Cut Off Price in IPO and OFS – Floor Price vs Cut-off Price

What is the Meaning of Cut Off Price in IPO?

Today I’m going to explain the cut off price in IPO, what does it mean, and how the same is calculated.

Cut-off price is the offer price at which shares will be allocated to investors depending upon the demand of the share. One can come across this term when a company wants to raise capital for the first time via IPO.

On the other hand, if the company is already listed and their promoters want to sell their shares then they should hold at least 10% shares and can initiate an offer of sale.

Regulating body SEBI permits only retail individual investors to have an option of applying at the cut-off price.

Now let’s discuss the same in more detail with an example.

In the book-building process, IPO price is not fixed instead issuer indicates a price band which would be a range of price within 20% limit.
The company declares this piece of information in the prospectus, investors must bid for the price within the price band limit.
Depending upon the demand, the price gets discovered and that price will be coined as cut-off price or issue price. And the cut-off price will always fall within the price band.

Also Read Face Value in IPO – How to Calculate Face Value or Nominal or Par value?

Example

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Here is an example of a cut-off price in IPO.
The supposing issuer has raised 1000 shares and indicated a price band of Rs.100 to 108.
As an investor, you buy 100 shares at the price of Rs.102. And the cut-off price is 104 in that shares will not be allocated to you and a refund would be processed.

Bid PriceNumbers of SharesCumulative sharesCumulative % of the shares
10850050050%
10710060060%
10620080080%
1055085085%
1041501000100%
1033001300130%
1021001400140%
1012001600160%
100501650165%

On the other hand, if you have applied for 100 shares at 104 or above then definitely you will be allotted the shares.
In case you applied for the cut-off price then you are in a potential position to get the allotment.

If the investors want to buy IPO at any cost, then they should apply for shares at the ceiling price as the cut-off price will be within the price band limit.
Post bidding whatever price gets determined as the cut-off price you will be able to get a sure shot allotment and whatever extra you have paid will be refunded back to you.

Also Read Price Band in IPO – How is the Price Band of an IPO Decided?

Cut Off Price in OFS

Whereas in Offer of Sales, promoters only indicate the floor price. Retail investors must place a bid over & above floor price and once the bid gets closes.
Promoters identify the cut-off price based on weighted averages. that will be coined as cut-off price in OFS.
The major benefit investors will get from OFS is that they can buy shares at discount.

Now let me exemplify with an example.
Let’s say the promoter has declared a floor price of 100 for selling 100 shares. And 5 investors have placed a bid for different prices and numbers of shares.

InvestorsNumber of SharesBid PriceValue of Bid
A50010251000
B70010573500
C1000103103000
D20010120200
E60010462400
Total Number of Shares3000 310100

Weighted Average (310100\3000)      = 103

With the help of weighted average formula, the cut off price is derived for RS.103

Hoping with the help of examples and explaining these terms in layman language we could make you understand this terminology in both contexts.

Also Read What is SME IPO? | SME IPO Vs Regular IPO | How to Invest in SME IPO? | Sell SME IPO Shares |

Floor Price vs Cut off Price

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At times investors from non-financial backgrounds get confused between the floor price and cut-off price.

The floor price is the lowest limit in the price band over which sellers can place a bid in IPO or OFS. Whereas cutoff price gets derived basis the demand of the stock using the book-building process as exemplified in the above scenario of IPO and OFS.

The floor price is outlined by company issuers or promoters to make sure the subscription of shares does not happen below this limit. If investors try to place a bid below floor price it either does not allow them to bid or else issue a refund.

In the above examples, if we want to understand the floor price for the IPO scenario is Rs 100 as the indicative price band was between 100 to 108 Rs. On the other hand, the floor price was declared by promoters in OFS over and above only the retail investors can place a bid i.e.Rs.100.

Also Read What is OFS in Share Market? | How can I Invest in Offer for Sale?

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