPO in India. The process involves various steps and different entities, including registrars and investment banking.
The whole process begins with application in front of IPO, roadshow, red herring, and price-fixing.
Let’s Understand Cut-off Price in IPO?
This piece of information will guide you through the process of IPO pricing in depth.
Let’s begin.
To understand the pricing, first of all, let’s know the two types of the mechanism of IPO pricing in India.
Fixed-Price mechanism
In a fixed-price mechanism, the company decides the price of IPO in advance. It makes the IPO available to the public. Under this mechanism, the complete detail of investors belonging to various categories is declared on the date of the issue. Before the issue date, there is no way of knowing the demand for shares in this mode.
If the company opts to launch IPO with Fixed-Price Mechanism, the SEBI guidelines mandate that the company reserve 50% of total shares for retail investors.
Book-Building Method
Under book-building-mechanism, the IPO price is not fixed at the beginning. At the time of launching an IPO, the company announces price bands. Investors make bidding with the price that ranges between these price bands.
It’s critical to make this mechanism essential as the price of IPO is fixed during the public offering period. To maintain high transparency, the company releases the data of investors daily.
Who Decides the Price Band for IPO?
Generally, it’s the company who takes the final call on the decision of fixing a price band of an IPO during the launching process. But, the company takes the help from experts of their Investment banks to finalize the price band.
These experts perform a detailed study of the market, the company’s interest in the market, and public demand. After this analysis, they suggest a price band of IPO.
If the company finds these price bands suitable, it declares these price bands in the prospectus that is made available to the public.
Bidding
Once the IPO is launched, interested investors start bidding on the IPO price within the price band decided by the company. During this process, interested investors bid for the number of shares they are interested in at a specific price within the price band.
Generally, IPOs are open for 3 to 5 days bidding in India. But that time period can be extended if the company fails to attract a sufficient number of investors in stipulated time.
Cut-off Price
After the completion of the bidding process, the investment banks hired by the company analyze all the applications to decide the price at which the IPO will be allotted. This final price, decided by the company at which the IPO will be allotted, is called the Cut-Off price in IPO.
The price which has received maximum application is decided at a cut-off price for the IPOs that are under-subscribed.
If the IPO is oversubscribed, then the ceiling price is finalized as the cut-off price.
Publicity of Bid’s Details
Unlike the Fixed Price mechanism where details of the bid are made available to the public on the day of closure, here details of the bid are made public on every single day. This is done to ensure a complete transparent process as the cutoff-price is fixed by the number of bids.
Also Read: What is IPO Process in India?
Final Settlement
Once the cut-off price is fixed, investors who made bid below the cut-off price are refunded their whole amount as they are not allotted the IPO. For the investors who made bid above the Cut-off price and got allotment are refunded the excess amount.
If an investor wants to buy IPO at any cost, they have to opt for the option of buying at Cut-off while making the application. This will ensure that he/she will be eligible for the allotment, no matter where the Cut-off price goes.
Conclusion
In India, currently, all the companies opt for a Book-building mechanism to fix the Cut-off price of their shares. This method very efficient and flexible for all After fully understanding the whole process, we hope you got a detailed understanding of the process. In case you need any further assistance related to IPOs, feel free to reach us!
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