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WHAT IS IPO ALLOTMENT

11 Mins 09 May 2023 0 COMMENT

INTRODUCTION

It is tough to understand and appreciate the IPO process without understanding IPO allotment process. Not everyone who applies for an IPO gets the IPO allotment. You may get full allotment or you may end up with zero allotment. What normally happens is that you get a portion of your application quantity as allotment, which looks like a good deal. So, what is IPO allotment?

It is the process of deciding how many shares each applicant should get and sending such shares to the demat credit of the individual. It is essential for the investor to understand the IPO allotment process since a proper and granular understanding of the IPO allotment process will enable investor to grasp the process details and also give cues on how to get IPO allotment.

WHY DO WE GET LOWER ALLOTMENT?

It often happens that you apply for an IPO but the actual allotment is either nil or you get lower than expected allotment. It is hardly gratifying to see your neighbours and friends get allotment and your application getting rejected. Here is what you need to know.

  • IPO applications can get rejected if they are invalid. It may be due to duplicate application, signature mismatch, wrong data filled in etc.
  • When an issue gets substantially oversubscribed in the retail portion, the decision to allot shares to retail investors is done via lottery process. If you are unlucky, you may not get any shares. We will look at it in detail later.
  • In the event of oversubscription, the issuer in consultation with the investment bankers and the stock exchanges will arrive at an allotment formula called the basis of allotment, Based on this formula, you may fall into a bracket of proportionate allotment, which means you only get part of the shares quantity you applied for.
  • In the event of retail portion getting undersubscribed or just about subscribed, you stand a good chance of getting allotment equal to your application of shares.

WHAT IS THE PROCEDURE FOR ALLOTMENT OF SHARES IN IPO?

Today, all bids are logged only through the central IPO system operated by the stock exchanges. Only valid bids will be loaded and such bids must be submitted on time. For example, if you submit IPO bids after 1 PM on the closing day of the IPO, the bid may not be considered by the broker, so you may lose out on the chance to apply for the IPO. Once all the bids are received, they are all registered online.

The system uses an online process, wherein all the invalid bids that were incorrectly submitted are eliminated from the total number of bids. What remains is the final number of successful bids for the said IPO. This is the base case on which the allotment process starts. But for that, there are some base case scenario assumptions and the allotment differs with the assumption.

ALLOTMENT IN UNDERSUBSCRIPTION AND IN OVERSUBSCRIPTION

It is said that when the IPO is undersubscribed or when it is just about subscribed, allotment is not such a big challenge. Here we look at both the cases and how allotment works in both the cases.

  • Firstly, if the total number of successful bids is less than or equal to the number of shares offered by the firm, there is not really much of a problem. In such cases, the complete allotment of stocks will take place. In short, each and every applicant who has put in a valid application for the IPO will be allotted shares.
  • The problem arises in the event of oversubscription of an IPO i.e. if the total number of successful bids is more than the number of shares offered by the firm. Here again there are two scenarios you must be aware of. The first scenario is when there is marginal oversubscription and the second is when there is substantial oversubscription.

Let us look at both these scenarios separately and how the allotment works.

ALLOTMENT WHEN THE OVERSUBSCRIPTION IS MARGINAL

This methodology will apply when the IPO is subscribed 1.2 times or 1.3 times. In such cases of marginal oversubscription, the allotment would be done such that all the applicants firstly get at least the basic minimum lot applied for. This is to make it more favourable for the small investors and widen the equity ownership. Here is how it works.

For example, if there are 10 lakh shares offered to the investors and if the minimum lot size is 100 shares. Then the maximum number of investors who will get at least one lot is 10,000 investors (10 lakhs/100 shares). Once the base lot is allotted to as many investors as possible, the balance will be allotted proportionately. This ensures that small investors get a good chunk of the allotment.

ALLOTMENT WHEN THE OVERSUBSCRIPTION IS SUBSTANTIAL

We now move to the second case where the oversubscription is substantial say 40-45 times or even higher. In the case of marginal oversubscription we have seen that priority is   to ensure each applicant gets at least one lot first and the balance is done proportionately. But then what about the big oversubscription?

In the event of substantial oversubscription of the IPO, it would not be possible to allot even a single lot to all eligible applicants. In that case, the eligible minimum allottees would be decided by way of lucky draw (draw of lots). This lottery system is entirely computerised without any bias allowed to creep in. In case your name is not drawn by the lottery system, then you may end up with zero allotment.

To sum it up, non-allotment is not just due to technical flaws in the application, but also when your name does not figure in the lottery.

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