I’ve not been allotted any shares in the last five IPOs. What am I doing wrong and what can I do to increase IPO allotment chances?
This is one of the most common complaints of investors after not getting shares allotted in IPOs. Whether you are a newbie or an experienced one, allotment in recent IPOs has left investors confused about the process. As most of the recent public offers are attracting massive subscriptions, it is becoming harder for investors to get allotments. In our social streams and on this website, we are often asked about the IPO allotment process so we have put together this guide. Hopefully, this explains the process while also helping to increase IPO allotment chances.
First of all, we need to understand the IPO allotment process in detail before taking steps to improve allotment chances. While there is no guarantee to get confirmed IPO allotment, these tips will take you closer to your goal.
How to increase IPO allotment chances – Understand process first
Prior to October 2012, market regulator SEBI had mandated registrars to allot shares in the retail category on a proportionate basis in case of oversubscription. This means that an investor making an application of INR100,000 or INR150,000 stood to be allotted more number of shares than an investor making a bid of INR15,000. In IPOs where the demand is equal or less than the shares available, it used to work fine.
However, the process naturally helped big applications when the demand exceeded availability. Many high-networth individual (HNI) investors channeled their money into retail category to corner shares. Naturally, it did not go down very well with SEBI.
As a result, SEBI implemented a new IPO allotment process in October 2012 that called for all retail individual investor (RII) applications to be treated equally. Under the new system, applicants are allotted at least the minimum application size, subject to availability of shares in the aggregate. Again, if the demand is less than the number of shares available in the retail category, every investor will get full allotment.
In case of demand exceeding the availability of shares, then the maximum number of investors who can be allotted the minimum bid lot will be computed by dividing the total number of equity shares available for allotment to the category by the minimum bid lot. Under the current guidelines, no allotment is less than the minimum bid lot size.
Read Also: IPO Process in India – All you want to know
Maximum RII Allottees = (Total number of shares available for RIIs)/Minimum bid lot
Practically speaking, investors can only hope to get a single lot in oversubscribed IPOs. Here is a longer explanation of how the IPO allotment process works in real life.
How to increase IPO allotment chances?
Now that we know the logic behind allotment, it is time to see what can be done to increase IPO allotment chances. As one can sense, there is not much that investors can do if there is too much demand for IPO shares. Nevertheless, there are ways to avoid the pitfalls and optimize the allotment results. Here are some simple ways to increase IPO allotment chances:
Avoid big applications
As mentioned above, SEBI’s current allotment process treats all retail applications (less than INR200,000) equally. This means there is no advantage of making a big application of INR100,000 in case of oversubscription. Big applications only make sense in large IPOs where there is reasonable surety of retail segment remaining undersubscribed.
A recent example is the INR11,372.64 crore IPO of General Insurance Corporation (GIC) where every retail investor stood a chance to get allocation. Although the reasons behind this undersubscription were different, it served as a good example.
Use multiple demat accounts
Since large applications are ineffective, one can go for using the same amount in making multiple applications from different demat accounts. Probability of successful allotment increases to six times when one goes for six applications of single lots than making one application of six lots. It is important to understand that these demat accounts need to be linked to different PAN accounts. In other words, one can’t make more than one application in his/her own name.
Asking friends and family members to open demat accounts and apply in upcoming IPOs is a perfect method to improve IPO allotment chances. Opening new demat accounts is a breeze nowadays and several brokers open demat and trading accounts for free. What’s more, it is a matter of just a few minutes with e-KYC.
Bid at cut-off price, always
This is a tricky part as investors are often confused between price bids and cut-off bids. By selecting a specific price, investor tells the registrar that s/he is interested in buying shares at that price while cut-off simply conveys that the investor is flexible to buy at any price within the price band. This price is determined as the point of maximum demand.
As an example, in a price band of INR100-105 per share, no bids below INR105 per share will be considered in allotment if the cut-off price is decided at INR105 per share. Thus, retail investors should place their bids at either cut-off or maximum price to increase IPO allotment chances.
Avoid last minute rush
Many investors rely on subscription levels in HNI and QIB categories before placing their bids on the last day. This may be quite a smart way to figure out how an IPO is perceived by these well-informed categories but could turn out to be a disaster if your bank’s internet banking is down temporarily. One may not have funds in other bank accounts and additional work of adding demat account details may be required at the last moment.
Of course, there is always the option of filling up physical forms, this is hardly an effective solution at the last moment. Even if one manages to fill the form, it may be too late. Several banks stop accepting applications after 4 PM on the last day.
Avoid technical rejections
IPO applications may be rejected on technical grounds without the investor knowing about the errors. Starting 1 January 2016, all IPO applications are mandatorily through ASBA (Application Supported by Blocked Amount) mechanism and most investors apply through netbanking which minimizes potential errors of spelling mistakes, name mismatch, inaccurate cheque details. Nevertheless, applications are still rejected on technical grounds and something as simple as different names in bank account and PAN may result in a lost opportunity.
Buy parent company shares
Here is another one and an excellent option where it is applicable. Having at least one share of the parent or holding company in the demat account will make the investor eligible to apply in shareholder category. It should be noted that the shares of the parent company must be in investor’s demat account as on the date of Red Herring Prospectus.
Of course it applies only in the cases where the parent of the IPO-bound company is already listed and there is a reservation for shareholders in parent company. In the recent concluded IPO of Ujjivan Bank, retail category was subscribed 48 times while the shareholder category was subscribed only 4 times. Needless to say, chances of allotment are much better in the shareholder category. The icing on the cake is that one can place bids in both categories!
These are simple yet effective steps that enhance IPO allotment chances and move you closer to confirmed IPO allotment.
Also, check our page of IPO allotment status for the latest updates. Happy investing!