Learn how the IPO allotment process works and what factors affect your chances of getting shares in an IPO. Find out how to check the allotment status and the refund process for IPO applications.
Understanding IPO Allotment process: How to Get Shares in an IPO
Are you interested in investing in IPOs? Do you want to know how the IPO allotment process works and what factors affect your chances of getting shares in an IPO? If yes, then this blog post is for you.
In this blog post, we will explain what is an IPO and why it is important for investors to understand the allotment process. We will also provide a brief overview of the main steps and factors involved in the allotment process. Finally, we will show you how to check the allotment status and the refund process for IPO applications.
What is an IPO and Why is it Important?
An IPO, or Initial Public Offering, is the process by which a private company offers its shares to the public for the first time. An IPO is a way for a company to raise funds from the market and expand its business. It is also a way for the existing shareholders to exit or reduce their stake in the company.
An IPO is important for investors because it gives them an opportunity to invest in a new or emerging company and benefit from its growth potential. However, investing in an IPO also involves some risks and challenges. One of the main challenges is the IPO allotment process, which determines how many shares an investor will get in an IPO.
How Does the IPO Allotment Process Work?
The IPO allotment process is the process by which the shares offered in an IPO are distributed among the investors who have applied for them. The IPO allotment process depends on several factors, such as the type of investor, the quota or reservation for each category of investor, the level of subscription or demand for the IPO, the cut-off price, the lot size, the minimum and maximum bid, and the method of allotment.
There are three types of investors who can apply for an IPO:
- Qualified Institutional Buyers (QIBs): These are institutional investors such as banks, mutual funds, insurance companies, etc. who have a high net worth and expertise in the market. They usually get 50% of the total shares offered in an IPO.
- Non-Institutional Investors (NIIs): These are high net worth individuals (HNIs) or corporate bodies who invest more than Rs. 2 lakhs in an IPO. They usually get 15% of the total shares offered in an IPO.
- Retail Investors: These are individual investors who invest up to Rs. 2 lakhs in an IPO. They usually get 35% of the total shares offered in an IPO.
The quota or reservation for each category of investor is fixed by the company and the regulator (SEBI) and is mentioned in the prospectus of the IPO. The quota or reservation affects the chances of getting allotment in an IPO. For example, if the retail quota is 35%, it means that only 35% of the total shares offered in an IPO will be allotted to retail investors.
The level of subscription or demand for the IPO is the number of times the IPO is oversubscribed or undersubscribed in each category of investor. For example, if the retail category is subscribed 10 times, it means that the total number of shares applied by retail investors is 10 times more than the number of shares available for them. The level of subscription or demand for the IPO also affects the chances of getting allotment in an IPO. For example, if the retail category is oversubscribed, it means that there is more demand than supply for the shares and the chances of getting allotment are low. On the other hand, if the retail category is undersubscribed, it means that there is less demand than supply for the shares and the chances of getting allotment are high.
The cut-off price is the highest price at which the shares are allotted to the investors in an IPO. The cut-off price is determined by the company and the book running lead managers (BRLMs) based on the bids received from the investors. The cut-off price is announced after the closure of the bidding period. The investors who have applied at or above the cut-off price are eligible for allotment. The investors who have applied below the cut-off price are rejected.
The lot size is the minimum number of shares that an investor can apply for in an IPO. The lot size is fixed by the company and the regulator (SEBI) and is mentioned in the prospectus of the IPO. The lot size varies from IPO to IPO and depends on the price band and the face value of the shares. For example, if the price band of an IPO is Rs. 100 to Rs. 110 and the face value of the share is Rs. 10, then the lot size could be 10 shares. This means that an investor can apply for a minimum of 10 shares and a maximum of 200 shares (in multiples of 10) in the IPO.
The minimum bid is the lowest price at which an investor can apply for an IPO. The minimum bid is equal to the lower end of the price band of the IPO. For example, if the price band of an IPO is Rs. 100 to Rs. 110, then the minimum bid is Rs. 100.
The maximum bid is the highest price at which an investor can apply for an IPO. The maximum bid is equal to the upper end of the price band of the IPO. For example, if the price band of an IPO is Rs. 100 to Rs. 110, then the maximum bid is Rs. 110.
The allotment method determines how IPO shares are allocated to investors.
There are three main methods of allotment:
- Proportionate Allotment: This method is used when the IPO is oversubscribed in any or all categories of investors. In this method, the shares are allotted to the investors in proportion to their applied amount. For example, if the retail category is subscribed 10 times and an investor has applied for 100 shares, then the investor will get 10 shares (100/10) in proportionate allotment.
- Lottery System: This method is used when the IPO is oversubscribed in the retail category and the proportionate allotment is not possible due to the lot size. In this method, the shares are allotted to the investors by a random draw of lots. For example, if the retail category is subscribed 10 times and the lot size is 10 shares, then the investor will get either 10 shares or zero shares in lottery system.
- First-Come-First-Serve Basis: This method is used when the IPO is undersubscribed in any or all categories of investors. In this method, the shares are allotted to the investors on a first-come-first-serve basis, i.e., the investors who have applied earlier will get the allotment first. For example, if the retail category is subscribed 0.5 times, then the investor will get the full allotment of the applied shares in first-come-first-serve basis.
How to Check the Allotment Status and Refund Process?
The allotment status of an IPO can be checked online or offline. The online method is faster and easier than the offline method. The online method can be done through the websites of the registrar of the IPO or the stock exchanges. The registrar of the IPO is the entity that handles the allotment and refund process of the IPO. The stock exchanges are the platforms where the shares of the IPO are listed and traded. The websites of the registrar and the stock exchanges are mentioned in the prospectus of the IPO.
To check the allotment status online, the investor needs to enter the application number, PAN number, or DP ID/Client ID. The application number is the unique number generated by the system when the investor applies for the IPO. The PAN number is the permanent account number issued by the income tax department. The DP ID/Client ID is the identification number of the depository participant and the client, respectively. The depository participant is the intermediary that holds the shares of the investor in electronic form.
The allotment status will show the number of shares allotted to the investor and the amount of refund, if any. The allotment status will be available on the websites of the registrar and the stock exchanges within 15 days of the closure of the bidding period.
The refund process of an IPO is the process by which the excess amount paid by the investor is returned to the investor. The refund process depends on the mode of payment used by the investor.
