It is well established that retail investors get either 35% or 10% reservation in mainboard IPOs. However, in some cases, there are shares reserved for employees and shareholders in parent company. It creates confusion as if the reservation for employees and shareholders impacts the number of shares available for retail and HNI investors. In this article, we take a closer look at employee and shareholder reservation in IPOs and how retail investors can benefit from it.
First of all, the reservation for both these categories is offered over and above the shares registered for retail investors. The three regular categories of QIB, NII, and RII investors are offered specific number of shares in an IPO, which is determined on the basis of the company’s past profitability track. The combined number of shares to these three categories forms the core of the offer and thus, is rightly called “Net Offer”. Any shares offered to employees and shareholder in parent company are offered over and above this Net Offer without impacting the shares available for retail and other investors.
As an example, the recently concluded IPO of IRCTC had a Net Offer of 20,000,000 shares with specific reservation for QIB (50%), NII (15%) and Retail investors (35%). In addition, the company earmarked 160,000 shares for allotment to its eligible employees which increased the offer size to 20,160,000 shares. As a result, the final reservation and subscription looked like this.
Similarly, Ujjivan Bank IPO had a reservation of 20,833,333 shares for shareholders of the parent company Ujjivan Financial Services Ltd (UFSL). Once again, these shares were not part of the Net Offer made to QIB (75%), NII (15%) and Retail investors (10%).
In some cases, there could be reservation for both these categories. One such example is the upcoming IPO of SBI Cards and payments.
How to benefit from shareholder reservation in IPOs?
Now that we have established that this reservation doesn’t impact the shares allotted for retail investors, the next question arises if there is a way investors can benefit from this. The answer is yes! While one needs to be an employee in the company to take advantage of the employee reservation, almost anyone can apply under the shareholder quota, effectively doubling his chances of allotment. Of course, investors will need to have at least one share of the parent company in their demat account as of the record date to become eligible in this category.
As a result, retail investors can make two applications in such issues and both will be considered valid. However, there is a catch. Read on.
What’s the maximum application size in shareholder reservation in IPOs?
What’s more, maximum application size under shareholder or employee reservation is often bigger which implies higher allotment in case of under-subscription. While offer-specific details will be available in IPO prospectus, it is observed that SEBI allows applications up to INR500,000 (net of discount, if any) under employee category while shareholders can bid for the entire reservation portion.
The catch here is that if investors plan to place two applications under retail and shareholder quota, both applications need to be individually less than INR200,000. Effectively, an application above INR200,000 in the shareholder quota with an application in the retail quota will be considered multiple bids, and therefore, will be rejected.
How is allotment done in shareholder category?
When it comes to allotment, bid amount of up to INR200,000 (net of discount, if any) only is considered in the first instance. In the event of under-subscription, the unsubscribed portion will be available for allotment, proportionately to all eligible investors who had bid in excess of INR200,000. It is not often that shareholder category will see under-subscription in the IPOs of well-run companies. However, sometimes markets present such opportunities. One such example is HDFC Standard Life Insurance IPO where HDFC shareholders had a reservation and yet, the category was subscribed only 29%.
As we see, shareholder quota in IPOs can be quite helpful for investors in enhancing their allotment chances. If applied thoughtfully, this approach can immensely aid small investors as shareholder quota doesn’t get massive subscription generally seen in the retail reservation.