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What is the Process of Allotment of Shares in an IPO?

What is the Process of Allotment of Shares in an IPO?
by Nutan Gupta 23/02/2017

Initial Public Offerings (IPOs) usually get to witness good participation from retail investors. The allocation of shares to investor categories is reserved in every IPO. These categories are - qualified institutional buyers, non-institutional investors and retail investors. Most of the times, the quota of shares which is reserved for the retail investors get over-subscribed. Over-subscription happens when the number of applicants exceed the number of shares which are being offered. So, when an issue is over-subscribed, the applicants get fewer shares than what they have applied for. In case there is no over-subscription, the investors get full allotment of shares.

Process of Allotment when an issue is over-subscribed:

IPO Allotment to Qualified Institutional Buyers

In case of QIBs, the authority to allot shares is at the discretion of the merchant banker. Shares are allotted proportionately to the applicants. So, if the shares are oversubscribed by 4 times, then an application of 10,00,000 shares will receive only 2,50,000 shares.

IPO Allotment to Retail Individual Investors

As far as the retail individual investors (RIIs) are concerned, the process of allocation of shares is different. The maximum amount which retail investors can apply per IPO is Rs. 2 lakh. In order to determine the total demand for shares in the retail investor category, all the applications are grouped together and the total number of applications are calculated. If the number of applications are more than the number of shares offered for retail investors, the maximum RIIs who are eligible for the allotment of the minium bid lot are determined.

The total number of equity shares available for allotment to RIIs is divided by the minimum bid lot. This gives the maximum number of RIIs who can be allotted the shares.

For example - If shares worth Rs. 20 lakh need to be allotted to the retail segment and the minimum lot size is Rs. 10,000, only a maximum of 200 applicants will be allotted the shares with the minimum lot of Rs. 10,000.

If the number of RIIs exceed the maximum RII allottees, the RIIs (in that category) who will be eligible for the minimum bid lot will be determined on the basis of draw of lots. This is a computerised process and hence there is no room for partiality.

High Net-worth Individuals

Usually, HNIs invest a large amount of money in IPOs. Financial institutions provide funding to HNIs in order to invest in IPOs. It is not necessary that a HNI will be allotted the exact number of shares that he has applied for. If there is an over-subscription, the HNIs may be allotted less shares than what they must have applied for. For example : A particular HNI client has applied for 10 lakh shares and the HNI quota is over-subscribed by 150 times. The total shares that will be allotted to him will be 6666. This number arrives by dividing the total number of shares applied for by the number of times that it has been over-subscribed.

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