Ipo Allotment Process। How shares are alloted in ipo?

Before understanding the ipo allotment process we understand the different categories of ipo investors. There are three types of ipo investors and they are:

1. Qualified Institutional Buyers i.e QIB.
2. Non-institutional Investors i.e NII (High net worth investors or HNI).
3. Retail Investors.

Qualified institutional investors or QIB invest for their porfolio or for the public. Examples of qualified institutional investors are:

• Mutual Funds.
• Provident Funds.
• Pension Funds.
• Insurance Companies.

Qib invest always with a large capital. In ipo a particular quota is reserved for every category. Maximum 50% quota can be reserved for qib (QIB) in ipo. 

Next category is non-institutional investors or HNI. The category includes:

• Individual Investors.
• NRI.
• HUF.

NII can bid minimum upto 2 lakh rupees. And 15% quota is reserved for nii (NII) in ipo. Non-institutional investors are called high net worth investors or HNI. Next point is retail investors.

Ipo Allotment Process

Retail investors are individuals like i and you. Retail investors can bid maximum upto 2 lakh rupees. If you bid in ipo more than 2 lakh rupees then you are called high net worth investors. Minimum 35% quota is reserved for retail investors. After somedays of bidding shares allotment process is started. Let’s see how shares are alloted for the retail investors.

You can not buy one or two shares in ipo. You have to buy a lot (group of shares that is decided by the ipo company). Understand with an example. Imagine P company brings their fixed price issue. P company decides the price of one share is 100 rupees and the lot size of 16 shares. So the price of 1 lot is (16*100 rupees) =1600 rupees. To invest in ipo you should bid minimum 1 lot.

If you bid from 1 lot to 125 lot then you are called retail investors and have to apply for ipo from retail investors category. Because the price of 125 lot is or less than 200000 rupees. If you bid more than 125 lot for P company then you are called HNI or high net worth investor and you have to apply from HNI category. Because then your investment will be more than 200000 rupees. Now disscuss about oversubscribe in ipo.

What is oversubscription in ipo?

If shares number are subscribed more than the shares number that company issue in ipo then it is called oversubscribe. For example, if any company reserve 100000 shares in ipo for retail investors and 200000 bids are come then it is called that ipo is oversubscribed by retail investors 2X more. If 500000 bids come for this 100000 shares then it is called that ipo is 5X oversubscribed by retail category. A particular quota is reserved for QIB,HNI and retail category. 

If any company reserve 35% shares for retail investors and it is oversubscribed then but retail investors got the shares from the 35% reserve quota. Imagine PQR company raises 100 crore rupees issuing 10 lakh shares  and the value of each share is 1000 rupees. And if the company reserve 35% shares for retail category and the each lot size of the shares is 20 then it means the company reserve 350000 shares for retail investors and an individual retail investors can subscribe maximum 10 lots and the total number of lot is 17500 lots. 

 If 17500 bids come then each individual gets the lots that he/she subscribed. And if more than 17500(like 20000) bids come then each investors are alloted 1 lot at first and next rest of the lots are propotionally alloted into retail investors. And if bids come extra more than 17500(like 150000) then shares are alloted in lottery basis and each individual can be got maximum 1 lot. In this case the shares allotment is depend on your luck.

The shares allotment process is fully computerised and automated. That much shares are oversubscribed then that much chance of your share allotment becomes less. It occasionally happens that in spite of being bid we can not get shares but our friends or relatives get the share. It happens because of lottery system. Now discuss about HNI category share allotment process.

 When the shares are oversubscribed for HNI category then shares are alloted in proportionally. It means you get the shares that is the division of your bidding share by the oversubscription(that X more oversubscribed). If any company reserve 50000 shares for HNI category and you bid for 1000 shares and the ipo is oversubscribed by 4X or 200000 bids come for the ipo then you get

= your bidding shares/ that much X oversubscribed.

= 1000/4 (here)

= 250 shares. 

Here you apply for 1000 shares and it is oversubscribed by 4X more. So in this case you(from HNI category) fet 250 shares. After seven days of shares allotment the company or stock is listed in stock exchange in stock market.

 If you have any query related to ipo please comment below so that the topic can be covered.

Best wishes to invest.

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