IPO Allotment Process is the logical and step-wise method of determining the allotment of shares to investors by the offer’s registrar.
With the revival of the IPO market, we have got several queries related to the IPO allotment process in India. Amid the strong response to the public offer of IRCTC which has already got oversubscribed with one day remaining, investors are wondering how the process of IPO allotment works in India, if they should apply for one lot or more and if applying early will improve their allotment chances.
In this article, we take the example of the IRCTC IPO, and here are some vital details of the public offer.
IRCTC IPO details
|Subscription Dates||30 September – 3 October 2019|
|Price Band||INR315 – 320 per share (retail discount – INR10 per share)|
|Offer For Sale||20,160,000 shares (INR627.88 – 637.96 crore)|
|Total IPO size||20,160,000 shares (INR627.88 – 637.96 crore)|
|Minimum bid (lot size)||40 shares|
|Minimum investment||INR12,200 – 12,400 (adjusting for retail discount)|
|Face Value||INR10 per share|
|Listing On||NSE, BSE|
We have taken this example to understand how the IPO allotment process works for retail investors. In short, the allotment for retail investors is based on a formula that treats every applicant equally irrespective of the application size.
The formula allots at least one lot to every applicant provided there are enough shares in the aggregate. For a longer explanation, read on.
Process of IPO allotment: Retail quota and lot size
As one can see, IRCTC is offering 20,160,000 shares in the IPO in the price range of INR315-320 per share. Out of these, 160,000 shares are reserved for employees and 20,000,000 shares are offered to Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs) and Retail Individual Investors (NIIs).
As mentioned above, retail investors have a 35% allocation in this IPO which works to 7,000,000 shares. It is important to note that this arrangement is not set in stone and for companies without consistent profits, retail investors will be eligible for only 10% allocation. This is done by SEBI in order to safeguard small investors.
Since IPO applications are made in multiples of lot size, one can either apply for minimum 40 shares or 80 shares, 120 shares and so on. For mainboard IPOs, minimum lot size is kept in a way which translates into a bid of less than INR15,000. There is a popular misconception among investors that applications in multiples of this amount will improve their allotment chances. However, this is far from reality.
Note: The lot size is applicable only for IPO allotment and after listing, investors can sell their shares in market in any quantity.
IPO Allotment Procedure: Cut-off price
The price band in this case is INR315 – 320 per share which means investors can make their applications at any price point within this range. The downside of selecting a specific price is that if there are more buyers above your price point, your application will be out of consideration. Investors can also choose cut-off option which is a way of saying that the investor is willing to pay any price within the price band.
Basis of IPO allotment
Following the IPO subscription dates, the ball moves in the court of the registrar of the offer. The IPO registrar is in charge of finalizing the allotment on the basis of guidelines prescribed by SEBI. In October 2012, the market regulator made some changes in the IPO allotment process and the new guidelines treat all Retail Individual Investor (RII) applications equally. Under the new IPO allotment process, applicants are allotted at least the minimum application size, subject to availability of enough shares in the aggregate. Following this guideline, two broad scenarios emerge and the system works in both cases.
IPO allotment process in case of undersubscription
If the aggregate demand of shares is less than the number of shares available in the retail category, every investor will get full allotment, irrespective for their application size.
On a lighter note, the chances are high that an IPO isn’t investment worthy if there is not enough demand for it. In such a case, investors wouldn’t lose big time by simply following the herd and skipping the IPO altogether. Once in a while, there may be instances of a company’s business model not understood well by the market and in such cases, further research and discretion are highly recommended before applying in the public offer. At times, taking a long-term view and discarding temporary setbacks can also help.
IPO allotment process in case of oversubscription
In the event of aggregate demand exceeding the number of shares available, the registrar will try to accommodate everyone by issuing one lot to as many applicants as possible. For our example, 7 million IRCTC shares need to be divided in the lots of 40 shares (under the current guidelines, no allotment is less than the minimum bid lot size). As a result, maximum number of retail investors who can receive allotment = 7,000,000/40 = 175,000.
Read Also: 7 common IPO mistakes and how to avoid them
At this point, two situations may arise in the process of IPO allotment.
The IPO is oversubscribed but not by a wide margin. Given that there are some investors applying for multiple lots, the number of applications is less than the maximum allottees. For our example, let’s assume there were 150,000 applicants, including 30,000 who applied for two lots while the remaining 120,000 applied for one lot of 40 shares. In this case,
Total demand = (120,000*40) + (30,000*80) = 7,200,000 shares
What this means is that everyone will get one lot and there will still be 1 million shares left. These shares will be proportionately allotted to the 30,000 investors who applied for two lots.
The IPO is oversubscribed by a wide margin. In this case, the number of applications is higher than the maximum possible allottees. In our example, let’s assume the number of applications received is 200,000. Since the registrar has to treat all applications equally, the 175,000 applicants will be randomly selected and this means 25,000 applicants will get no allotment.
Role of luck in IPO allocation process
As one can see, it is largely a matter of luck in case of oversubscription. Since IRCTC already received 6X subscription in the retail quota, there are going to be more unsuccessful applicants than the successful ones. Unfortunately, most IPOs deserving your investment would be oversubscribed!
Despite the important role luck plays in IPO allotment, investors can follow some simple steps and boost their chances in IPO allotment process. In case you landed on this page looking for latest allotment status, head to this page. IPO allotment is an important step in the overall IPO process which is quite a long and exhaustive procedure.
We hope you liked going through this guide on IPO allotment process in India as of now. SEBI keeps making changes to rules according to the prevailing market conditions and thus, these rules are subject to change in the coming years. What’s unlikely to change though is the regulator’s commitment towards small investors.