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

Nutan Gupta

23 Feb 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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mutual-fund

Why to Choose Mutual Funds Instead of Directly Investing Into Equities?

Whether to invest in equities or mutual funds is a question that has plagued every investor. As someone who needs the best value for his/her investment should you invest in equity directly or via mutual funds?

Let’s start by first understanding what these two terms ‘equities’ and ‘mutual funds’ stand for-

Equities- Equities generally represent ownership of a company. If you own any equity in a company, you are a part owner of the said company (depending on how much equity you own).

Mutual Funds – It is an investment scheme which is professionally managed by an asset management company. It pools together the resources of a group of people and invests their money in equities, debentures, bonds and other securities.

Why choose mutual funds over equities?

For people who’ve never invested in either stocks or mutual funds, it is hard to know which is better and where to start. Broadly speaking, if you are a novice investor, mutual funds are not only less risky but also way easier to manage. Here are some ways in which investing in mutual funds is beneficial as opposed to investing in equities -

Diversification

Mutual funds provide more diversification as compared to an individual equity stock. When you invest in equity, you are investing in a single company which has its inherent risk. For example, if you invest Rs.20,000 in buying equities of one company, you could face a total loss if that particular company performs poorly in the market.  

If you invest the same amount in mutual funds, it will be invested in different kinds of stocks and financial instruments, high-risk and low-risk both, so you might not face total loss even if one company does poorly.

Scale of Investment and Lower Costs

For an individual investor buying and selling stocks is a difficult task due to its high price. Thus, any gains made from stock appreciation are nullified if the overall trading costs are considered. Comparatively with mutual funds, as the money is pooled from a large number of investors, the cost per individual is lowered.  

Another advantage of mutual funds is that you don’t need to invest large sums of money. Buying equities for a profitable venture needs huge amounts of money, a minimum of few lakhs. With mutual funds, you can start with Rs.1000 and earn profits on that as well.

Convenience

Keeping an eye on the markets everyday is a time-consuming business, especially if you are investing as a side gig. There are people who spend their lives studying the market and still end up sustaining heavy losses. Though investing in mutual funds does not guarantee high returns, it is stress-free and needs less work as compared to investing in equities.

To sum it up

It is important to remember that mutual funds have their own disadvantages as well. Thus, as with any financial decision, educating yourself and understanding the suitability of all the available options is the ideal way to invest. 


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

Nutan Gupta

23 Feb 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.

Have Referral Code?