WHAT — two numbers: a lower floor price and an upper cap price.
WHY — the company + merchant bankers don't know true demand, so they let the market bid inside the band. The final issue price (also called the discovered price) is set from where demand is strongest.
HOW — SEBI rules require the cap to be within 20% of the floor:
WHY — Processing millions of tiny 1-share bids is costly. SEBI also requires each retail application to be worth roughly ₹14,000–₹15,000 at the cap price, so lot size is chosen to hit that minimum.
HOW — lot size is computed so that (lot size) × (cap price) lands in that minimum-application window.
WHY it helps retail — small investors can't judge the exact price. Ticking cut-off guarantees their bid stays valid at the final price (as long as they blocked enough money), improving allotment chances.
HOW money is blocked — you apply at cut-off but your funds are blocked at the cap price (worst case). If the final price is lower, the extra is refunded/unblocked.
Recall Feynman: explain to a 12-year-old
A company wants to sell tickets to become part-owners, but doesn't know the right ticket price. So it says: "Price is somewhere between ₹100 and ₹105 — bid inside that." That's the price band. To avoid tiny messy orders, you must buy tickets in packs of 140 (the lot). After everyone bids, one winning price is chosen — the cut-off. Small kids (retail investors) can just say "I'll pay the winning price, whatever it is," and money is temporarily held at the top price ₹105 so they surely have enough; the leftover is returned.
Dekho, jab koi company pehli baar public ko shares bechti hai (IPO), toh usse pata nahi hota ki log kitna dene ko taiyaar hain. Isliye company ek fixed price ke bajaye ek price band deti hai — jaise ₹100 se ₹105. Neeche wali price ko floor aur upar wali ko cap kehte hain. SEBI ka rule hai ki cap, floor se 20% se zyada nahi ho sakta (yaani Cap ≤ 1.2 × Floor). Sab log is range ke andar bid karte hain, aur demand ke hisaab se ek final price nikalti hai jise cut-off price ya issue price bolte hain.
Lot size ka funda simple hai — IPO mein tum 1-2 share nahi kharid sakte, tumhe ek fixed bundle mein bid karna padta hai, jaise 140 shares ka ek lot. Ye isliye hai kyunki SEBI chahta hai har retail application lagbhag ₹14,000–₹15,000 ki ho cap price par. Toh lot size = (minimum amount ÷ cap price). Multiples mein hi apply kar sakte ho — 140, 280, 420… aur retail ki max limit ₹2 lakh hai.
Cut-off price retail investors ke liye ek shortcut hai. Tumhe exact price guess karne ki zarurat nahi — bas "cut-off" tick kar do, matlab "jo final price banegi wahi de dunga". Lekin dhyan do: paisa cap price par block hota hai (worst case), taaki agar price upar bhi jaaye toh tumhare paas paise ho. Agar final price kam nikli, toh extra paisa refund/unblock ho jaata hai — formula: refund = lots × lot size × (cap − final price). Yaad rakho: "Block at cap, charge at cut, cash back the gap."
Test yourself — Primary vs Secondary Market & IPOs
