How IPO Pricing Works - Book Building vs Fixed Price Issues
Last month, two NRIs from Dubai applied for the same IPO. Both invested Rs 2 lakh.
One chose the "cut-off" option in a book-built IPO. The other picked a specific price within the band. The first got allotment at the final discovered price. The second missed out because his bid fell below the cut-off.
Same IPO. Same amount. Different outcomes.
The difference? Understanding how IPO pricing actually works.
At Belong, we see this confusion regularly in our WhatsApp community. NRIs understand stocks. They understand mutual funds. But IPO pricing mechanisms remain surprisingly unclear.
This guide explains exactly how companies set IPO prices in India. You will learn when to bid at cut-off and when to pick a specific price. Find out which method suits your investment style.
Two Ways Companies Price an IPO
When a company goes public in India, SEBI allows two pricing methods.
Fixed Price Issue: The company announces a single, non-negotiable price before the IPO opens. You know exactly what you will pay per share. Simple and predictable.
Book Building Issue: The company announces a price range instead. Investors bid within this band. The final price is discovered based on overall demand.
SEBI introduced book building in 1995 to make the IPO process more efficient. Today, nearly all mainboard IPOs use book building. Fixed price issues are more common in smaller SME IPOs.
👉 Tip: Check the Red Herring Prospectus (RHP) to know which method your target IPO uses. It also tells you whether NRIs are eligible to participate.
How Book Building Discovers the Right Price
Think of book building as an auction with boundaries.
The company and its lead manager set a price range. SEBI mandates this range cannot exceed 20% between the floor and cap price. For example, if the floor is Rs 100, the cap cannot exceed Rs 120.
Investors submit bids at various prices within this band. After the bidding window closes, the company analyses demand at each price level. The "cut-off" price is then decided based on where maximum demand meets available shares.
All successful applicants pay this cut-off price, regardless of what they bid.
This method reflects actual investor appetite. If demand is strong at higher prices, the cut-off settles near the cap. Weak demand pushes it toward the floor.
How Fixed Price Issues Work
Fixed price issues are straightforward.
The company sets one price. No bidding. No price discovery. You apply at that announced price or you do not apply.
Demand is revealed only after the issue closes. If the IPO is oversubscribed, allotment happens proportionally or through lottery.
This method suits smaller companies that want simplicity. It also works when the issuer has a loyal retail investor base and wants to avoid pricing uncertainty.
However, fixed price issues carry a risk. If the company sets the price too high, investors may avoid it. Too low, and the company leaves money on the table.
👉 Tip: In fixed price issues, you cannot bid at cut-off. The price is already fixed. Make your decision based on the company's fundamentals, not pricing tactics.
Cut-off Price Bidding: What Most Blogs Get Wrong
Here is where many NRIs make mistakes.
In book-built mainboard IPOs, retail investors can choose to bid at the "cut-off" price. This means you agree to pay whatever final price is discovered after the bidding closes.
But this option is not available to everyone.
According to SEBI regulations, cut-off bidding is permitted only for Retail Individual Investors (RIIs). That means applications up to Rs 2 lakh.
If you apply for more than Rs 2 lakh, you fall into the Non-Institutional Investor (NII) category. NIIs must bid at a specific price within the band. Cut-off option is not available.
This catches many NRIs off guard. They apply as HNIs, choose a price below the eventual cut-off, and miss allotment entirely.
In SME IPOs, the rules differ further. SEBI replaced the RII category in July 2025. The new term is "Individual Investors." These investors must apply for a minimum of 2 lots. Cut-off bidding is not permitted in SME IPOs at all.
What NRIs Need to Know About IPO Bidding
NRIs can invest in Indian IPOs. But there are specific rules.
First, you need an NRE or NRO account without PIS linkage. IPO investments do not fall under the Portfolio Investment Scheme. So PIS approval is not required.
Second, the company must permit NRI participation. Always check the RHP. Some companies restrict IPO subscriptions to Indian residents only.
Third, different application forms exist based on repatriation choice.
Blue forms are for NRIs investing on a repatriation basis through NRE accounts. White forms are for non-repatriable investments through NRO accounts.
