What is the process of IPO share allotment to retail investors?
The year 2017 was a blockbuster year for the Indian IPO’s. As many as 152 IPOs hit the market last year, raising a total of $11.6 Billion. Few of the big names that offered their initial public offering last year were BSE, CDSL, Avenue Supermart (Dmart), SBI life insurance, Cochin shipyard etc.
Now, the old investors already know what is an IPO and how its allotment process works. However, for the newbie investors, many a time it looks like a mystery.
For example, here are the IPO details of Apollo Micro Systems Limited IPO (Apollo Micro Systems IPO):
»» Issue Open: Jan 10, 2018 – Jan 12, 2018
»» Type of Issue: Book Built Issue IPO
»» Issue Size: Equity Shares of Rs 10 aggregating up to Rs 156.00 Cr
»» Face Value: Rs 10 Per Equity Share
»» Issue Price: Rs 270 – Rs 275 Per Equity Share
»» Market Lot: 50 Shares
»» Minimum Order Quantity: 50 Shares
»» Listing At: BSE, NSE
Almost all the points mentioned above can be understood logically. However, let me explain few of the important ones in the IPO issue detail.
From the term issue date, you can understand that you have to apply for that IPO between those issue dates.
Next, the minimum order quantity is 50 shares, which is same as the market lot. This means that you cannot apply for less than 50 shares for this IPO. If you apply for 30 shares, then your application will be rejected. Further, you can buy the shares only in the lot of 50. This means that you can buy the shares in the numbers of 50, 100, 150, 200… which is basically 1 lot, 2 lot, 3 lot, 4 lot… etc
Further, from the issue price, you can understand that you have to place the bid between Rs 270 to 275, for each share. The upper level of the issue price is called the cut-off price (here Rs 275).
You can understand all these points 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 discuss in this post.
Nevertheless, before we learn the process of IPO share allotment to retail investors, there are few 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 of the IPO exceeds the total number of shares offered by the company.
For example, in the IPO of Apollo Microsystems Ltd which is discussed above, the shares offered by the company were 4.14 million. On the other hand, the IPO received the bids for 1.02 billion shares. Overall, it was over-subscribed nearly 247 times.
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 networth investors (HNI)
- Retail institutional investors (RII)
Each category has a fixed division of share allocation.
For example, the issue structure for Apollo Microsystems ltd was: QIB- 50%, NII- 15% and Retail Investors- 35%.
This means that 50% of the total share was reserved for the QIB, 15% of the total share was reserved for NII and 35% of the total share was reserved for the RII.
This ISSUE STRUCTURE can change for different IPOs. However, the company has to specify the allocation in the IPO details.
Also read: How to buy your first stock? The Simple Way
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 10-15k to 2 lakhs.
For example, in the Apollo Microsystems Ltd,
Issue Price: Rs 270-275
Minimum order quantity was Rs 50.
Therefore, it a retail investor wants to apply the shares at a bid of Rs 270, then the total application amount will be= Rs 270 * 50 = Rs 13,500.
Further, he/she can apply for the maximum of Rs 2 lakhs. This means that for Apollo Microsystems, the RII can get maximum of 14 lot (Each lot of 50 shares).
Now, how the process of IPO share allotment to retails investors actually happens?
First of all, the host calculates the total number of demand. 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 that will receive the minimum bid lot = 10 lakhs/50 = 20,000.
This means that this 20,000 people will receive at least 1 lot.
Note: In 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 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, 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 allotted bid lot shall be determined on the basis of draw of lot i.e lottery.
Let’s say for the same example discussed above, 1 lakh people applied for the allotment. In such 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 the equal chance to get the allotment.
Overall, in 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 maximise the chances of getting an IPO?
Many a time, the IPO you’ll be applying 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.
In the same example of Apollo Microsystem limited discussed above, it got over-subscribed 247 times.
Then what to do in such cases?
Here are two basic advise to maximise 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.
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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