Understanding the process of IPO share allotment to retail investors: The year 2020 was a mixed year for the Indian IPO’s. As many as 14 popular IPOs hit the market last year. A few of the big names that offered their initial public offering last year were Burger King, Happiest Minds, CAMS, Angel Broking, SBI cards, and more. (You can read the Indian IPOs performance for 2020 here).
Now, the seasoned investors may already know what is an IPO and how its allotment process works. However, for the newbie investors, many a time allotment process may look like a mystery, especially when they are not allotted any shares even if applying for multiple IPOs.
In this post, we are going to discuss the process of IPO share allotment to retail investors i.e. the common investors. Let’s get started.
Introduction to IPO Details
Let us first understand the IPO details with the help of an example. Here are the issue details of the Burger King IPO that closed last year.
- IPO Dates: Dec 2 – Dec 4, 2020
- Type of Issue: Book Built Issue IPO
- Issue Size: 135,000,000 Eq Shares of ₹10 (aggregating up to ₹810.00 Cr)
- Face Value: Rs 10 Per Equity Share
- IPO Price Band: ₹59 to ₹60 per equity share
- Market Lot: 250 Shares
- Minimum Order Quantity: 250 Shares
- Listing At: BSE, NSE
Although most of the points mentioned above can be understood logically, let me explain a few of the important ones in the IPO issue in detail.
From the term IPO date (or Issue date), you can understand that you have to apply for that IPO between those time periods to be eligible for getting the shares.
Next, the minimum order quantity is 250 shares, which is the same as the market lot. This means that you cannot apply for less than 250 shares for this IPO. If you apply for 30 shares, then your application will be rejected. Further, you can buy the shares only in a lot of 250. This means that you can buy the shares in the numbers of 250, 500, 750, 1,000… which is basically 1 lot, 2 lot, 3 lot, 4 lot… etc.
Further, from the IPO price band, you can understand that you have to place the bid between Rs 59 to 60, for each share. The upper level of the issue price is called the cut-off price (here Rs 60). To increase the chances of getting allotted to the shares, it is recommended to bid at the cut-off price of the IPO.
All these points you can easily understand just by reading the IPO details. But what about the allotment? What is the process of IPO share allotment to retail investors? Why some people receive allotment and others don’t? How exactly are the stocks allotted to the retail investors? This is what we are going to next in this article.
Nevertheless, before we learn the process of IPO share allotment to retail investors, there are a few more things that you need to understand first.
What does the Over-Subscription of an IPO mean?
The over-subscription of an IPO means that the demand for the IPO exceeds the total number of shares offered by the company.
For example, Burger King IPO (which is discussed above), evoked a huge oversubscription of 157 times. Burger King IPO received over 1,100 crore bids for its shares compared with 7.45 crore shares on the offer, data compiled by the National Stock Exchange showed.
As the Subscribers for Burger King IPO consisted of Retail investors, qualified institutional buyers, and non-institutional investors, the subscription differed for each segment. The retail individual investor’s segment of the IPO was subscribed over 68 times while the portion meant for qualified institutional buyers (QIBs) was subscribed close to 87 times and non-institutional investors 354 times.
If you’re a common investor, you’ve to look into the retail segment over-subscription, which in the case of Burger King’s IPO was 68 times. The higher the over-subscription, the lower are the chances for getting allotted to the shares of that IPO.
Who can apply for the IPOs?
The IPO applications are divided into three categories:
- Institutional or qualified institutional buyers (QIB)
- Non- Institutional Investors (NII) or High net worth investors (HNI)
- Retail institutional investors (RII)
Each category has a fixed division of share allocation. For example, Burger King IPO is a public issue of 7,44,91,524 equity shares. The issue offers 1,36,27,118 (18.29%) shares to retail individual investors, 4,04,23,729 (54.26%) shares to qualified institutional buyers, 2,04,40,677 (27.45%) shares to non-institutional investors.
This means that 54.26% of the total share was reserved for the QIB, 27.45% of the total share was reserved for NII, and 18.29% of the total share was reserved for the RII. This ISSUE STRUCTURE can change for different IPOs. However, the company has to specify the issue allocation in the IPO details.
IPO Share Allotment Process
1. The Process of IPO Share Allotment to QIB
For QIBs, the discretion of IPO shares allotment is done by merchant bankers. Further, in the case of over-subscription, the shares are allotted proportionately to the QIBs. For example, if a QIB applied for 10 lakh shares and the IPO got 5 times over-subscribed, then it will get only 2 lakh shares.
