How IPO Allotment Works

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The process of IPO allotment is a long sequence of events which takes place when a private company is going public and offering its shares to the general public to raise money from them. Now, to understand how the allotment of those shares takes place, let us first understand in brief, the steps involved in the IPO launch.

Initially, a merchant banker/underwriter is appointed by the company launching IPO. With its assistance, a registration statement is prepared which is submitted to SEBI for its approval. SEBI has the power to give a green signal to the registration statement or stop it from moving ahead.

If SEBI gives its approval to the registration statement, the company is now required to prepare the Draft Red Herring Prospectus (DRHP). This prospectus needs to be prepared in order to safeguard the interests of the investors as it contains all the vital information about the company. It is a lengthy document and reading it will take time but it is totally worth it because it will give the true picture of the company.

DRHP contains crucial information like:

  • Reasons for going public
  • The intended use of proceeds of the IPO
  • Business-related information about the company
  • All the financial statements
  • Management related information
  • Risks related to the business
  • Size of the IPO and approximate number of shares being offered to the public in the IPO

SEBI reviews the DRHP and gives its recommendations. Then the price band is decided between which the shares of the company will be offered to the public. Meanwhile, the company is marketing the IPO through various media channels.

Now starts the process of book building. In this process, the underwriter of the offer collects data from various investors of the number of shares they are willing to buy at what price within the price band fixed earlier. When finally the pre-decided time of the book building process gets over, the final price at which the stock will be offered to the investors is decided.

This price is called the cut-off price.

Then comes the day of the listing of the offer and the listing price is decided based on the demand and supply of that particular stock on that day. Accordingly, the stock is listed at a premium, par or discount of the cut-off price.

Now, let us try to understand the process of IPO allotment.

At the time of IPO allotment, two cases can occur:

  1. When the number of applications for shares is less than or equal to the number of shares being offered. In this case, each investor will be allocated their desired number of shares. If the number of applications for lots is less than the number of lots offered, the issue is called “Undersubscribed“.
  2. When the number of applications for shares is more than the number of shares being offered. If the number of applications for lots is greater than the number of lots being offered, the issue is called “Oversubscribed“.

It is important to know that during IPO allotment, investors can apply for shares under various categories, which are:

  • Retail Individual Investors
  • Qualified Institutional Buyers (QIBs)
  • Non-Institutional Buyers
  • Anchor Investor

Different cases of IPO allotment under the above-mentioned categories have been described below.

IPO Allotment to Retail Individual Investors (RIIs):

Not less than 35% of the offer size is reserved for this category of investors. Resident and non-resident Indian individuals, Hindu Undivided Families (HUFs) who want to invest less than Rs 2 lakh worth of shares apply for IPO allotment under this category.

As per SEBI, the allocation for shares of an IPO in RII category is made in lots. The number of lots being offered in this category is fixed according to the total number of shares being offered and the total number of shares in one lot.

For example: If a company wants to offer 5 lakh shares to RIIs and the lot size has been decided to be 50 shares per lot, then, the number of lots being offered will be calculated as follows:

Number of lots being offered in IPO = Total number of shares/Number of shares in one lot

i.e. Number of lots (in this case) = 5,00,000/50 = 10,000

Since the issues are often oversubscribed heavily in this category, SEBI’s rules make sure that the maximum number of retail investors that can be allotted shares of the IPO. Allotment to retail individuals is done on the basis of the total number of shares offered in this category divided by the size of the lot. This gives the maximum number of retail investors (Maximum RII Allottees) that can be allotted shares.

Once the process of receiving all the applications is finished, bids that are not submitted properly are eliminated through a simple computer process. After that, the total number of bids are counted.

If the number of shares applied for is equal to or less than the number of shares offered, all the applicants are allotted their applied number of shares.

In case of oversubscription, there can be two cases:

  • Small oversubscription: In case of small oversubscription, first the minimum lot is allotted to all applicants and then, the balance shares are allotted proportionately to RIIs who applied for more than one lot.
  • Large oversubscription: If the issue is heavily oversubscribed, it is not possible to allot even 1 lot to all the applicants. So, the RIIs who will be eligible for the IPO allotment is determined through a computerised lottery process.
    The lottery system can be done on the basis of say, Permanent Account Number (PAN). So, if your PAN is selected, you will get the IPO allotment, otherwise, not.  

So, it is possible that many retail investors may not receive even a single lot despite applying to the maximum limit of Rs 2 lakh. This happened with many retail investors who desired IPO allotment of Alkem Labs and Dr Lal Pathlabs. The retail portion of their issues was oversubscribed up to three times.

To know the status of IPO allotment, websites of BSE or NSE can be checked.

IPO Allotment to Qualified Institutional Buyers:

50% of the offer size is reserved for this category. Commercial banks, mutual funds, etc. can apply through it. In case of QIBs, allocation of shares is at the discretion of the merchant banker. Allotment of shares is done on the proportionate basis.

For example, suppose an issue is oversubscribed 100 times. i.e. the number of applications for shares received is 100 the number of shares offered. Then, in this case, a QIB will receive 1/100th the number of shares it originally applied for.

IPO Allotment to Non-Institutional Buyers:

Not less than 15% is reserved for this category. Resident Indians, companies, societies, etc. who apply for more than Rs 2 lakh worth of shares fall in this category. In this case, allotment of shares is done on the proportionate basis.

IPO Allotment to Anchor Investor:

An anchor investor is that QIB which applies for Rs 10 crore or more worth of shares through book building process. Up to 60% of QIB category can be allotted to anchor investors. Their offer price is decided separately. Merchant bankers, promoters or their relatives are not allowed to invest under this category.

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