IPO allotment process Detailed guide.
IPO allotment is the most discussed and the most heated work in the stock market. IPO has got a lot of attention recently because of the huge subscription and a large number of companies are filing papers to raise money via IPO.
But, the process of allotment of IPO for retail investors is more confused in terms of the process involved, and the different reasons because of which the application getting rejected.
During the last one month(September 2020) IPO has received a lot of attention in the primary market and 8 initial public offerings hit the Dalal Street with few of them oversubscribed to the tune of 150 times.
When it comes to the returns of investments in IPO, few IPO has given a return of almost 120% and few have listed at a discount of 20%. So if you consider the risk to reward ratio, it is very attractive. Most importantly the return is very attractive for retail investors who invest capital less than 2 lakh rupees.
Investors who invest an amount of less than 2 lakh rupees are called as retail investors in the Indian stock market. On the other hand, those who invest more than 2 lakh rupees are called Non-Institutional Investors(NII’s). These can also include High Net worth Individuals (HNI), Non-Resident Indians(NRI), companies and others.
In addition to these two categories of investors, there is a third category called Qualified Institutional Buyers(QIB). This category involves Mutual fund houses, Pension fund, insurance and others who deal in very large volumes of trade and usually buy and sell in bulk quantity.
IPO Process and Basis of Allotment
Now the process of allotment of shares is different for retails investors, NII, and QIBs The process is in accordance with the SEBI regulations.
When a company is going for IPO, out of the total number of shares, the company usually keeps a certain percentage of quota for each type of investors. For example in general, out of the total number of shares that the company is giving, 35% will be reserved for Retail Investors, 15% is reserved for NII and 50% is reserved for QIBs. This is in general and might change from IPO to IPO. And this percentage is even decided in accordance with SEBI. Regulations.
Whenever an IPO is decided, the company decides few things like the price band and lot size, Number of shares for different category of investors, and timeframe of IPO process.
The price band is the minimum to the maximum price at which investors can bid. For example, the price band of Computer-aided management service which raised IPO recently is ₹1224-₹1230. Investors are allowed to bid at a price within this range. The lot size is the minimum number of shares for which investor has to bid and can only bid in multiple of that. For example, 1 lot size of CAMs IPO is 12 shares and can only bid in multiples of 12. Usually, the lot size is decided generally to keep the price of one lot size is around ₹15000.
The time frame is usually a few days when it will accept the bids from investors. And after the time frame is over after a few days the shares are allotted based on the subscription and process of allotment.
After the IPO allotment process is completed the most important things that investors are interested in the basis of allotment. After receiving the bids from investors, the company determines the basis on which it allocates the shares to different investors. Here we need to understand different scenarios.
The first case will be when the IPO is undersubscribed. This is the case when the IPO received bids for less number of shares than the total number of shares that are available for offer. In such case generally, all the investor are allotted the shares they have applied and the price will the lower end of the Price range. That is all investors receive as many lots of shares they have applied for at the price of the lower end of the price band. SEBI mandates that an IPO have to be subscribed at least 90% for it to be successful. if it receives less number of bids, then the IPO is a failure and the company cannot raise funds and go public.
Second scenarios will be fully subscribed. This is the case when bids are received for as many shares as the total number of shares actually available in IPO. This is almost same as the Undersubscribed situation. Investors will receive as many lots as they have applied for at a price generally at the lower end of the price band.
The third case is when the IPO gets Oversubscribed. This is the situation when there will be a lot of discussions that go on. Because whenever there is a huge potential of profit from an IPO, it gets oversubscribed and most of the cases the retail investors won’t get the number of shares they desired for. The process of allotment of shared in this scenario is different. First, if the IPO is oversubscribed, the price at which it will be allotted is on the upper end of Price band or called a cutoff price. and In case of retail investors, when the IPO is oversubscribed, SEBI mandates that each retails investor is first allotted a minimum of 1 lot. Remember that in this case all those applications who have bid at the lower end of the price band will be rejected, as the price decided was the upper end. and out of all those who applied at the cut off price, one share is allotted to each on a lottery basis. Yes, shares are allotted as 1 lot to each accepted application of retail investor on a lottery basis and if all the retail investors are allotted and then still if few shares are available, then they are allotted in proportion to the number of shares applied for.
To understand clearly take the example to two recent IPOs. One is Happiest minds which got oversubscribed. The IPO of Happiest minds is subscribed 150 times the number of shares available. In such scenarios, the shares are allotted on basis of a lottery. Initially system, the price is fixed at the upper end i.e., 166 of the price band(165-166). Now the applications when are bid at a lower price are rejected. And out of all the applications of retail investors, the shares are allotted on a lottery basis one lot to each retail investors. In the process, there are only a few retail investors who will receive the shares and many have not received any shares and their money has been returned back.
How much time is taken for an IPO
Usually, the IPO accepts applications for 3 days and after the time period is over, the basis of allotment is finalized within a week of the closing date of IPO. Once the basis is finalized generally the shares are credited to the investor’s Demat account within 2-3 trading days. and the share goes for the listing day. On a listing day, the stock gets listed at 10 Am in the morning at the opening prices is decided based on the equilibrium reached in the pre-opening session. Usually, for an IPO which is oversubscribed, the listing price is much above the issue price.