The ASBA (Application Supported by Blocked Amount) process applies. Your bank blocks the application money. Funds are debited only if you receive allotment. No allotment means automatic release of blocked funds.
👉 Tip: If you invest through an NRE account, both your principal and profits can be freely repatriated abroad. NRO repatriation is limited to USD 1 million per financial year.
Why Book Building Usually Benefits Investors
The book building process offers several advantages.
Price discovery is market-driven.
The final price reflects genuine investor interest, not just the company's optimism.
Transparency during bidding.
You can track demand on stock exchange websites while the issue is open. If you see weak institutional interest, you might reconsider.
Flexibility in bidding.
Retail investors can use the cut-off option. Sophisticated investors can target specific prices.
Reduced underpricing.
Research shows that book-built issues tend to be priced closer to fair value than fixed price issues.
Fixed price issues can sometimes offer better listing gains if the company has intentionally priced conservatively. But this is a gamble, not a strategy.
The 2025 SEBI Changes for SME IPOs
SEBI introduced significant changes for SME IPOs in 2025.
From July 2025, the minimum application for individual investors in SME IPOs is 2 lots, not 1. Applications of 3 lots or more fall into the NII category.
Critically, cut-off bidding is no longer permitted in SME IPOs. Every investor must specify a price within the band.
This change reduces speculation. It forces investors to think about valuation before bidding, rather than blindly accepting whatever price emerges.
For NRIs targeting smaller companies, this means more homework upfront. You cannot rely on the cut-off safety net.
How Allotment Works After Bidding Closes
Once bidding ends, the registrar processes applications.
In oversubscribed IPOs, allotment follows category-specific rules.
Retail category: If oversubscribed, minimum lot sizes are first allotted to as many applicants as possible. Remaining shares are distributed proportionally. In heavily oversubscribed issues, lottery determines allocation.
NII category: Proportionate allotment applies. If the NII portion is 10x oversubscribed, you receive roughly 10% of your bid quantity.
QIB category: Qualified Institutional Buyers receive proportionate allotment based on discretion of lead managers.
The refund process is automatic through ASBA. Unblocked amounts return to your account within a few days of allotment finalisation.
👉 Tip: Many HNIs use IPO financing from banks or NBFCs to increase their application size. Interest costs eat into listing gains. Calculate carefully before leveraging.
Which Method Should You Prefer?
Neither method is universally better. The right choice depends on context.
Choose book building when:
You are comfortable with price uncertainty. You trust institutional investor judgment. You want to see real-time demand data before the issue closes. The IPO is from a well-known company with clear valuation benchmarks.
Consider fixed price when:
You prefer certainty over discovery. The company has a track record you understand well. You are investing in a smaller SME issue where the promoter has priced conservatively.
For most mainboard IPOs, book building is the only option anyway. SEBI requires it for companies that do not meet certain profitability criteria. This includes companies following the QIB route.
IPO Taxation for NRIs
Gains from IPO investments are subject to capital gains tax.
Short-term capital gains (holding period less than 12 months) are taxed at 20% from FY 2024-25 onwards.
Long-term capital gains (holding period more than 12 months) up to Rs 1.25 lakh are exempt. Gains above this threshold are taxed at 12.5%.
TDS applies when NRIs sell shares. Your broker deducts tax at source before crediting sale proceeds. You can claim credit for this TDS while filing your Indian tax return.
Does your country have a Double Taxation Avoidance Agreement (DTAA) with India? If yes, you may avoid paying tax twice on the same income.
👉 Tip: UAE has a DTAA with India. Understand the specific provisions to claim relief correctly.
What About GIFT City IPOs?
GIFT City offers an alternative route for listing.
The IFSCA Listing Regulations 2024 provide a globally benchmarked framework for listing securities in International Financial Services Centres. Both Indian and foreign companies can list here.
IPOs in GIFT City trade in foreign currencies. This appeals to NRIs who want USD-denominated investments without converting to rupees.
XED Executive Development became India's first GIFT City IPO in recent years. As this ecosystem matures, more companies may choose GIFT City IPO listings, especially those targeting global investors.
