It is easy to assume SEBI approves an IPO's price, or that the price is an average of all bids. Neither is true. SEBI has no role in fixing it. In a book-built issue, investors bid within a price band, and the company and its bankers set the final price from those bids. That process is bookbuilding, and it explains the price band and Cut-off box on your IPO application.
What
Is Bookbuilding in an IPO?
Bookbuilding is a way of discovering the price of shares in an initial public offering. Instead of one price, the company discloses a band.
The floor price is the lowest you can bid; the cap price is the highest.
Each bid records a price and a quantity. Together, the bids form the "book": how many shares investors want at each price.
The Book
Running Lead Managers (BRLMs) are the investment banks running the issue. After bidding closes, they fix the final price with the company, based on that demand.
Book
Building Process of IPO, Step by Step
1. Offer document: The company files a red herring prospectus, with full details of the issue except the final price and number of shares.
2. Price band: The floor and cap are announced at least two working days before opening. The gap between them must be 5% to 20%.
3. Anchor round: Institutions called anchor investors bid in a separate round before the public issue.
4. Bidding: The issue stays open three to seven working days, or up to ten if the band is revised. Retail investors can revise or withdraw until closing.
5. Pricing: The price is fixed, and the final prospectus carrying it is filed with the Registrar of Companies.
6.
Allotment and listing: You can then check your IPO
allotment status online. For issues opening on or after 1 December
2023, SEBI requires listing within three working days of closing.
Also Read: After allotment and listing, investors may also want to understand the IPO Lock In Period
Explained: A Guide for Retail Investors to learn when certain shares can be sold.
How the Cut-off Price Is Found: A Worked Example
The figures are hypothetical; the method follows SEBI's own illustration.
A company offers 10,00,000 shares at a band of ₹240 to ₹252. Bids arrive like this:
Bid price | Shares bid | Cumulative shares | Issue covered |
₹252 | 3,00,000 | 3,00,000 | 30% |
₹250 | 3,00,000 | 6,00,000 | 60% |
₹248 | 5,00,000 | 11,00,000 | 110% |
₹245 | 4,00,000 | 15,00,000 | 150% |
₹240 | 6,00,000 | 21,00,000 | 210% |
Demand is added from the top down, because anyone willing to pay ₹252 will also pay ₹248. The book cuts off at ₹248, the highest price at which every share finds a buyer.
The price can be fixed at or below that level. Nothing is averaged.
A retail bid at
₹245 becomes invalid if the price is ₹248. A Cut-off bid stays valid at whatever price is set. Only retail individual investors, bidding up to
₹2,00,000, get this option.
Say you tick
Cut-off for one lot of 59 shares. ₹14,868 (59 × ₹252) is blocked in your bank account. If you are allotted at ₹248, ₹14,632 is debited and ₹236 is released.
IPO
Book Building vs Fixed Price Issue
In a fixed price issue, the company states one price upfront.
Point | Book building issue | Fixed price issue |
Price known | After bidding closes | Before the issue opens |
What you choose | Price within the band, and quantity | Quantity only |
Retail share of net offer | At least 35% (profitability route) | At least 50% initially |
Cut-off option | Available to retail | Not applicable |
Benefits of Book Building
The company gets a demand-based price. For you, the gains are practical:
• The book is open. NSE and BSE display demand by investor category during bidding.
• Your money stays put. Under ASBA (Application Supported by Blocked Amount), the bid amount is blocked, not debited, until allotment.
• The Cut-off option removes the risk of bidding below the final price.
There is a catch. Strong demand shows an issue is popular, not that its price is fair.
These safeguards sit within the SEBI
rules for IPO investments, and SEBI does not recommend any issue.
Limitations
You Should Know
• A discovered price is not necessarily a fair one. It reflects a few days of demand, and hype can push it to the cap. Shares can list below the issue price.
• Oversubscription means a lottery. When retail demand exceeds the retail portion, the minimum lot goes to applicants picked by a draw of lots.
Until allotment is final, the blocked amount cannot be used elsewhere. The band is only a starting point. To judge the price, you still need to analyse an IPO on its business, valuation and risks.
Investor Consider First to learn how these two fundraising methods differ.
Before
You Bid in Your Next IPO
Bookbuilding turns a band into a price using real demand. Before your next application, read the "Basis for Issue Price" section of the offer document and note the band and lot size. Choose between a specific price and Cut-off, knowing a bid below the final price is rejected.
On Indiabulls
Securities, you can apply for an IPO from the app's IPO section using a
UPI mandate. Approve the mandate before 5:00 PM on the closing day, or the bid will not count.
