How are shares allotted in an IPO?

As businesses grow, so do their capital needs. Filing for an IPO is one way in which companies attempt to infuse massive funds into their company. An IPO or Initial Public Offering is the process by which a privately held company or a government entity raises money from the open market. The entity becomes a public company open to scrutiny by the market watchdog, SEBI and its investors are awarded shares in exchange for their money.

The IPO share allotment process can be slightly tricky to understand as retail investors are not often allotted any shares or are allotted lesser shares. This blog explains the IPO share allotment process in detail.

IPO allotment process

Before jumping to the actual IPO allotment process, it is imperative to understand a few terms of definition.

  • Minimum application

    As per SEBI guidelines, every applicant needs to invest a minimum amount in the IPO of a company. This minimum amount can range from INR 10,000 to 15,000. Based on the lot size, people can invest only that amount or in multiples of it. For instance, if the lot size is 25 shares, investors can apply for 25 shares, 50 shares, 75 shares and so on.
  • Minimum subscription

    This refers to the minimum number of shares that the public must be willing to take up, or else the company’s IPO stands cancelled. At present, the limit is set at 90% of the issue size. For example, if a company intends to allot shares of face value INR 10 lacs, it should attract applicants willing to invest at least INR 9 lacs (i.e., 90% of the shares offered). If it fails, the underwriters may step up to take the balance shares. However, if the company does not meet the minimum subscription criterion, its IPO is deemed cancelled.
  • Oversubscription

    This is a situation in which a company attracts more applications than it can allot. E.g., If a company has reserved 100 lots for RIIs or retail investors and gets a bid for 150 lots, the retail category is said to be oversubscribed by 1.5 times.
  • Categories of applicants

    In an IPO allotment process, there are four categories of applicants:
  1. Retail Individual Investors (RIIs)

    Individuals who invest a maximum of INR 200,000 in an IPO.
  2. Non-Institutional Investors (NIIs)

    Applicants who invest more than INR 200,000 in an IPO. NIIs include Hindu Undivided Families (HUFs), High Net Income individuals (HNIs), and corporate entities.
  3. Qualified Institutional Buyers (QIBs)

    QIBs include Foreign Institutional Investors (FIIs), venture capital funds, banks, mutual fund houses, insurance companies, pension funds, and other similar entities. As QIBs invest a massive sum of money, companies may give them a preferential allotment.
  4. Reserved category

    Shares offered to RIIs, NIIs, and QIBs together form part of the ‘net offer’. Some shares may be earmarked for the employees of the company and the existing shareholders of its parent company. These shares are over and above the net offer and form a part of the reserved category.

    There is also a minimum IPO share allotment quota reserved for the applicants:

Category Min. Allocation (%)
RIIs 35
NIIs 15
QIBs 50

How is IPO allotment done?

The following cases are possible:

  1. Under subscription of shares by less than 90% -The IPO is cancelled, and the money received from applicants is returned.
  2. Subscription of more than 90% shares - Applicants get all the lots they applied for, provided their application was valid.
  3. Oversubscription of shares - In this case, shares can be allotted either on a proportionate basis or a lottery basis.

What are the possible reasons for not getting an allotment?

The reasons for not getting an allotment can be:

  • The offer was oversubscribed, and the applicant was not selected by the lucky draw.
  • The applicants lodged incorrect details while applying for the IPO. These can be details like invalid PAN, Demat account number, etc.

In most cases, applicants are not allotted shares due to the first reason.

Who decides the IPO price?

Investment banking firms value the issuer company based on various parameters including:

  • The company’s financials
  • Past performance
  • Future performance
  • Industry growth rate
  • The performance of other companies in the same industry
  • The potential demand for its shares

The company’s worth is calculated using the Intrinsic Valuation (IV) approach, Relative Valuation approach or a mix of the two. These are complex methods in which the Investment Bankers are trained and help companies put a price tag on their shares.

Another important point to note is that the IPO share price is not a fixed number but a price band. Say the price band is between INR 800 to 1,000. The public can choose the price that they think is the worth of the company. The company collects all the price points along with the respective quantities. This is called the book-building process and helps the company in discovering the price of its shares. The price at which the maximum number of bids is received is the price at which the issue is listed.

Frequently Asked Questions Expand All

In the case of oversubscription, shares are allotted on a lottery basis. This is a computerised and automated system. The more oversubscribed an IPO is the lesser an investor’s chances of share allotment.

However, if the issue is only slightly oversubscribed, every retail investor will first get 1 lot each and then the remaining lots can be allotted proportionately to those of them who applied for more than 1 lot.

The shares to be allotted to QIBs and NIIs are always decided on a proportionate basis.

Within 7 days of the IPO allotment process, the company is listed on the stock exchange(s) and its shares are open for trading. Investors may then choose to sell their existing holdings or buy more of them.