There has been a tremendous interest in the initial public offerings (IPO) that have been launched recently. IPOs are done through the book building process. In this type of process, the company that goes for an IPO, indicates a floor price when it files its red herring prospectus with the Securities and Exchange Board of India (SEBI).
So, what is cut-off price in an IPO?
The Lead Manager and the issuing company may than decide on a "cut off" price. Interestingly, according to the Securities and Exchange Board of India guidelines only retail investors are allowed to invest at the cut off price in an Initial Public Offering.
Investing by retail investors in an IPO
Retail investors can invest a sum of up to Rs 2 lakhs in an IPO. A sum above this would imply a high networth individual and certain norms would change accordingly.
IPO's work through the book building process, where the actual objective is price discovery of shares. This is important to help understand the risk appetite by investors.
There is first a floor price that is mentioned in the red herring prospectus. There is also a price band within which investors can bid.
After this process is complete on the basis of a dutch auction, a cut off price is arrived at. Retail investors are allowed to bid at the cut-off price.
Once this mechanism is complete, the price is determined and the offer is opened for subscription. After a few days the allotment of shares is done and the listing of the stock takes place.
Investors need to understand the process of applying online in an IPO correctly. Recently, there have been a number of successful IPOs, including the likes of Dr Lal's Pathological Labs, Alkem Labs and Interglobe Aviation etc.