Initial Public Offerings (IPO) presents the investors with a chance to own shares in a company that is going public. A majority of investors especially new ones, observe the process of IPO allotment and are likely to have questions on how this process works. In the course of this guide, you’ll find all the information that is essential to understand the process of IPO allotment and be ready to get engaged in this process.
What is an IPO?
But, first of all, it is necessary to determine what IPO is before discussing IPO allotment in detail. From the above definition, IPO is known as the initial public offering of a firm’s shares after they were previously in ownership of the firm’s shareholders only. This is one of the methods that companies use to get money from investors with the help of that investors get an option to own shares in the company.
After the IPO process has commenced, any interested investors are free to approach a company and apply for the shares at an offering window. Nevertheless, the IPO application does not mean that you will automatically receive an allotment since the number of shares is usually small and does not meet those of the interested applicants. The allotment process determines in some capacities the recipient of the shares and the number of shares that they are supposed to receive.
Table of Contents
A Beginners Guide: How to Allot IPOs?
Understanding the IPO Process
The IPO process starts with a company filing documents with the Securities and Exchange Board of India (SEBI) or other securities market regulatory authority in some other country. It is on these documents that a lot of key information is provided such as the company’s financials, the recommended price per share, and the number of shares being floated in the market. If approved the company can proceed to the offer of the IPO and this gives the investors the right to subscribe during the offer period.
Opening of the IPO Subscription
The IPO subscription as seen earlier usually closes after a short period of 3 to 5 days. At this time, investors can give orders to buy a fixed number of shares at a price that falls within the price limit that has been set by the company – the price band. In the case of retail investors, bids are usually entered in lots meaning a group of shares that has to be applied for in multiples.
Different Types of Investors
This is because IPO allotments are usually rationed according to classes of investors and this is to ensure that each class receives what they require. The main categories include:
- Retail Individual Investors (RIIs): These are people who seek to purchase up to 200000 rupees worth of a company’s shares.
- Non-Institutional Investors (NIIs): These investors apply for shares over INR 2 Lakh.
- Qualified Institutional Buyers (QIBs): These are major economic players including; Banks, mutual funds, and insurance companies among others.
This means that every category is assigned certain number of shares that are out of the total number of shares in existence.
Subscription Levels and Oversubscription
Usually, when an IPO is launched and the shares are opened for subscription, there is a keen study of the demand. The subscription level demonstrates the share sought divided by the total number of shares out there in the market. For instance, in the case of the subscription being “2x,” then this implies that the investors have subscribed for twice the number of offers.
In some cases, IPO may be ovover-subscribedhich implies that many people are applying for the available stock. This may result in a proportionate allotment or even rejection for some investors depending on the regulations set by the company and the financial regulator.
Registrar is one of the most important positions in the Council and it plays a significant role in the achievement of the Council’s objectives
After the closing of the IPO subscription period, there is the process of IPO allocation. These companies actually appoint a registrar like Link Intime or KFin Technologies to conduct the process of allotment. Some of the tasks performed by the registrar include: He/she has to ensure that the shares are distributed to the right investors and he/she is also supposed to deal with refunding of unsuccessful applicants.
IPO Allotment Process
The IPO allotment policy is mainly framed by SEBI and mainly follows the proportionate policy. Here’s how it typically works: Here’s how it typically works:
- Proportionate Allotment: For cases where the demand for the IPOs is high the shares are divided among the investors in proportion. For instance, when an investor opens an account with an amount of money to be invested in a new issue, he or she may apply for as many shares as the amount will allow, say 100 shares in a very popular IPO that attracts many applications, the investor will be allocated 20 of the 100 shares applied for out of the total applications. This way every applicant gets a fair chance of getting what he or she wants and or needs.
- Lottery System: In some instances, if the IPO is over-subscribed in the retail investor category, then the system used can be a raffle system. This process of random selection defines who of the applicants will be given the shares. This is often the case with popular IPOs The most common examples of this are seen in high-demand IPOs.
- Refund of Excess Amounts: The remaining amount that an investor paid in excess if he/ she failed to be allotted the desired number of shares or no share was offered. Such a refund is normally given back to the investor in his/her bank account in the next few days.
Listing of Shares
When the shares are issued out, one gets credited into his or her dematerialized account. The company then floats the stock in the stock exchange and the investors are then allowed to buy and sell the stock in the market. The market price of the shares during flotation may not necessarily reflect the price set during the issue price since this depends on the market forces of demand and supply.
