The Indian primary market is in a sweet spot, as we all know. The number of initial public offerings on the main board (BSE and the National Stock Exchange) has been on the rise, and 2024 saw 90 companies tapping the market.

Of the 90, nearly 70 companies received bids for over 10 times; leading the list were Vibhor Steel Tubes (320 times), Manba Finance (224 times) and KRN Heat Exchanger (213 times). The IPOs of just six companies — Carraro, Suraksha Diagnostic, Zinka Logistics, Niva Bupa Health Insurance, Godavari Biorefineries and Entero Healthcare — saw muted response, with subscription of less than two times.

Almost all IPOs in the mainboard are through book-building process — where an issue price is discovered on the basis of demand received from the prospective investors at various price levels for their desired quantity in multiples of lot size. The market regulator, a couple of years back, mandated that the difference between the floor price and the upper price band should be at least 5 per cent.

Due to the frenzy, many investors are not getting allotment, leaving them disappointed even though they apply at cut-off option. According to current regulatory norm, in case of over-subscription, a computerised lottery has to be conducted so that each applicant gets an equal opportunity to receive an allotment.

Irrelevance of cut-off option

A cut-off option allows investors to subscribe to the shares at any price discovered within the price band.

For example, if a company comes out with a price band of ₹100-150 for an IPO, investors can bid at any price between ₹100 and ₹150. However, a person who applies at ₹100 may not be eligible to receive allotment, even if the company chooses to fix the IPO price at ₹101 post the price-discovery exercise. For those who apply, at cut-off, it will consider application price at upper end (i.e. ₹150) but they will still be eligible to receive allotment of shares even if the company fixes the IPO price at lower end, i.e. ₹100. Investors (retail) need to pay just the price fixed. So, applying through cut-off will enhance the chances of getting allotment.

A few years back, Parag Milk had fixed the IPO price at ₹215 at the lower end of the price band ₹215-227, that too due to lack of investor interest. In fact, the company was forced to lower the price band itself from ₹220-227 and extended the IPO window by another day. When the issue eventually sailed through, the IPO price for retail investors was fixed even lower at ₹203.

However, none of the issues that came out in recent years had fixed the IPO price other than the upper end of the price band. Of late, nearly 80-85 per cent, retail applications were at the cut-off price, instead they can apply at upper end which amounts to the same.

The current trend clearly means irrelevance of applying at cut-off while at the same time, denying the real meaning of price discovery as well.