Initial Public Offerings, or IPOs, have gained significant momentum in recent times.
When companies launch an IPO, they sell their shares or securities to the public for the first time. By doing so, they aim to raise funds from investors and increase their brand visibility and credibility. So, as new corporations continue to list themselves on the stock exchange, investors have become more eager to buy their IPOs.
But have you ever applied for an IPO only to not receive the allotment? Well, not being able to enjoy the benefits of a promising IPO is discouraging. This has led many retail investors to believe that big corporations only favour certain institutional investors. Do you feel the same? If yes, then it’s time to dive into the IPO allotment process and understand why you didn’t receive the allotment.
The fundamentals of the IPO share allotment process
Every company that issues an IPO follows these five fundamental steps:
- The company releases relevant documents for the proposed IPO.
- There is a book building period where prospective investors can examine these documents and apply for the IPO.
- Depending on the number of applications received in this period, the company can increase or decrease the size of the issue. If there are insufficient applications, the company can also choose to cancel the IPO.
- The company will now announce the number of shares it will sell according to the listing as well as the authorised brokerage houses that will sell these shares.
- After the book-building period ends, you can start trading these shares through your broker.
What is the IPO share allotment process?
Before diving into the process of IPO allotment, let’s first understand the meaning of ‘lot size’. When a company issues an IPO, it divides its total shares into lots. Let’s understand this with the help of an example.
Suppose company ABC wants to issue an IPO of 10 lakh shares with a lot size of 10 shares each. Now, the total number of lots offered by the company will be 1 lakh (Total number of shares/Total number of shares per lot). If you want to invest in the IPO, you’ll have to buy in multiples of these lots. You can bid for the number of lots you want and not for the number of shares.
After the company receives the bids, it proceeds to the IPO allotment. In the process of IPO allotment, there can be two situations:
1. Shares are under-subscribed
When the company receives fewer bids than the number of lots it offers, the issue is under-subscribed. If the company meets the minimum subscription requirement, all investors receive the IPO allotment for the number of lots they want.
According to SEBI guidelines, when the company does not receive applications for at least 90% of the issued shares, it should cancel the IPO. When this happens, no IPO allotment is made, and the company refunds the full amount to the applicants.
2. Shares are oversubscribed
When investors are optimistic about the company’s future performance, they are more inclined to subscribe to the IPO. As a result, the number of applications exceeds the number of shares on offer, oversubscribing the IPO. When this happens, you will either receive a full allotment, pro-rata allotment, or no IPO allotment at all. If you don’t get the allotment, you’ll receive a refund for the entire amount.
If investors oversubscribe the issue, there are two situations in the IPO allotment process-
- Small oversubscription: In the case of small oversubscription, the issuing company will adopt the pro-rata IPO share allotment process. For example, you are allowed to apply for a maximum of 15 lots. Now, suppose the issue is subscribed 15 times, and all investors have applied for 15 lots. When this happens, the company will allot one lot to each investor.
- Large oversubscription: When the IPO of a company is promising, the issue can receive a large oversubscription. For example, more than 100 times. The pro-rata process of IPO allotment cannot solve the equation in this case. Therefore, to allot the shares, the company adopts a lucky draw method. With this method, you will receive the allotment without any bias, as the entire IPO allotment process is computerised. However, in the case of a large oversubscription, your odds of receiving the allotment are very low.
The allotment of an IPO entirely depends on how much interest investors have in it. Different companies have different quotas for qualified institutional buyers (QIBs), non-institutional buyers, retail investors, and employees. Therefore, the final share allotment will depend on the overall subscription and the category you fall under.
When an IPO is oversubscribed, getting the allotment every time is not possible. Instead of getting disheartened, you can invest in stocks of other companies or other financial instruments, such as mutual funds. Want to start investing? Check out Tata Capital’s Moneyfy app. Explore investment options tailored to your financial goals and risk appetite and manage your portfolio seamlessly. Download the app today!