How to Increase Chances of IPO Allotment: One of my favourite meme sections to go through this year are those about IPO’s. Maybe it’s a coping mechanism to all the IPO’s I’ve missed out on because I did not receive any allotment.
There have been over 40 investment-worthy IPO’s this year alone. But despite that, we have seen soo many complaints and requests on our site and Instagram from investors asking us to share strategies or tricks to receive IPO allotment.
Hence we have decided to write this article on how to increase your chance for an IPO allotment. Here we share some tips that are obviously not a sure shot at the allotment but will definitely increase your chances of receiving an allotment. Keep Reading to find out!
How are Shares Allotted in an IPO?
Before we jump into the top tricks to increase your chances of receiving an IPO allotment, let us first try to understand how the allotment process actually works. But Why? Even though I know the strategies mentioned below, there are still times I miss out on IPO’s.
But understanding how the allotment takes place helps me cope with the lost opportunity. After noticing several discrepancies in the process SEBI implemented a new allotment process in 2012. According to this all Retail Individual Investors(RII) are to be treated equally.
The allotment in an Initial Public Offering (IPO) is determined based on the number of investors that have subscribed to an IPO or in other words the number of applicants that an IPO has received. There can be 2 outcomes here. The IPO is oversubscribed i.e. the number of investors applying to the IPO is more than the shares that have been offered.
The other outcome is that the IPO is undersubscribed. Here the number of investors subscribing and buying shares in the IPO is less than the number of shares offered by the company.
In a case where the IPO is undersubscribed every investor who has applied to the IPO will get an allotment. In a situation where the IPO is oversubscribed the shares will be allotted by dividing the total number of shares available to retail investors by the minimum bid lot.
Maximum RII Allottees = (Total number of shares available for RIIs)/Minimum bid lot
Here retail investors will get one lot or nothing. The investors who receive one lot are selected on a lottery system. This would explain why we don’t receive allotments every time we apply for oversubscribed IPO’s.
How to Increase Chances of IPO Allotment?
Now let’s go through some small changes we can make to the way we apply which will improve our chances of getting an IPO allotment.
1. Avoid Applying for Huge Amounts
This point is mainly dedicated to busting a myth. Many investors have the misunderstanding that by taking on more lots in an Initial Public Offering (IPO) that go all the way up to Rs. 2 lacs the greater their chances.
As we have seen above all retail investors are treated equally. So by investing large amounts you do not increase your chances. But what should you do if you have Rs. 2 lac and still want to get an allotment.
2. Apply Through Multiple DEMAT Accounts
As we have seen above applying for multiple lots through one is ineffective in increasing your chances. Instead what one can do is apply for one lot but through multiple Demat accounts. So say if you apply through 5 Demat accounts. This automatically increases your chances of allotment fivefold.
However one must be careful so as to not apply using DEMAT accounts that have the same PAN card number. If one does so then all his applications through various accounts stand rejected.
Instead what one should do is apply through DEMAT accounts that have a different PAN number. This can be done by using accounts of family and friends. On the flip side, investors must also be wary of getting more than one allotment. As the system works on a lottery basis.
3. Always bid at the Cut-off Price
After an investor decides to apply for an IPO the next step is deciding how much he is willing to pay for the company. This is why the companies release a price band between which investors can bid at a price. Take for example the price band is set at Rs. 200-210.
An IPO has oversubscribed only the bids at the maximum price or the cut-off price are considered. Investors who bid for amounts lesser than this cut off are rejected. In the above example in order to avoid chances of being rejected the investor must apply at Rs. 210.
Hence investors must always apply at the cut off price to increase their chances of IPO allotment.
4. Buy Parent or holding company shares
This strategy is only applicable for those IPO’s whose parent company is already listed. When it comes to IPO’s investors who hold at least 1 share of the parent company are eligible to apply through the shareholder category. But how is this beneficial?
In most IPO’s we see that the retail portion is subscribed multifold times. However, when it comes to the shareholder category the number of subscribers is considerably less. This increases the chances of an investor receiving an allotment.
5. Ensure that the details are filled in properly
One of the most common yet extremely easy to avoid mistakes pertains to application errors. Application may be rejected through simple errors like spelling mistakes, mismatches between applicants names and names on PAN cards, erroneous cheque details. One of the best ways to avoid this is by making use of ASBA (Application Supported by Blocked Amount).
These are some of the top techniques we’ve used not only to avoid unnecessary rejection noticed in most IPO applications but also to improve the chances of an allocation. Let us know what you think about these in the comments below. Happy Investing!
Aron, Bachelors in Commerce from Mangalore University, entered the world of Equity research to explore his interests in financial markets. Outside of work, you can catch him binging on a show, supporting RCB, and dreaming of visiting Kasol soon. He also believes that eating kid’s ice-cream is the best way to teach them taxes.