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Saturday, February 18, 2012

Apply MCX IPO at Cut-Off price

The MCX IPO has come up with a very wide price band of Rs. 860 to Rs. 1032 and it is very difficult for any retail investor to determine the price to bid at in the book building process.
There has already a frenzy spreading in the market about the MCX IPO. Business channels are continuously bombarding investors with ‘grey market premium’ updates.

Mr. Joshi was also
confused about the price at which he should bid in the MCX IPO.
If you too are a retail investor like Mr. Joshi, take advantage of your privilege and opt for the ‘cut-off price’ option while subscribing to the MCX IPO or any other IPO/FPO.
Whether you are applying on-line or submitting physical application, you should not forget to tick the 'cut-off price' option.

Suppose Mr. Joshi bids at Rs. 1032 and discovered price or issue price comes as Rs. 1020 then this means – Mr. Joshi has unnecessarily paid Rs. 12 extra per share (though he shall get refund of the excess amount later)
On the flip side if Mr. Joshi bids at Rs. 1010 and cut-off (or discovered price) settles at Rs 1020, Mr. Joshi shall not get a single share.

So what Mr. Joshi should do?
And the answer is simple- Mr. Joshi should bid at the 'cut –off price'. This means Mr. Joshi shall get shares (considering Mr. Joshi gets the allotment in the IPO) at the cut-off price.
Discovered price is the maximum price at which issue gets completely subscribed (100 % subscribed).
But one thing Mr. Joshi should know that he shall have to submit the full amount (ceiling price or highest price of the band multiplied by the bid quantity) at the time of subscription.
In case discovered price derived is less than the ceiling price, Mr. Joshi shall get the refund of the balance amount.

Suppose Mr. Joshi applies for 192 shares  opting for the  ‘cut-off’ option , then he shall have to deposit Rs. 1,98,144 (192 X 1032)  at the time of the application.
If discovered price comes at Rs. 1020, then Mr. Joshi shall get a refund of Rs. 2304 (12 X 192). 

In L&T finance holding's IPO, price band was Rs. 51- Rs. 59 but the issue was offered at Rs. 52.
To cut a long story short, retail investors should bid any IPO at the cut-off price.

PS: In the aforesaid example it is presumed that Mr. Joshi gets the full allotment. Usually when an IPO is over-subscribed allotment is done proportionately.


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