If you want a better shot at getting an IPO share, here’s what you need to know.
Investors who want to participate in initial public offerings (IPOs) but are unsuccessful often have these queries after being denied access to any shares. Share allotment in recent IPOs has dissatisfied investors of all experience levels. Recent public offerings have been extremely well received, making it challenging for investors to get allotments.
We get a lot of questions concerning the IPO allotment procedure, so we’ve compiled this guide to answer them. This should help to clarify the procedure and improve applicants’ odds of being selected for the initial public offering.
Before we can take measures to improve our chances of being allotted shares in an initial public offering (IPO), we need a thorough understanding of how IPOs are allocated. In spite of the fact that following these guidelines is no guarantee of obtaining an IPO allotment, it will increase your chances significantly.
How to Improve Your Odds of Getting Allotted Shares in an Initial Public Offering
- If there was an oversubscription for shares in the retail category, registrars were required by market regulator SEBI to allocate them proportionally prior to October 2012.
- This meant that a bidder who put down INR100,000 or INR150,000 had a better chance of receiving shares than a bidder who put down just INR15,000. Formerly, this method functioned properly in initial public offerings (IPOs) where demand was exactly proportional to, or lower than, the number of shares being offered.
- When demand outpaced supply, the method inevitably aided large applications. It has been found that many high-net-worth individuals (HNIs) put their money in the retail category in order to corner shares. Of course, it didn’t sit well with SEBI.
- Therefore, SEBI introduced a new IPO allotment method in October 2012 that mandated treating all retail individual investor (RII) applications the same. Shares are distributed to applicants in accordance with the new approach, with the minimum application size guaranteed. Once again, full allotment will be granted to all retail investors if demand is lower than supply.
- If there is more interest than supply, we shall divide the total number of equity shares available for assignment to the category by the minimum bid lot to determine how many investors will be allocated shares. Any allocation made under the current rules must be smaller than the smallest unit available for bidding.
Improve your odds of getting an initial public offering allocation with these 6 pointers
Now that we understand the reasoning behind allotment, we can examine ways to improve the odds of getting shares in an initial public offering. Given the high demand for IPO shares, it’s clear that investors have few options. However, there are strategies that can help you dodge the hazards and get the most out of your allotment. A better probability of getting an IPO share might be yours by following these easy steps.
Here are the six most important things you can do to improve your odds of getting an IPO allotment. While there is no way to guarantee an IPO allotment, taking these precautions will greatly increase the likelihood that you won’t be disqualified for insignificant reasons.
1. Don’t use big apps
- As was said above, the current SEBI allotment process treats all retail applications (those that are less than INR200,000) the same. This means that making a big application of INR100,000 won’t help if there are already too many. Big applications only make sense when there is a good chance that the retail segment will remain undersubscribed in a large IPO.
- The IPO of General Insurance Corporation (GIC), which raised INR11,372,64 crore, is a recent example. Every retail investor had a chance to get an allocation. Even though this unsubscription was caused by different things, it was a good example.
2. Have more than one Demat account
- Since big applications don’t work well, the same amount can be used to make multiple applications from different Demat accounts. If you apply for six single lots instead of one application for six lots, your chances of getting an allotment go up by six times. It’s important to know that these Demat accounts need to be linked to different PAN accounts. In other words, a person can only fill out one application in his or her own name.
- Asking friends and family to open Demat accounts and apply for upcoming IPOs is a great way to increase the chance of getting an allotment. Today, it’s easy to open a new Demat account, and some brokers will even open Demat and trading accounts for free. With e-KYC, the process takes only a few minutes.
3. Always offer the lowest price.
- This part is tricky because investors often get price bids and cut-off bids mixed up. By choosing a specific price, the investor tells the registrar that he or she wants to buy shares at that price. The cut-off price, on the other hand, tells the registrar that the investor is willing to buy at any price within the price band. This price is set at the point where there is the most demand.
- For example, if the cut-off price is set at INR105 per share in a price range of INR100-105 per share, no bids below INR105 per share will be considered for allotment. So, small investors should place their bids at either the cut-off price or the highest price possible to increase their chances of getting an IPO share.
4. Avoid Last-Minute Rush
- Before bidding on the last day, many investors look at the number of bids in the HNI and QIB categories. This might be a smart way to find out how these well-informed groups feel about an IPO, but it could be a disaster if your bank’s online banking is down for a while. One may not have money in other bank accounts and may have to do extra work at the last minute to add Demat account details.
- Even though you can always fill out paper forms, this isn’t a very good way to get things done at the last minute. Even if the form is filled out, it may already be too late. On the last day, some banks stop taking applications at 4 p.m.
5. Stay away from technical rejections
- IPO applications can be turned down for technical reasons, even if the investor doesn’t know about them. Starting on January 1, 2016, all IPO applications must be made through the Application Supported by Blocked Amount (ASBA) mechanism.
- Most investors apply through net banking, which reduces the chance of spelling mistakes, name mismatches, and wrong cheque details. Still, some applications are turned down for technical reasons, and something as simple as having a different name on a bank account and PAN can mean a missed chance.
6: Buy shares of the parent company
- Here’s another great way to increase your chances of getting an IPO share, if it applies to you. Investors can use the shareholder category if they have at least one share of the parent or holding company in their Demat account. Note that the parent company’s shares must be in the investor’s Demat account on the date of the Red Herring Prospectus.
- Obviously, this only works if the parent company of the company going public is already listed and there is a reservation for shareholders in the parent company. In the IPO of Ujjivan Bank, which just ended, the retail category was subscribed to 48 times, but the shareholder category was only subscribed to 4 times. Chances of getting an allotment are, of course, much better for shareholders. The cherry on top is that people can bid in both categories!