What is IPO Allotment Process?
An IPO (initial public offering) is a momentous occasion in the history of a registered company. It is a sign that a company has finally matured into a fully-grown, effective organization that has commanded enough goodwill in the market to be able to start raising funds from the public. For many venture-capital funded startups, an IPO is usually baked into the list of things they need to achieve in order to fulfill the wishes of their investors by delivering an ‘exit’.
IPOs tend to be done at a huge scale and bring about a few changes in the ownership structure of a company. With fresh infusion of money, companies can now expand operations, invest in product development, hire better talent and so much more. This comes at the cost of a dilution in ownership structure and the price at which the stocks trade indicates the trust that it’s investors/owners place on it’s future potential.
Needless to say, if a company has matured enough to announce an IPO, it means that it has braved many storms and would have already established itself as a leader in the segment that it operates. For such companies, the initial public offering process attracts a lot of coverage and fanfare as there are many potential investors who will be seeking to get in on the bandwagon.
The initial public offering process itself comes with a few nuances that account for instances where there is a mismatch between the amount of shares that are being floated and the amount of bids that are received. To know more about how these instances are dealt with, we will have to understand the IPO allotment process itself.
The Allotment Process
Before you can even begin to think about subscribing to an IPO, you need to have the following:
- Demat account (necessary for buying shares)
- Trading Account (necessary if you intend on selling shares)
- Amount in Demat account that corresponds to your bid
If you do have all the basics in place, you will have to initiate the application process. It’s a fairly straightforward procedure and happens in the following sequence:
Step 1: Initiate Application
This can be done via online/offline mediums and it’s absolutely essential that your account has enough funds to cover the bid that you place. Since the market regulators have made the ‘Blocked amount facility’ compulsory for IPOs, your bid is unlikely to be considered if you fail to have the amount set aside.
Step 2: Allotment
This happens behind closed doors and could go one of any way depending on the number of bids and the validity of bids that are submitted. It is important to note that not all the applicants end up getting what they had requested for as demand tends to outstrip supply by a vast margin.
Step 3: Approval
In about 7 days’ time, the registrar of the IPO finishes and confirms allotment of the to successful bidders. The IPO allotment status can be checked via the website of the registrar. It can also be checked on the websites of the NSE or the BSE. You will need the PAN and DPID/Client ID number or the bid application number for the IPO allotment status check.
Now that we know what the allotment process looks like, it is worth taking a deeper look at the dynamic governing the allotment process and how fringe cases are dealt with.
How Does The Registrar Decide On The Allotment?
When the application process for an IPO is done, one of two things usually happen:
- 1: When the application process for an IPO is done, one of two things usually happen:
- 2: Total number of bids is more than shares offered by the firm.
Case 1: Total number of bids is more than shares offered by the firm.
If this were to happen (and it’s not all that often that it does), the registrar will have no need to intervene. Every applicant with a valid bid will get the lot that they requested. No one is bound to walk away without any shares.
Case 2: Total Number Of Bids ≥ Shares Offered By Firm
This case is more likely to happen and requires a bit of planning from the registrar to decide how the allotment actually takes place. Thankfully, there is a mandate issued by India’s market regulator, SEBI (Securities and Exchange board of India) which stipulates that at least one lot must be given to every applicant. Keeping this in mind, let’s work with an example to understand the allotment process in greater detail.
Let’s assume that Company A offers 7,00,000 shares as a part of it’s IPO and the minimum lot size is 70. As per the SEBI mandate, the maximum number of investors who are bound to get at least one lot is: 10,000(7,00,000 ÷ 70). Consequently, 10,000 investors will definitely receive at least one lot.
Depending on the margin by which the IPO is oversubscribed, the allotment procedure varies. They are dealt with in the following manner:
- 1. Small Margin: If the IPO is oversubscribed by only a small margin, the minimum lot (70 in the example above) will be distributed among all applicants. The remaining shares will be allocated proportionally to those investors who had submitted more than one bid.
- 2. Large Margin: For situations where the shares are oversubscribed by many multiplied of the original amount (like Reliance’s IPO in 1977), the registrar resorts to allotment via a lucky draw. In such situations, investors whose bids don’t make it during the draw will not be allotted any shares.
In case you applied to an IPO and missed out on receiving any shares, one of two things could have happened:
- Your bid was deemed invalid (incorrect PAN/Demat account number)
- Your name didn’t come up in the lucky draw
The IPO status is an indication of the collective trust that the company manages to command in the stock market. In recent times, an IPO is a huge event that attracts significant media coverage and interest from both retail investors as well as large financial institutions that are looking to buck the latest trend. Once the allotment procedure is done, the shares are then listed on the exchange within days which then opens it up to trading.