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.
How IPO shares are allotted?
When one considers investing in an IPO, they also want to know how the shares are allocated.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 theSecurities 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.
Procedure for allotment of shares in IPO
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.
Let’s say,
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.
Additional read: What Does it Mean by Fear and Greed Index
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.
Again, there can be sub-cases in this i.e.
- Smallover-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. - Largeover-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.
Reason forno allotment of shares in an IPO
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).
Conclusion
In conclusion, the IPO allotment process is a crucial stage in the journey of companies transitioning to public ownership. Understanding this process empowers investors to navigate the complexities of share allocation and manage expectations effectively. By grasping the intricacies outlined here, investors can make informed decisions and potentially capitalise on new investment opportunities.
