The Cut-Off Price is the final price at which shares are issued to investors in an Initial Public Offering (IPO) or other share auctions. Think of it as the 'winning' price in a grand auction for a company's stock. When a company goes public using a Book Building process, it doesn't set a single, fixed price. Instead, it offers a price range (or 'price band'), and invites investors—from large institutions to everyday individuals—to place bids for the number of shares they want and the price they're willing to pay. After the bidding period closes, the company and its Underwriters analyze the demand at every price point. The cut-off price is the highest price at which the company can sell all the shares it intends to issue. All investors who bid at or above this price are then eligible for Allotment of shares at this uniform cut-off price. It's the market's way of finding the perfect equilibrium between the supply of new shares and the public's demand for them.
Figuring out the cut-off price is part art, part science. It’s a dynamic process that unfolds in a few key stages.
Once an IPO is announced with a price band (e.g., $20-$25 per share), the bidding window opens. Investors submit their applications, specifying two things: the number of shares they want and the price they are willing to pay per share. In many markets, like India, retail investors are given a special option: they can choose to bid “at cut-off.” This means they agree to buy shares at whatever price is ultimately decided, giving up control over the price in exchange for a potentially higher chance of receiving shares.
During the bidding period, the underwriters (the investment banks managing the IPO) compile all the bids into a ledger, or 'book'. This book gives them a real-time snapshot of investor demand at every single price point within the band. For example, imagine a company is offering 1 million shares. The book might show:
This data is crucial. It tells the company how 'hot' the offering is and where the real appetite lies.
With the book built, the company and its underwriters sit down to make the final call. Their goal is to maximize the funds raised without jeopardizing the sale. In the example above, they can see there is demand for 1.5 million shares at the top-end price of $25. Since they are only selling 1 million shares, they have more than enough demand to set the price at the maximum. Therefore, they would likely set the Cut-Off Price at $25. Anyone who bid $25 (or chose the “at cut-off” option) would be eligible for allotment. Anyone who bid below $25 would unfortunately get no shares.
The cut-off price isn't just a technical detail; it has direct implications for your investment strategy when considering an IPO.
When you participate in an IPO, you face a strategic choice:
For a value investor, the excitement surrounding an IPO and its cut-off price can be a dangerous distraction. This price is determined by short-term market sentiment and demand, not necessarily the company's long-term Intrinsic Value. A stampede of eager buyers can easily push the cut-off price far above what the business is actually worth. The key is to do your own homework before the IPO. Calculate what you believe the company is truly worth. If the entire price band is significantly below your estimate, providing a healthy Margin of Safety, then participating might make sense. Otherwise, it's often wise to let the IPO dust settle. Great businesses can often be bought much more cheaply on the open market weeks or months later, once the initial hype has faded and the price is dictated more by business performance than by auction dynamics.