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Initial Public Offerings (IPO)

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What Is The Cut-Off System In The Bidding Process?

In the last unit, we learned when and how shares are allotted to investors. But prior to that, investors are required to bid for a particular number of shares as per their eligibility. In India, there is a cut-off system in the bidding process of an IPO.

Retail investors are allowed to invest in IPOs using the cut-off system that indicates their willingness to subscribe to the shares at any price discovered within the price band. Supposedly, the price band for an IPO has been fixed at ₹350-₹360 and Mr. X places bids for a certain quantity of shares at a price of ₹354. Mr. X will not be eligible to receive the shares if the final price of allotment works out to be greater than ₹354 However, if Mr. X would have subscribed the issue at the final cut-off price, the shares would have been credited to his account at the final allotment price. Generally, the allotment price works out to be the upper end of the price band i.e., ₹360 in this case.

How does one increase chances for an allotment?

In case of oversubscription of issue, retail investors are eligible to receive a maximum of one lot per issue. If applications are made using multiple demat accounts under the ownership of a single person, the application shall be forfeited. 

Retail Investors can apply for shares under the HNI quota that requires bids for a minimum of ₹2 lakh or higher. However, the chances of allotment are even smaller as the HNI portion is likely to be more oversubscribed than the retail quota. 

The best available alternative hence is to apply from demat accounts of other family members to increase chances of allotment.

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