The IPO allotment process refers to how a company allocates its shares to investors once the subscription period concludes. This process is overseen by the registrar, which reviews valid bids that satisfy the eligibility criteria and the cut-off price.
In cases where the IPO is undersubscribed, all applicants receive the shares they requested. Conversely, if it is oversubscribed, shares are allocated either on a proportional basis or through a lottery system. Successful applicants will have the shares deposited into their demat accounts, while those who did not receive shares will be issued refunds.
An IPO is considered oversubscribed when the number of applications surpasses the available shares for distribution. When an IPO is oversubscribed, the registrar performs a lottery to distribute shares among the applicants.
How does IPO allotment process work if the issue is oversubscribed?
To understand this, let’s consider an example where Arun Kejriwal, the founder of Kejriwal Research and Investment Services, elaborates on the topic by explaining from the fundamentals that investors in an IPO fall into three different categories: retail, High Net-Worth Individual (HNI), and Qualified Institutional Buyer (QIB).
Kejriwal explained that considering QIB first, if an offering is subscribed to ten times, you will receive one-tenth of your application amount in proportion to the demand. It’s really that simple.
“Now, let us come to HNI. In HNIs, there are two categories. Big HNI, small HNI. So, the allotment that you will get in this is also predetermined.
A big HNI, if the issue is oversubscribed by more than five times, you will get maximum of two lakhs per person, and that will be on lottery system if the issue is oversubscribed beyond a particular time. I mean, if it is subscribed more than five times,” he said.
Kejriwal went on to explain that if we consider it to be oversubscribed by 12 times, the effective amount of 10 lakhs will now be treated as if it were two lakhs, with the distribution made in increments of two lakhs to the successful candidates, splitting the entire amount into lots of two lakhs.
Therefore, he said that if the total issue size was 10 crores, dividing that by two lakhs results in 50 times 10. This means that 500 individuals will receive shares worth two lakhs each, totaling two lakhs in value.
Further, Arun Kejriwal stated that for the small HNI category, which is set at two lakhs, you will only receive two lakhs. Therefore, if it is oversubscribed, it will again follow a lottery system. Now, moving on to retail. In retail, a minimum of 15,000 will be allocated to you, if lucky. If it is oversubscribed, any allocation beyond that will also be determined by lottery.
How IPO shares are allotted?
When thinking about investing in an IPO, individuals often seek to understand the process of share allocation. They may have tried to take part in an IPO before and were unable to secure any shares, leading them to question the reasons behind it. The distribution of shares occurs based on the regulations established by the Securities and Exchange Board of India (SEBI).
When a firm declares its IPO, the total equity shares available are split into lots, with each lot containing an equal number of shares, and each application by retail investors is made in multiples of these lots.
For example, if a company plans to issue 100,000 shares in an IPO and has established a lot size of 10 shares per lot, the total number of lots available would be calculated as (Total number of shares / Number of shares per lot), resulting in 10,000 lots.
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