The IPO allotment process is a crucial mechanism through which a company distributes its shares to investors after the subscription period ends. This entire procedure is meticulously managed by the registrar, who examines all valid bids that meet the eligibility requirements and the predetermined cut-off price. The outcome of this process determines which investors receive shares and how many they get, directly impacting their investment portfolios.
What Happens When an IPO is Undersubscribed or Oversubscribed?
In scenarios where an IPO is undersubscribed, meaning the demand for shares is lower than the supply, all applicants are granted the exact number of shares they requested. This straightforward allocation ensures that every investor who applied receives their desired stake. However, the situation becomes more complex when an IPO is oversubscribed, which occurs when the number of applications exceeds the available shares for distribution.
When faced with oversubscription, the registrar employs specific methods to allocate shares fairly. These methods include proportional distribution or a lottery system, depending on the investor category and the level of oversubscription. Successful applicants will find the allotted shares credited directly to their demat accounts, while those who do not receive any shares will have their application amounts refunded promptly.
Detailed Breakdown by Investor Categories
To comprehend the intricacies of IPO allotment during oversubscription, it is essential to understand the three primary investor categories defined by SEBI regulations: Retail Investors, High Net-Worth Individuals (HNIs), and Qualified Institutional Buyers (QIBs). Each category follows distinct allocation rules.
Arun Kejriwal, founder of Kejriwal Research and Investment Services, provides valuable insights into how these categories operate. He explains that for QIBs, the process is relatively straightforward. If an offering is subscribed ten times over, each QIB applicant receives one-tenth of their application amount in proportion to the overall demand. This proportional allocation ensures a fair distribution based on the level of oversubscription.
Allocation for High Net-Worth Individuals
Kejriwal further elaborates on the HNI category, which is subdivided into Big HNIs and Small HNIs. For Big HNIs, if an issue is oversubscribed by more than five times, the maximum allotment per person is capped at two lakhs. Beyond this threshold, a lottery system is implemented to determine who receives shares. For instance, if the issue is oversubscribed 12 times, an effective amount of 10 lakhs is treated as two lakhs, with the distribution made in increments of two lakhs to successful candidates.
This means the entire amount is split into lots of two lakhs. If the total issue size is 10 crores, dividing that by two lakhs results in 500 lots. Consequently, 500 individuals will receive shares worth two lakhs each, totaling the allocated value. For Small HNIs, the allotment is strictly limited to two lakhs, and if oversubscribed, a lottery system is again applied to determine recipients.
Retail Investor Allotment Procedures
Moving to retail investors, Kejriwal notes that a minimum of 15,000 rupees worth of shares is allocated to lucky applicants. If the IPO is oversubscribed, any allocation beyond this minimum is also determined through a lottery system. This approach aims to provide retail investors with a fair chance to participate, even when demand is high.
How Are IPO Shares Allotted According to SEBI Regulations?
Many individuals exploring IPO investments often seek clarity on the share allocation process, especially if they have previously participated without securing shares. The distribution of shares is governed by strict regulations set forth by the Securities and Exchange Board of India (SEBI), ensuring transparency and fairness.
When a company announces its IPO, the total equity shares available are divided into lots. Each lot contains an equal number of shares, and retail investors must apply in multiples of these lots. For example, if a company plans to issue 100,000 shares in an IPO and sets a lot size of 10 shares per lot, the total number of lots available would be 10,000. This lot-based system simplifies the application process and facilitates organized allocation.
Understanding these mechanisms can help investors navigate the IPO landscape more effectively, making informed decisions and setting realistic expectations regarding share allotment outcomes.
