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HOW IPO SHARES ARE ALLOTED
IPO ALLOTMENT PROCESS
PROCEDURE FOR ALLOTMENT OF SHARES IN IPO
An announcement of IPO by renowned companies creates an excitement amongst the investors. IPO or Initial Public Offerings is a process of offering shares of a private company to the public in a new stock issuance that helps company raise capital from public investors.
Companies announce their decision to go public when they need to raise capital for operations or expansion and are confident about their future performance. When the IPO is finally announced in the market, the company generally, keeps the bidding window open for 3days. Within these days the investors apply for shares of that company. Once the applications are submitted within that period, the IPO allotment process takes place which depends on the response the IPO got from the investors. Various factors affect the allotment process.
When an investor thinks of investing in IPO, they also want to know about how the allocation of shares takes place. Perhaps, they previously attempted to participate in an IPO and didn’t receive an allocation of shares and wants to know why.
The allocation of shares happens according to the rules laid down by the Securities and Exchange Board of India (SEBI). There are three categories according to which the allocation is reserved: Qualified Institutional Buyers (QIB), Non-Institutional Investors and retail investors. It is impossible to know in advance whether an investor will receive an allocation of shares but understanding how the shares are allocated in IPO might help to set the expectations and explain why the shares may not get allocated.
Before understanding the procedure of share allocation to retail investors in an IPO, it is important to understand the concept of “Lot Size”.
When a company announces IPO, its total equity shares on offer are divided into lots, each lot comprising of an equal number of shares and each application made by retail investors is in multiple of these lots.
A company XYZ intends to issue 1 lakh shares in an IPO and has decided a lot size of 10 shares per lot.
In this case, Total no. of lots on offer = (Total no. of shares / Total no. of shares in 1 lot), which equals to 10,000.
Whenever a retail individual investor will bid for shares in an IPO, he/she will bid in terms of no. of lot like 1 lot, 2 lot and so on but they cannot bid in terms of no. of shares. Once all the bids are submitted, a system process is run to eliminate all the improper submission of bids by the investors.
Now, after getting the total no. of successful bids, there may be 2 cases which are:
Total cumulative no. of bid lots < Total no. of lots offered
- In case the total no. of bid lots, by all the applicants combined is less than total no. of lot offered then everyone gets the allocation of same number of lots that they had bid for.
Total cumulative no. of bid lots > Total no. of lots offered
- This case is little complicated. Here, while allotting the shares, SEBI rules are taken into consideration, according to which no individual can be allotted more than 1 lot.
Small Over-Subscription – In this case, each applicant with successful bid would be 1st allotted with 1 lot of shares and the balance shares shall be allotted proportionately.
Large Over-Subscription – If the over-subscription is extremely large then each applicant with successful bid cannot be allotted even 1 lot of shares. In this situation, according to SEBI, the lots shall be allotted on a lucky draw basis. The process is all computerized so there are no chances of any partiality.
Arbitrageurs:Arbitrageurs are those who try to make profit from the difference in the prices of an asset due to market conditions.
There can be two reasons for non-allotment of shares in an IPO offering which are mentioned below:
Invalid bid because of invalid PAN no. or invalid Demat Account no. or multiple applications submitted from the same name.
Applicant could not get assigned any lot after the lucky draw process for allocation of shares, in case of huge over-subscription).
When an IPO gets announced, investors from different categories start applying for shares. Once the applied share gets credited to their Demat & Trading account, it is referred to IPO allotment.
No, the IPO allotment doesn’t happen on the basis first come first serve. The allotment process totally depends on how the IPO got responses from the investors. If the IPO is undersubscribed, then the investor may get allotted all the lots for which they have applied. If the IPO is oversubscribed, then the allocation of shares to the retail investor happens through a computerized process.
As a retail investor, you can only increase your chances of getting an IPO allotted by applying for shares through multiple demat accounts, say, a family member or a friend. You cannot apply for shares on your own name from multiple Demat accounts.
The allotment of IPO shares depends on how the investors have showed their interest to it. There are different cases which affect the IPO allotment process:
In case the total no. of bid lots, by all the applicants combined is less than total no. of lot offered then everyone gets the allocation of same number of lots that they had bid for.
The other case is when the total no. of bid lots is by the applicants is more than the offered, then SEBI rules are taken into consideration, according to which no individual can be allotted more than 1 lot.
When the IPO is oversubscribed, then the scenario is totally different. Oversubscription is again, divided into small and large.
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