What is the Basis of Allotment in IPO

After understanding the different investor categories in IPOs, let us now understand the basis of IPO allotment. An announcement of an IPO from a renowned company often sparks excitement among investors. As companies decide to go public, they open a bidding window typically lasting three days, during which investors apply for shares. Once the application period closes, the IPO allotment process begins, which is influenced by investor response and regulatory guidelines set by the Securities and Exchange Board of India (SEBI). This process is designed to allocate shares across three main categories: Qualified Institutional Buyers (QIB), Non-Institutional Investors, and Retail Investors. Understanding how IPO shares are allotted can set realistic expectations for investors and shed light on why allocations may vary.

It's necessary to understand some terminologies before we explore how shares are allocated in an IPO.

• Lot Size:

When a company launches an IPO, it divides its total offering of shares into lots, each lot consisting of an equal number of shares. For example, if Company XYZ plans to issue 1 lakh shares and sets a lot size of 10 shares per lot, there would be 10,000 lots available. Retail investors participate by bidding in multiples of these lots—such as 1 lot, 2 lots, and so on—but cannot bid for individual shares. This standardized approach simplifies the bidding process and ensures fairness among investors. Once all bids are submitted, a systematic process verifies each bid to eliminate any errors or improper submissions before moving to the allocation phase.

• Minimum Application:

According to SEBI guidelines, each applicant must invest a minimum amount in the IPO, typically ranging from INR 10,000 to 15,000. Based on the lot size, investors can apply for shares in multiples of this minimum amount. For instance, if the lot size is 25 shares, you can apply for 25, 50, 75 shares, and so on.

• Minimum Subscription:

This refers to the minimum number of shares that must be subscribed by the public for the IPO to proceed. Currently, the limit is set at 90% of the issue size. For example, if a company plans to issue shares worth INR 10 lakhs, it must attract applications for at least INR 9 lakhs (90% of the shares). If this threshold isn't met, the IPO is cancelled, unless underwriters step in to buy the remaining shares.

• Under Subscription:

If an IPO does not attract enough investors to meet the minimum subscription threshold, it is termed undersubscribed. This situation indicates a lack of interest or confidence from the investors in the company’s prospects, leading to the cancellation of the IPO unless underwriters cover the shortfall.

• Over Subscription:

Oversubscription occurs when the number of applications exceeds the shares available. For example, if a company reserves 100 lots for retail investors but receives bids for 200 lots, it is oversubscribed by 2 times.

How is the IPO allotment done?

Here’s a breakdown of how shares are allocated to investors:

1. Under Subscription of Shares (Less than 90%):
If an IPO receives applications for less than 90% of the shares offered, it is considered under-subscribed. In this scenario, the IPO is cancelled, and the money received from applicants is returned. This situation indicates that the IPO did not generate enough interest among investors.

2. Subscription of More than 90% Shares:
When the IPO receives applications for more than 90% of the shares, applicants typically receive all the lots they applied for, provided their applications are valid. This means that if you applied correctly, you’re likely to get the number of shares you requested, as long as the total subscriptions do not exceed the shares available.

3. Oversubscription of Shares:
Oversubscription occurs when the number of applications exceeds the number of shares available. In this case, the allotment can be done in two ways:

• Proportionate Basis: Here, shares are allocated proportionately among all applicants. For example, if a company is 2 times oversubscribed, each applicant might get half of the shares they applied for.
  
• Lottery Basis: When there is a significant oversubscription, a computerized lottery system may be used to allocate shares. This ensures a fair and random distribution among all applicants.

These methods ensure that the allotment process is transparent and fair, aligning with regulations set by SEBI. Understanding these scenarios can help you better prepare for the IPO application process and set realistic expectations about the number of shares you might receive.

What Are the Possible Reasons for Not Getting an Allotment?

Applying for an IPO doesn’t guarantee that you’ll receive an allotment. Here are some common reasons why this happens:

• Oversubscription:
  One of the most common reasons for not getting an allotment is oversubscription. When an IPO attracts more applications than the number of shares available, the company uses a lottery system to select the lucky applicants. If you weren't selected in this lucky draw, you won't receive any shares.

• Incorrect Details:
  Sometimes, errors in the application can cause problems. This includes mistakes like entering an invalid PAN number, a wrong Demat account number, or other incorrect details. These errors can disqualify your application.

While oversubscription is the main reason for missing out on an allotment, it's always good to double-check your details to avoid unnecessary rejections.

Happy Learning!