Cut-off price in an Indian IPO
The cut-off price (also written as cutoff price) in an Indian Initial Public Offering (IPO) is a bidding option available exclusively to retail individual investors under the book-building process, under which the investor agrees to accept the final issue price at which the IPO is priced, whatever that price turns out to be within the price band , without specifying a particular price at the time of bidding. A cut-off bid is treated as equivalent to a bid at the upper end of the price band for the purpose of calculating the amount to be blocked under ASBA or UPI ASBA ; if the final issue price is lower than the upper band, the excess amount is released to the investor after allotment. The cut-off option is specified by the SEBI (ICDR) Regulations, 2018 as a convenience mechanism for retail investors who do not wish to estimate whether the final issue price will be at the floor, the ceiling, or somewhere within the band.
Regulatory basis
SEBI ICDR Regulation 49(3) provides that a retail individual investor may bid at a price within the price band or at the cut-off price, and that a cut-off bid is to be treated as a bid at the cap (upper end) of the price band for the purpose of the ASBA block amount. Non-institutional investors (NIIs), qualified institutional buyers (QIBs), and anchor investors may not bid at the cut-off; they must bid at a specific price within the band.
The restriction of the cut-off option to retail investors is deliberate. SEBI’s rationale is that retail investors, natural persons bidding for shares worth up to ₹2,00,000, are presumed to lack the price-discovery expertise of institutional investors and benefit from a mechanism that insulates them from the risk of being priced out if the issue closes at the upper end of the band. NIIs and QIBs, by contrast, are expected to have the analytical capability to assess the appropriate bid price.
How cut-off bidding works in practice
When a retail investor selects the cut-off option on a broker’s UPI ASBA interface (for example, the Bids → IPO screen on Kite ) or on the bank’s ASBA NetBanking IPO portal:
- Block amount: the UPI mandate or bank lien is created for the maximum possible application value: the lot quantity multiplied by the upper end of the price band .
- Price at allotment: if the final issue price is at the upper band, the investor’s cut-off bid is allotted at that price and the full blocked amount is debited (to the extent of shares allotted). If the final issue price is set below the upper band, which happens occasionally when the book building process produces a clearing price below the upper band, the investor pays the lower final price, and the difference between the blocked amount and the actual allotment value is released.
- Allotment eligibility: a cut-off bid is always eligible for allotment, regardless of where the final issue price lands within the band. A specific-price bid is eligible for allotment only if the bid price is at or above the final issue price. An investor who bids at the floor of the band at a specific price risks having their bid ineligible for allotment if the issue is priced at the upper end of the band.
Why retail investors are generally advised to bid at cut-off
The primary reason retail investors are advised to use the cut-off option rather than a specific price bid is the elimination of pricing-out risk: the risk that the issue is priced at the upper end of the band and the investor’s specific-price bid at a lower price is excluded. In heavily oversubscribed issues, the final price is almost always at the upper end of the band; any specific-price bid below the upper band is rejected at the time of allotment. Since the amount blocked under ASBA is the same for a cut-off bid and an upper-band specific-price bid, there is no financial disadvantage to bidding at cut-off rather than a specific price at the top of the band. The only scenario where a specific-price bid could be advantageous is if the investor has a strong view that the issue will be priced below the upper band and wishes to avoid being allotted at an unwanted price, a scenario that is uncommon in practice given that final pricing typically occurs at or near the upper band in well-received issues.
Comparison with specific-price bids
| Attribute | Cut-off bid | Specific-price bid |
|---|---|---|
| Available to | Retail individual investors only | All investor categories |
| Block amount | Upper band × lot quantity | Specified price × lot quantity |
| Allotment eligibility | Always eligible (if bid accepted) | Only if bid price ≥ final issue price |
| Refund on lower-priced allotment | Excess block released automatically | N/A (block is for bid amount) |
| Risk of pricing-out | None | Yes, if final price > bid price |
| Use in anchor allocation | Not permitted | Mandatory |
Multiple bids by a single retail applicant
SEBI ICDR permits a retail investor to place up to three bids per application: three separate price-quantity combinations (or a mix of cut-off and specific-price bids). A cut-off bid for one lot, a specific-price bid at the midpoint for two lots, and a specific-price bid at the floor for three lots, for example, constitute three bids in a single application. All three would be submitted under a single PAN per application. In heavily oversubscribed issues the multiple-bid option is not very useful from an allotment-probability standpoint, since the entire application (regardless of the number of bids within it) represents a single entry in the retail lottery.
Cut-off price and bid revision
An investor who submitted an initial bid at a specific price (say, at the floor of the band) and later decides to switch to cut-off may revise their bid through their broker’s interface or bank ASBA portal before the 5 PM cutoff on the last day of the subscription window. The revision increases the blocked amount from (floor price × lots) to (upper-band price × lots) if the initial bid was at the floor and the cut-off option is selected on revision. Conversely, an investor who initially selected cut-off cannot subsequently switch to a specific price below the upper band by revising their bid (doing so would reduce the blocked amount and change their allotment eligibility).
Cut-off price in the context of oversubscribed issues
In a heavily oversubscribed issue, all cut-off bids and all specific-price bids at or above the final issue price (which is typically the upper band) are equally eligible for the retail lottery. There is no preference given to cut-off bids over specific-price-at-cap bids in the lottery. The lottery treats all eligible bids as having equal probability; a cut-off bid and an upper-band-specific bid occupy the same position in the eligibility pool.
This mathematical equivalence means that the practical advantage of the cut-off option is the elimination of pricing-out risk (the risk that the final price is set above the investor’s specific bid), not an improvement in allotment probability once the issue is confirmed to be oversubscribed. Once it is clear on Day 3 of a three-day subscription window that the issue will close at the upper band (as indicated by the subscription data), a specific-price bid at the upper band and a cut-off bid are functionally identical.
History of the cut-off option in Indian IPO regulation
The cut-off price option for retail investors was introduced as part of the book-building framework in the early 2000s, recognising that retail investors were at an information disadvantage relative to institutions in estimating the correct bid price within a price band. Before the cut-off option existed, retail investors had to choose a specific price and faced the risk of being priced out if the issue was priced at the top of the band. The introduction of the cut-off option allowed retail investors to participate in book-built issues without needing to predict the clearing price, reducing the information barrier to retail participation in the primary market.
References
- Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, Regulation 49(3), Cut-Off Price Bidding.
- SEBI Master Circular on Issue of Capital, 2023, operational provisions on cut-off bids.
- NSE Exchange Notice on Book Building Process, available at nseindia.com.
- SEBI, FAQ on Primary Market, Cut-Off Price, available at sebi.gov.in.
See also
- IPO price band , the range within which cut-off bids are priced
- Book building , the process within which the cut-off option operates
- UPI ASBA , the retail application channel through which most cut-off bids are placed
- Bank ASBA NetBanking , the alternative channel for cut-off bids
- ASBA , the blocked-amount mechanism underlying cut-off bids
- Retail individual investor , the only investor category permitted to bid at cut-off
- Basis of allotment , how cut-off bids are treated in the allotment process
- Initial Public Offering , the broader IPO process
- Anchor investor , must bid at specific price, not cut-off