How does the IPO Allotment Procedure Work?
- The allotment of shares to investors by the offer’s registrar follows a systematic and orderly process known as the initial public offering (IPO) allotment process.
- The resurgence of the IPO market has resulted in a rise in inquiries about the allotment procedure for initial public offerings in India.
- As the public offer of IRCTC has already been oversubscribed with one day to go, investors are wondering how the process of IPO allotment works in India, whether they should apply for one lot or more, and whether or not applying early will increase their allotment chances.
In this piece, we’ll use the IRCTC IPO as an example, and go over some of the key aspects of the offering.
IRCTC IPO details
|Subscription Dates||30 September – 3 October 2019|
|Price Band||INR315 – 320 per share (retail discount – INR10 per share)|
|Offer For Sale||20,160,000 shares (INR627.88 – 637.96 crore)|
|Total IPO size||20,160,000 shares (INR627.88 – 637.96 crore)|
|Minimum bid (lot size)||40 shares|
|Minimum investment||INR12,200 – 12,400 (adjusting for retail discount)|
|Face Value||INR10 per share|
|Listing On||NSE, BSE|
We used this example to learn how the IPO allotment process works for small investors. In short, the allocation for individual investors is based on a formula that treats all applications the same, no matter how big they are.
The formula makes sure that each applicant gets at least one lot, as long as there are enough shares for everyone. Read on for a longer explanation.
How IPO shares are given out: retail quota and lot size
- As you can see, IRCTC is selling 20,160,000 shares in the IPO, and each share costs between INR315 and INR320. Out of these, 160,000 shares are set aside for employees, and 20,000,000 shares are offered to Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NICs), and Retail Individual Investors (NICs).
- As was said above, 35% of this IPO is set aside for small investors, which is equal to 7,000,000 shares. It’s important to remember that this arrangement is not set in stone and that retail investors will only be able to get a 10% share in companies that don’t make consistent profits. This is what SEBI does to make sure that small investors are safe.
- Since IPO applications are made in multiples of lot size, you can apply for a minimum of 40 shares, 80 shares, 120 shares, and so on. For mainboard IPOs, the minimum size of a lot is set so that a bid of less than INR15,000 means you want to buy it. Investors often think that submitting more than this amount of applications will improve their chances of getting shares. But this is far from the truth.
Note: (The lot size only applies to the IPO allotment. Once the stock is on the market, investors can sell their shares in any amount.)
IPO Procedure: Cut-off price
In this case, the price range is between INR315 and INR320 per share, which means that investors can apply at any price within this range. The problem with choosing a specific price is that your application won’t be considered if there are more buyers above your price point. Investors can also pick the “cut-off” option, which means they are willing to pay any price within the price band.
How IPO shares are given out
- After the dates for signing up for an IPO, the ball moves to the registrar of the offer. The IPO registrar is in charge of making sure the allotment is done according to SEBI’s rules. The market regulator made some changes to the IPO allotment process in October 2012, and the new rules say that all Retail Individual Investor (RII) applications are treated the same.
- Under the new IPO allotment process, applicants are given at least the minimum number of shares they asked for, as long as there are enough shares overall. Using this rule as a guide, you can make two big groups of situations, and the system will work in both of them.
IPO allotment process if not enough people sign up
- If the total number of applications for shares in the retail category is less than the number of shares available, every investor will get their full allotment, no matter how big their application is.
On a lighter note, there is a good chance that an IPO is not worth investing in if not enough people want it.
- In this case, investors wouldn’t lose a lot if they just did what everyone else did and skipped the IPO. There are times when the market doesn’t fully understand a company’s business model. In these cases, it’s best to do more research and be careful before applying for a public offer. Sometimes, it can help to look at the big picture and forget about short-term problems.
IPO allotment process if too many people want to buy shares
If there are more people who want shares than there are shares available, the registrar will try to satisfy everyone by giving as many people as possible one lot. In our example, 7 million IRCTC shares must be split into 40-share lots (under the current guidelines, no allotment is less than the minimum bid lot size). So, the most retail investors who can get an allocation is 7,000,000/40, which is 175,000.
The initial public offering is oversubscribed, but not by a lot. Since some investors want more than one lot, the number of applications is less than the number of lots that can be given out. Let’s say there were 150,000 people who wanted to apply. Of those, 30,000 wanted to apply for two lots, while the other 120,000 wanted to apply for one lot of 40 shares. This time around,
Total demand = 120,000 times 40 plus 30,000 times 80 = 7,200,000 shares.
This means that everyone will get one lot, and there will still be 1 million shares left. The 30,000 investors who asked for two lots will each get a certain number of these shares.
The initial public offering is way oversubscribed. In this case, there are more people who want to apply than there are spots available. In our example, let’s say that 200,000 applications were sent in. Since the registrar has to treat all applications the same, the 175,000 applicants will be chosen at random. This means that 25,000 applicants will not get an allotment.
How luck plays a part in giving out IPO shares
- As you can see, a lot of it comes down to luck when there are too many people who want to sign up. IRCTC already has 6X the number of subscriptions for the retail quota, so there will be more applicants who don’t get in than get in. Unfortunately, most IPOs that are worth investing in are already full.
- Even though luck plays a big part in IPO allotment, investors can improve their chances by taking a few simple steps. If you came to this page looking for the most up-to-date information about allotments, go to this page. IPO allotment is an important part of the IPO process as a whole, which is a long and difficult process.
- We hope you enjoyed reading this guide on how IPOs are given out in India right now. SEBI keeps changing the rules based on how the market is doing. This means that these rules could change in the years to come. The regulator’s commitment to small investors, on the other hand, is not likely to change.