IPO Allotment Process – Allotment to Retail Investors & Qualified Institutional

IPO ALLOTMENT PROCEDURE

An Initial Public Offer or an IPO is a momentous landmark in the history of a registered company as they are going public. It signifies that an entity has finally matured into a fully-fledged grown, effective company that has gained enough goodwill in the market to be able to start raising funds from the general public. IPOs are usually at a huge scale and bring about a few changes in the top ownership structure of an entity. 

With the fresh introduction of money, companies can now expand operations, hire better talent, invest in product development among other things. But we must know that this comes at the cost of dilution of ownership and leadership structure and the price at which the stocks trade in exchange signifies the trust that its investors have in their future potential. 

The IPO process comes with a few complexities that account for instances where there is a mismatch between the amount of the share that is being floated and the amount of bid actually received. In this article, we will know more about how these instances are handled and dealt with and how the IPO allotment process takes place. Let’s get started. 

THE IPO ALLOTMENT PROCEDURE

1. Initiate the application

This can be done through offline or online mediums and it is absolutely necessary that investors have enough funds to cover the bid they place. Since the market regulators have made the ‘Applications Supported by Blocked Amount (ASBA)’ mandatory for IPOs, the bid is unlikely to be considered if they fail to have the amount set aside. 

2. Allotment 

This process happens behind the scenes and can go any way relying on the number of bids and the validity of bids being submitted. It is significant to remember that not all the applicants will get what they have requested as demand tends to outstrip supply by a broad margin. 

3. Approval

In around a weeks time, the registrar of the IPO wind up and confirm the allotment of the bidders. The IPO allotment status can be checked via registrars websites. It can also be checked on the BSE or NSE website. Investors will need their PAN or DPIN or Client ID to check the same.

Now to gain a deeper understanding of the allotment procedure let us have a look at the dynamic cases and how they are dealt with.

IPO ALLOTMENT CASES

1. Allotment to Qualified Institutional Banks (QIB):

In these cases, the discretion of IPO allotment is done by merchant bankers. Further, in the case of oversubscription, the shares are proportionally allotted to the QIBs. For instance, if a QIB applied for 20 Lacs shares and IPO get 10 times oversubscribed then it will get only 2 lakhs shares. 

2. Allotment to High Networth Individuals (HNIs):

HNIs are those people who invest a large amount of money in an IPO (Greater than Rs. 2 Lakhs) In case of oversubscription, HNIs are also allotted the shares in a proportionate manner. Further, it is also seen that financial institutions provide funding to HNIs in order to invest in IPOs. 

3. Allotment to Retail Investors:

Retail Investors are allowed to apply with a smaller fund between Rs. 12 to 18 thousand to Rs. 2 lacs. For instance, let’s take the example of Burger King IPO.

Issue Price was Rs. 59 to 60 and the minimum order quantity was 250. 

Hence, if a retail investor wants to apply for the IPO at a bid of Rs 60, the total application amount will be Rs 15,000 (Rs 60 * 250). Furthermore, they can apply for a maximum of Rs 2 lacs. This means that for the example taken, they can get a maximum of 13 lots of 250 shares each. 

Further in the allotment procedure, the host calculated the total number of demands and after the same here are the two possible cases:

1. Demand is less than or equal to the shares offered:

If demand is equal to or less than the offered retail proportion of the IPO shares, the full allotment is made the RI for all the valid bids. 

2. Demand is greater than the offered shares:

If demand is more than the allocation to the retail proportion of shares offered, then the maximum number of RI’s will be allotted a minimum bid lot. These are referred to as maximum RI allottees and is determined by dividing the total number of equity shares available for the allotment by the minimum bid lot. 

In the case of oversubscription, again there are two cases

I. In the case of a Small Oversubscription:

The minimum lot is distributed among all the applicants. Then the remaining shares in the retail portion will be distributed proportionately to the RIs, who have bid for more than 1 lot. 

Let’s take an example. 18,000 investors applied for the allotment. Among these, 5000 applied for 2 lots consisting of 50 shares each. 

Hence, the total number of shares applied will be (13k * 1 lot) + (5k * 2 lot) which will be 11.5 lacs shares.

Here we have oversubscription as the total shares offered are Rs. 10 lakhs. In these cases, the first 1 lot of 50 shares will be allotted to all 18k investors and then the remaining 1 lakh shares will be allotted proportionately to all those who have applied for more than a single lot. 

II. In case of a Big Over Subscription:

In case the RI applications are more than the maximum RI allottees, the allotment bid lot shall arrive on the basis of the draw of the lot i.e lottery. 

Let’s assume for the same example discussed above, one lakh people applied for the allotment. In such cases, who will get the allotment will be determined by lottery. However, the draw of lots is computerized and therefore, there is no provision for partiality and cheating. Everyone has an equal chance to get the allotment. 

Thus, the allotment totally depends on your luck in case of oversubscription.

This was all about the IPO allotment procedures in different cases. For more assistance in investment and finance-related areas, you can contact our experts and ZFunds and get first-hand expertise and assistance throughout your investment journey to help your corpus grow and build wealth.