Cut-off price
In a book-built issue, the price at which the issue is fully subscribed. Everyone who bid at or above it succeeds and is allotted at that price.
In plain language
In a book-built issue the company does not fix the price in advance. It sets a price band and lets investors bid. The cut-off price is where the bids, counted from the highest price down, add up to the number of shares on offer.
Everyone who bid at or above the cut-off is a successful bidder, and all of them pay the cut-off price — not what they bid. An investor who simply ticks "bid at cut-off" is saying, "I will pay whatever price the book discovers", and that application is always accepted.
How it works
Discovering it (section 3.9.2). The issuer, in consultation with the book running lead manager, decides the cut-off price "at which the issue gets subscribed". The RTA collates bid information to identify it.
Rules around it:
- The price band is announced at least 2 working days before the issue opens.
- Retail investors can revise bids while the issue is open.
- The company may set the cut-off below the price at which the issue is subscribed, for the benefit of investors.
- A retail discount to the cut-off is allowed, but it cannot exceed 10 per cent of the price at which shares are allotted to other categories.
- After the issue closes, those who bid below the cut-off have their blocked amounts released. If bids at or above the cut-off exceed the shares on offer, allotment is proportionate; if they fall short, everyone at or above the cut-off gets what they applied for.
A worked example
The workbook's example. A company offers 5,000 shares in a band of Rs 120–144:
| Price bid | 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 |
Demand reaches the 5,000 shares on offer at Rs 135, so that is the cut-off.
Successful bids: 1,000 + 1,500 + 2,500 = 5,000 shares, all allotted at Rs 135
Amount raised : 5,000 × Rs 135 = Rs 6,75,000
Unsuccessful : 1,500 shares bid at Rs 130 and Rs 120 — amounts unblocked
The investor who bid Rs 144 pays Rs 135, not Rs 144.
A retail discount, illustrative: if the issuer offers retail investors Rs 5 off, they pay Rs 130 — a discount of 5 ÷ 135 = 3.7 per cent, within the 10 per cent ceiling (which would allow up to Rs 13.50).
Why NISM asks about it
Chapter 3 (Primary Markets) defines the cut-off price in section 3.9.2 with the bid table above, and returns to it in sections 3.10 and 3.12 on bidding at cut-off and allotment. Expect a bid table to read, and questions on what a successful bidder pays and what "bid at cut-off" means.
Common exam traps
- Successful bidders pay the cut-off price, not their own bid.
- Bidding at the cut-off means the application is always accepted at the discovered price — it is not a bid at the floor of the band.
- The cut-off may be set below the level at which the issue is subscribed, for the benefit of investors.
- Retail discount is capped at 10 per cent of the price for other categories.
- Cut-off price belongs to book-built issues. In a fixed price issue the price is known when you apply.
Check yourself
1.A company offers 5,000 shares in a price band of ₹120 to ₹144. Bids: 1,000 shares at ₹144, 1,500 at ₹140, 2,500 at ₹135, 1,000 at ₹130 and 500 at ₹120. What is the cut-off price?
- a)₹144
- b)₹140
- c)₹135
- d)₹120
Show the answer
Answer: (c) ₹135
Build cumulative demand from the highest price downwards: 1,000 at ₹144; 2,500 by ₹140; 5,000 by ₹135. The 5,000 shares on offer are exactly accounted for at ₹135, so that is the cut-off price — the price at which the issue gets subscribed.
All allottees who bid at or above the cut-off price are successful bidders and all of them are allotted at ₹135, including the investor who bid ₹144. The ₹130 and ₹120 bidders receive nothing and their blocked money is released.
Why the wrong options tempt: ₹144 assumes an art-auction logic where the highest bidder wins at his own price. ₹120 confuses the floor of the price band with the cut-off. ₹140 is simply an intermediate cumulative point where only 2,500 of the 5,000 shares would be sold.
2.What distinguishes a fixed price issue from a book built issue?
- a)In a fixed price issue, the price is discovered from investor bids after the issue closes
- b)In a fixed price issue, the company and the lead manager decide the price in advance, so investors know it when they apply
- c)In a fixed price issue, SEBI fixes the price of the shares
- d)In a fixed price issue, retail investors bid within a price band
Show the answer
Answer: (b) In a fixed price issue, the company and the lead manager decide the price in advance, so investors know it when they apply
"In a fixed price issue of shares to the public, the company in consultation with the lead manager (who is the merchant banker in-charge of the issue) would decide on the price... This information is made available to the investors when the issue is announced so that investors know the price at which the shares will be allotted to them at the time of making the application."
- Options A and D describe book building, where investors bid above a floor price or within a price band and a cut-off price is decided.
- Option C is wrong. SEBI regulations allow the issuer to decide the price. SEBI does not set it.
Where this is taught
- Series II-A · Chapter 9: Processes related to Public Offering of sharesintroduced here
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
- Series XII · Chapter 3: Primary Marketsintroduced here
Related terms
- ASBAThe mandatory payment mechanism for public and rights issues, in which your bank blocks the application money in your own account and debits it only if you actually get an allotment.
- Initial Public OfferThe first offer of a company's shares to the public — by fresh issue, by existing shareholders selling through an offer for sale, or both — after which the shares must be listed.
- Self Certified Syndicate BankA banker to an issue, registered with SEBI, that offers ASBA — blocking an applicant's application money in their own bank account until allotment, then debiting or releasing it.
- Price bandThe highest and lowest price at which a contract may trade on a given day, set as a percentage of its base price to block erroneous and manipulative orders.
- Book built issueA public issue in which the price is discovered from investor bids inside a price band, rather than fixed by the issuer in advance, with allotment made at the cut-off price.
- Green Shoe OptionAn option in a public issue to allot up to 15 per cent extra shares, parking the money to buy shares in the market for 30 days after listing if the price falls below the issue price.
- Basis of allotmentThe process of deciding how many shares each applicant in a public issue gets — all they applied for if the issue is not oversubscribed, otherwise a proportion worked out separately for each investor category.