@Meher_Smaran can u explain the use of this “BIDS” while applying for an IPO in detail?
The sum total of all the bids is used to determine the cut-off price and in current times, when most of the IPOs are over-subscribed, the relevance of multiple bids is very low as the cut-off price is mostly assumed to be the highest price in the offer range.
In issues, where the subscription may not be full and in a scenario where the probability of the cut-off price not being the highest price in the range is high, that’s when the feature of multiple bids truly comes into play.
To give you an example, Let’s assume that company XYZ came up with an IPO with a book-building issue that is that the company wants investors to decide the price at which the company wants to allocate the shares to its investors.
Let’s say the issue range is between 100 and 110 and the lot size is 150:
100 becomes the floor price, 110 becomes the cap price and the sum total of all the bids becomes the cut-off price at which the shares will be allotted to investors.
You will be allowed to place 3 separate bids out of which the bid with the maximum amount (qty and price combined) will be blocked for your application.
If your bid 1 is 450 quantity at 100, bid 2 is 300 qty at 105, and bid 3 300 qty at 110, 45000/- will be blocked against your application (450*100) and if the cut-off price is at 105, your bid 2 & 3 will be the valid bids which will be considered for allotment.
While this is the theoretical side of things, practically speaking, in case of oversubscription of the IPO, the cap price i.e., 110 will generally be the cut-off price as maximum investors want to get allotment and they will try to place the bid at the maximum price. so all the exercise of bid 1 and bid 2 here will not be of any use and only the 3rd bid at 110 will be considered valid.
The only case where the concept of bidding is truly beneficial is in the case where there is a lack of investor interest and the cut-off price is not the cap price (higher end of the band) but either the floor price or any other price within the range.
Needless to say, in fixed issue IPOs where the company themselves fix the issue price (let’s say 110 is the price by taking the above example), there is no use of bids. Whatever you bid will be considered as your final valid bid.
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