How does the IPO allotment process work? A simple guide by financefetch to make you understand

The IPO allotment process is quite simple and easy to understand, but before that, we need to understand something related to IPO. IPO means initial public Offer and as its name says it is the process of offering shares of any company by the promoters of any private corporation to the general public for the very first time. The IPO allotment process does not offer shares to every investor because it acts on some well-defined and computer-operated system.

what is an IPO?

How does the IPO allotment process work?

The IPO allotment process is quite simple and easy to understand. You must have come across the word ‘Subscription‘ when going through the various IPOs and their related news. Subscription of an IPO is nothing but the number of bids an IPO received during its book-building process.  Now, there can be two possible scenarios, either IPO gets fewer bids than the shares means IPO is not fully subscribed or when any IPO gets an overwhelming response means it is oversubscribed. So, the chance of allotment and the process of IPO allotment varies in both cases. Allotment of shares usually takes one week after closing the application of IPO.

IPO Allotment system

  1. Lottery: Here, a sophisticated computerized lottery system works to choose the successful bidders and no chance of human manipulation lies at this stage. When IPO gets oversubscribed then the maximum number of bidders will be allotted 1 lot. So, the chance of getting allocation is the same for the bidder who applied for one lot and for the one who applied for multiple lots up to RS 2L (as a limit of 2L is there in the RII category).
  2. Proportionate: If you applied for fewer lots than the number of times the issue was oversubscribed, a lottery is drawn for one lot allotment. For example, if the IPO is subscribed 100 times in NII and an HNI applied for 90 lots, the allotment is done by lottery.

IPO allotment process

If IPO gets oversubscribed multiple times in the Retail category

Suppose IPO gets oversubscribed by multiple times that simply means the company received multiple applications against one lot or one share. It is quite easy to understand that in this case, the demand for that share is quite high, and not every applicant will get the share allotment. Also, the system which is followed for IPO allotment is a highly sophisticated computerized lottery system where you cannot have any manipulations. Here in the lottery system, the machine selects individuals’ PAN for share allocation. So, in this case, the chances of a share of IPO allotment also remain less and you should apply for only one lot.

If IPO remains under-subscribed in the Retail category

The second scenario is when IPO did not get a good response from the investors and remains undersubscribed. In this case, as the company did not receive enough applications against their shares, so you will get as many shares as you applied for. Maximum shares of 2 lakh can be allotted to an individual as it is the limit in the retail investor category. Here, your allotment of shares is almost confirmed but it also has a risk associated with it. Since IPO is undersubscribed, means it has less demand in the market which means it is highly predictable that the price of the share will fall on the day of listing in the market. So, you can lose your basic investment if the share is listed at a discounted price in the market.

So, both the cases of IPO subscription are having their pros and cons and hence it is advisable that you should apply for only one lot if want to remain safe with your investment and limit your losses. To make it understand better for you, Let’s take an example where the company Dhayal Ltd subscribed 100 times in the RII category:

Now suppose, If you applied for 90 lots, and IPO got oversubscribed by 100 times and the allotment will be done by lottery. Here, Allotment is not guaranteed because you applied for a less number of lots than the number of times the IPO oversubscribed (IPO oversubscribed 100 times while you applied for 90 lots only)

If you applied for 100 lots, you will get 1 lot guaranteed. (As you applied for an equal number of lots same as of oversubscription rate). In the same way, if you applied for 150 lots, you will get 1.5 lots and If you applied for 200 lots, you will get 2 lots for sure.

Now, suppose you applied for 175 lots, in that case, you will get 1.5 lots (for 150 lots application) for sure, and for the rest 25 lots, a lottery system will be followed.

IPO allotment process

Allotment Process of IPO for different Investors

For the RII category: If IPO doesn’t get over-subscribed in RII Category, full allotment to all applicants. If IPO is oversubscribed in this category – The allotment to each investor shall not be less than the minimum Bid Lot, subject to the availability of Equity Shares in the Retail Portion. For example, if the IPO is subscribed 2 times in retail 1 out of 2 applicants will get 1 lot irrespective of how many shares they applied for. Say investor A applied for Rs 2 lakh (15 lots), investor B applied for 1 lot and investor C applied for Rs 1 lakh (7 lots) in an IPO at the cut-off price. If IPO is subscribed 3 times in RII Category, the allotment will be done through the lottery and only 1 of 3 applicants will get 1 lot allocated. It doesn’t matter how many shares they have applied.

For the NII category – Proportionate. For example, if IPO is subscribed 100 times in the NII category, investors who applied for 100 shares will get 1 share.

For QIBs: Proportionate. For example, if IPO is subscribed 100 times in the NII category, investors who applied for 100 shares will get 1 share. 

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