Bidding at the cut-off
In a book-built public issue, choosing to bid at whatever price the book-building process finally settles on, rather than naming a specific price, which guarantees the bid is never rejected for being priced too low.
In plain language
In a book-built IPO, investors do not have to name their own price. Instead, they can choose to bid at the cut-off, which means agreeing in advance to pay whatever price the issue finally settles at, once all the bids are in.
This matters because the price band in a book-built issue can be wide, and an investor who guesses too low a price risks missing out on an allotment entirely. Bidding at the cut-off removes that risk.
How it works
Once the issue closes, the book running lead manager, in consultation with the issuer, works out the cut-off price — the price at which the offer gets fully subscribed. All investors who bid at or above the cut-off price are successful and receive allotment at the cut-off price, regardless of the higher price some of them may have actually bid. Investors who bid below the cut-off price get a refund of their application money and no allotment.
Retail investors bidding at the cut-off are, by definition, always bidding at or above the eventual cut-off, so their application is always accepted, subject to proportionate allotment if the issue is oversubscribed. The workbook's own worked example: a company offering 5,000 shares in a price band of Rs 120 to Rs 144 receives bids that fill the offer exactly at Rs 135 — everyone who bid at Rs 135 or higher gets allotment at Rs 135, the cut-off price, even those who had bid Rs 144.
A worked example
A company issues 5,000 shares in a book-built offer with a price band of Rs 120 to Rs 144. Demand builds up as follows:
| Price | Shares bid | Cumulative demand |
|---|---|---|
| Rs 144 | 1,000 | 1,000 |
| Rs 140 | 1,500 | 2,500 |
| Rs 135 | 2,500 | 5,000 |
| Rs 130 | 1,000 | 6,000 |
| Rs 120 | 500 | 6,500 |
The 5,000 shares on offer are exactly filled at Rs 135, so Rs 135 becomes the cut-off price. Ritu, a retail investor who chose to bid at the cut-off, gets an allotment at Rs 135 per share, exactly the same as an investor who had specifically bid Rs 144 — Ritu simply never had to guess the right number, and her bid was never at risk of rejection for being priced too low.
Why NISM asks about it
Chapter 6 (Securities Market Segments), section 6.1, works through this exact 5,000-share, Rs 120 to Rs 144 example while explaining book-built issues, and states the SEBI rule that the minimum application value in a public issue must fall between Rs 10,000 and Rs 15,000. Expect a question that gives a demand table like the one above and asks you to identify the cut-off price, or one that tests whether a retail investor's cut-off bid is always accepted.
Common exam traps
- Bidding at the cut-off does not mean paying the highest price in the band — it means paying whatever the cut-off turns out to be, which could be anywhere within the band.
- All successful bidders, whatever price within the band they bid, pay the same cut-off price — a bidder at Rs 144 does not pay more than one who bid exactly at the Rs 135 cut-off.
- If the issue is oversubscribed, allotment at the cut-off price is still only proportionate, not guaranteed in full — bidding at the cut-off avoids rejection, not rationing.