2. The process of IPO Share Allotment to Retail Investors
For the IPO application, retail investors are allowed to apply with a smaller worth between Rs 12-18k to Rs 2 lakhs. For example, in the case of Burge King IPO
- Issue Price: Rs 59-60
- Minimum order quantity: 250.
Therefore, if a retail investor wanted to apply for the Burger King shares at a bid of Rs 60 (Cut-off price), then the total application amount will be= Rs 60 * 250 = Rs 15,000. Further, he/she can apply for a maximum of Rs 2 lakhs. This means that for Burger King IPO, the RII can get a maximum of 13 lots (Each lot of 250 shares).
Now, let us understand how the process of IPO share allotment to retails investors actually happens. First of all, the host calculates the total number of demands. After calculating the demands, here are the two possible scenarios:
1. Demand is less than or equal to the shares offered
If demand is less than or equal to the offered retail proportion of the IPO shares, then full allotment will be made to the RII’s for all the valid bids.
2. Demand is more than the shares offered
If demand is greater than the allocation to the retail proportion of shares offered, then the maximum number of RII’s will be allotted a minimum bid lot. These are called maximum RII allottees and is calculated by dividing the total number of equity share available for the allotment to RII by the minimum bid lot.
Let us understand this with the help of a simple example:
Suppose there are 10 lakh shares offered to the retail investors and the minimum lot size is 50. Then, the maximum retail investors will receive the minimum bid lot = 10 lakhs/50 = 20,000. This means that 20,000 participants will receive at least 1 lot.
Quick Note: In the case of over-subscription, allocation lower than a minimum lot is not possible. If the minimum lot size is 50, you will not be allotted 30 shares. Anyone who is allotted the share will receive at least 50 shares.
In the case of over-subscription, again there are two possibilities:
A) In the case of a small over-subscription, the minimum lot is distributed among all participants. Then, the rest available shares in the retail portion will be distributed proportionately to the RIIs, who have bid for more than 1 lot.
Let’s say for the above example, 18,000 people applied for the allotment. However, among all the applicants, 5000 people applied for 2 lots (1 lot consists of 50 shares).
Hence, total no of shares applied = (13,000* 1lot) + (5,000* 2lot) = (13,000* 50) + (5,000* 100) = 11.5 lakhs
Here, we have oversubscription as the total shares offered to the retail investors is 10 lakhs. In such scenarios, the first 1 lot of 50 shares will be allotted to all 18,000 applicants. Then the remaining 1 lakh shares are allotted proportionately to all those who have applied for more than 1 lot.
Also read: Is it worth investing in IPOs?
B) In case the RII applications are greater than the maximum RII allottees (big over-subscription), then the allotted bid lot shall be determined on the basis of the draw of the lot i.e lottery.
Let’s say for the same example discussed above, 1 lakh people applied for the allotment. In such a scenario, who will get the allotment will be decided by the lottery. Nevertheless, the draw of lots is computerized and hence, there is no provision for cheating or partiality. Everyone has an equal chance to get the allotment.
Overall, in the case of oversubscription, the allotment totally depends on your luck.
3. Process of IPO Share Allotment to HNI
High net worth investors are those people who invest a large amount of money (greater than 2 lakhs) in an IPO. In case of oversubscription, HNIs are also allotted the shares proportionately. Further, many a time, the financial institutions provide funding to HNIs in order to invest it in IPOs.
That’s all. This is the process of IPO share allotment to retail investors, QIBs, and HNIs.
BONUS: How to maximize the chances of getting an IPO?
Many a time, the IPO you’ll be applying for will be over-subscribed. In such cases, even if you applied for a full quota of Rs 2 lakhs, still, there’s no guarantee that you’ll get even a single lot. Even in the same example of Burger King discussed above, it got over-subscribed 157 times.
Then what to do in such cases? Here are two basic pieces of advice to maximize the chance of IPO share allotment to retail investors. First, fill the application correctly, and second, apply at the cutoff price.
That’s all. I hope this post about the process of IPO share allotment to retail investors, QIBs, and HNIs is useful to you. If you have any questions regarding the allotment process, please comment below. I’ll be happy to help you out. Happy Investing.
Hi, I am Kritesh (Tweet me here), an NSE Certified Equity Fundamental Analyst and an electrical engineer (NIT Warangal) by qualification. I have a passion for stocks and have spent my last 4+ years learning, investing and educating people about stock market investing. And so, I am delighted to share my learnings with you. #HappyInvesting