The tax benefits under Section 10(4D) make GIFT City attractive for certain fund structures. Capital gains for non-residents from specified IFSC funds are exempt from Indian tax.
Explore GIFT City mutual funds and alternative investment funds if IPO access through this route interests you.
Common IPO Bidding Mistakes NRIs Make
After advising NRI investors for over a decade, certain patterns repeat.
Bidding below cut-off as an NII.
If you apply above Rs 2 lakh, you cannot use cut-off. Choose a price at or near the cap if you genuinely want allotment.
Ignoring RHP restrictions.
Some companies exclude NRIs or restrict participation to non-repatriable basis only. This information is clearly stated. Read it.
Not having documentation ready.
KYC, demat account, and bank linkage take time. Start the process well before an IPO you want opens.
Confusing IPO with secondary market rules.
PIS requirements apply to stock market trading, not IPO applications. Do not let this confusion stop you from participating.
Chasing hype without research.
Oversubscription numbers mean little about long-term value. A 100x oversubscribed IPO can still list at a loss if pricing was aggressive.
Learn from these common NRI investment mistakes before committing capital.
Step-by-Step: How to Apply for an IPO from Abroad
Here is the process for NRIs:
Ensure you have an NRE or NRO bank account and an NRI demat account.
Check if your bank offers ASBA through net banking. Most major banks do.
When an IPO opens, log into your net banking portal and navigate to the IPO section.
Select the IPO, choose investor category (Retail or NII based on amount), enter bid quantity and price.
For retail applications in book-built issues, you can select cut-off. For NII applications, choose a specific price.
Submit and authorize fund blocking.
Track allotment status after the issue closes. Shares credit to your demat account if successful.
Unblocked funds automatically return if you do not receive allotment.
The entire process is digital. Physical forms are rarely needed unless your bank lacks online IPO functionality.
👉 Tip: Use banks with robust NRI digital infrastructure. ICICI, HDFC, and SBI offer comprehensive online IPO application facilities.
Beyond IPOs: Building a Complete India Portfolio
IPOs are exciting. But they are just one piece of a broader investment strategy.
Consider diversifying across mutual funds, fixed deposits, and alternative investment funds.
For global diversification within a regulated Indian framework, explore GIFT City funds. Options include DSP Global Equity Fund and Tata India Dynamic Equity Fund. You can also consider Edelweiss Greater China Equity Fund and Sundaram India Mid Cap Fund.
Track market movements using tools like our GIFT Nifty tracker.
When you plan to repatriate funds from India, understand the repatriation rules and documentation requirements.
Explore upcoming IPO opportunities on our platform.
Frequently Asked Questions
Can NRIs bid at cut-off price in IPOs?
Yes, but only if applying in the retail category with an investment up to Rs 2 lakh. For applications above Rs 2 lakh (NII category), cut-off bidding is not permitted. You must specify a price within the band.
What is the difference between book building and fixed price IPO?
In book building, the company provides a price range and the final price is discovered through investor bids. In fixed price issues, the company sets one unchangeable price before the IPO opens. Book building reflects market demand; fixed price reflects company judgment.
Which account should NRIs use for IPO investment?
Use an NRE account for repatriable investments and an NRO account for non-repatriable investments. PIS approval is not required for IPO applications. Ensure your bank supports ASBA facility for online applications.
How is the cut-off price determined in book building?
The cut-off price is determined after analyzing all bids received during the subscription period. It is the price at which maximum demand meets available shares, within the announced price band. All successful applicants pay this price regardless of their bid amount.
Can NRIs apply for SME IPOs?
Yes, NRIs can apply for SME IPOs if the issuing company permits. However, since July 2025, cut-off bidding is not allowed in SME IPOs. Investors must bid at a specific price within the band. Minimum application is 2 lots.
Join Our Community
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Disclaimer: This article is for informational purposes only and does not constitute investment advice. IPO investments carry market risks. Past performance does not guarantee future results. Please consult a qualified financial advisor before making investment decisions. Tax rules are subject to change. Verify current regulations with official sources like SEBI and RBI.
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