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Allocation of Shares in an Oversubscribed IPO

18 Feb 2022 0 COMMENT

Introduction

When a company plans to go for an IPO, it first applies for India's Securities and Exchange Board (SEBI) approval. Once the application is approved, investors can apply for the company's shares within a specific period.  When the demand for shares is higher than the number of shares offered by a company, the IPO is oversubscribed. Click here to read more about how to apply for an IPO with your demat account.

The types of investors:

Investors can typically subscribe to shares only in lot sizes. A minimum lot size is the minimum count of shares an investor can apply for while bidding in an IPO. The investors who subscribed for the shares of an IPO are generally classified into three.

1. Qualified institutional buyers (QIBs)

SEBI defines this investor as one who has the necessary expertise plus financial background to evaluate carefully and strategically invest in capital markets. A limit of 50% of the offer of an IPO is allowed to QIBs.

2. Retail Individual Investors (RIIs)

These are individual investors who have do not have much capital. They are individual or non-professional investors who buy and sell shares through brokerage firms for their accounts. Their bids are for a lower amount compared to institutional investors. The maximum sum that a RII can invest in an IPO is two lakh rupees. They are allowed to receive at least 35% of the offer.

3. Non-institutional bidders (NIIs)

These investors are typically high net worth individuals and foreign bodies. They can apply for a sum greater than two lakhs rupees in an IPO and are allowed 15% of the total offer.

When a firm that does not have three straight years of profit applies for an IPO, they allot 75% of the shares on offer to QIBs, 15% to HNIs and only 10% to retail

Additional Read:  What are the different types of IPO investors

Allocations of shares in an oversubscribed IPO:

A company is oversubscribed if, for example, it offers 15 lakh shares in its IPO, but 15,000 investors apply for 105 shares. The total requirement of shares by investors is 15,75,000 more than what the company has offered.

In the case of a small oversubscription like above:

According to SEBI guidelines, if you are a retail investor, then the shares are allotted in a way that each investor gets a minimum of 1 lot. Then, the remaining shares are allotted proportionately to the other investors.

But if 15,000 investors applied for 1500 shares for the same company, a lottery system is used to decide who gets the share. In this instance, all the investors may not be allotted any shares.

Additional read: How shares are allotted in an oversubscription

Conclusion:

Market demand is one of the main factors that influence if in IPO gets oversubscribed. Investors are eager to buy shares of a company which is known to be profitable. Once they find out that their shares are oversubscribed, some companies offer more number of shares for subscription. These are offered at a higher price. This not only ensures that all investors get the shares they wanted but also ensures that the company can raise more capital. Click here to read more about how an IPO IS priced.

Disclaimer

ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470.  Please note, IPO related services are not Exchange traded products and I-Sec is acting as a distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.