Post-Allotment Guidelines for Investors
After the IPO allotment process is completed and shares are credited to the investor’s Demat account, there are a few important steps and guidelines to follow: After the IPO allotment process is completed and shares are credited to the investor’s Demat account, there are a few important steps and guidelines to follow:
Check Your Allotment Status
Once the allotment process is finalized, investors can check their IPO allotment status through several channels: Once the allotment process is finalized, investors can check their IPO allotment status through several channels:
- Registrar’s Website: The individuals who applied for the share can go to the website of the concerned registrar of the IPO and use their application number or their PAN number to find out whether they have been offered shares or not.
- Stock Exchange Website: Some of the allotment details are also available on the websites of the stock exchanges like BSE or NSE in the IPO section.
- Emails and SMS Notifications: Most registrars use emails or even short message service or SMS, to alert investors of their allotment status.
Appeals and Refund which applies to those people who have undergone the screening and come out negative.
If some of the investors were not allowed any shares or if they are allowed fewer shares than they had applied for, the refund is immediately started. There are two methods through which refunds are processed. There are two methods through which refunds are processed:
- UPI Mandate Release: If you applied the UPI method then the mandate for holding the fund is released automatically for the unallocated portion.
- Bank Transfer (ASBA): For investors using the ASBA method, where a specified amount to be bid for is blocked, the excess blocked amount is unblocked and credited to the linked bank account.
IPO Listing Day
The listing day is consider another important period for IPO investors. This is the stage where the shares of the company are floated on the stock exchange market and market price of the share is fixed. This in depends with the demand, market sentiment as well as the expectation on the company and may experience high volatility.
Key Points to Remember on Listing Day: Key Points to Remember on Listing Day
- Lock-in Period: There are particular categories of investors who cannot dump the allotted shares at least for some period of time, for instance, anchor investors or promoters.
- Price Volatility: Premarket volatility is quite regular and often seen that shares can experience a change in their price on the listing day. As for the fluctuations in the IPOs’ prices, some IPOs open at a higher price level compared to the issue price but the prices may otherwise decrease because of the market conditions or investors’ sentiments.
An analysis of factors that may increase or decrease one’s chances of getting an IPO allotment
There are a few factors that can influence the likelihood of receiving an IPO allotment, especially in oversubscribed IPOs:There are a few factors that can influence the likelihood of receiving an IPO allotment, especially in oversubscribed IPOs.
Size of Application
In most cases, the more shares you apply for, the more the probabilities that your application will be successful and get an allotment. However, SEBI has restricted the application amount for the retail investors to the maximum value of INR 2 lakhs.
Oversubscription
It was pointed out above that oversubscription cuts down the probabilities of the number of shares one is likely to be awarded. By oversubscription, shares may be allotted by the toss of a coin meaning even if you have applied for the shares you will not be allotted any.
Demand from Institutional Investors
This is because when an IPO receives huge interest from institutional investors such as the QIBs and NIIs, it creates competition within areas such as the retail investor segment.
IPO Allotment Process-Issues that Need to Be Avoided
- Applying for Multiple Applications using the same Permanent Account Number
- Another blunder which has been observed often about the investors, multiple application filings with the same PAN number. The rules set by SEBI exclude duplicate applications which may at times result in rejection. Ensure that you apply only once and if you do experience this you could cause it by applying more than once.
Wrong Demat/ Bank Details
Incorrect entry of Demat or bank account details leads to a rise in the risk of receiving a reduction in, or elimination of your allotment completely. See that your details are well provided and updated to avoid any mix up when applying for IPO.
Applying Without Research
IPOs are at times offered an application on the basis of the hype that surrounds such stocks Most investors for instance just apply for floats because of hype. This is important perhaps in view of the fact that the success of the application will depend on the evaluation of the financials of the company, its business model and growth prospects among other things. This makes sure that the money that you are putting down has the right potential return as per your needs.
Conclusion
Understanding the IPO allotment process may sound rather puzzling at first glance, but in fact, it is quite easy to cope with the process once you know what strategies to apply. Understanding how shares are allocated or distributed, the role of the registrar, and the future activities after the allotment can help boost the chances of being granted shares plus the various pitfalls that are likely going around in the future.
This means that subscription must take place within the subscription window, details in the application must be correct and one must avoid oversubscription. IPOs are special events that give people a chance to be shareholders of companies from the very beginning of their development, however, IPO investment is not without its drawbacks. That is why it is always advisable to take time and study the market and then venture into the market with a view of investing.
With the assistance of the detailed instructions described in this article, you will be ready for the next IPO investment where you, as an investor, will not be victims of unfair allotment of IPOs.
