Reasons for Non-allotment of IPO Shares
It is just so normal to be disappointed when you do not get an IPO allotment. After all, you have made plans of how to make the best of your IPO investment and you realize that the share allotment is nil. You got the news just the other day when you accessed your online allotment status at the website of the registrar. Is this normal in any IPO investment or are there are there other reasons too for non-allotment of shares? The answer is actually a bit of both. It is normal, but there are certain precautions you can take to avoid non-allotment.
Allotment is an important part of the IPO process and the basis of allotment is normally finalized by the merchant bankers in consultation with the stock exchanges within 3 days of the closure of the IPO. Once the IPO allotment is completed, it is available for online viewing and is an integral part of the IPO process. In this section, let us look at the various possible reason for non-allotment of shares. Not all rejections are due to oversubscription. Here we look at the important aspect of what is IPO shares and how the non-allotment of IPO shares happens and what are the circumstances under which it happens.
Key reasons for non-allotment of shares in an IPO?
At a micro level, there can be several reasons for not getting allotment of IPO shares. But, broadly, you can bunch these reasons into four broad categories. These can either lead to zero allotment of shares or at times lead to partial allotment of shares only.
- The first and, perhaps, the most common reason for not getting allotment of shares in the IPO or not getting the desired allotment is oversubscription. What do we exactly mean by oversubscription. For instance, if the issue size is 3 crore shares and if the applications come in for 78 crore shares, then the issue is 26 times oversubscribed. Obviously, everybody cannot get the entire quota of shares sought. The basis of allotment normally has relevance for retail quota since that is where a retail focused logic is used for allotment. While the retail allotment is largely on a lottery system basis, the underlying logic is that as many investors as possible get at least the minimum allotment of one single lot. So first priority is that all applicants get at least the minimum application lot and only then higher allotments are done.
- Your allotment can get rejected by the merchant banker and registrars for several technical reasons too and it may not be just about oversubscription. For instance, there are several very minute and technical factors that could have made the application invalid. It is the job of the registrar to the IPO to scan each application with a fine-toothed comb for completeness and correctness. There are several reasons for technical rejection. For instance, you may have submitted incomplete forms or inserted wrong information. Also your signature may not match with the signature in the DP master or there may be other data mismatches, which can be grounds for rejection. The only way you can avoid such an eventuality is by double checking while submitting. This can eventually save you a lot of late embarrassments and rejections of IPO applications.
- Applying lower than the band or applying lower than the discovered price is a common reason for IPO application getting rejected. For instance, if the price band of an IPO is Rs300 to Rs315 and let us assume that you have put in your bid at Rs310. That is a perfectly legitimate bid. Now if the price eventually gets discovered at Rs515, you’re your bid price, being lower than the discovered price is automatically rejected. What is the way out for retail investors in such cases? You can just bid for your retail application at cut-off and leave it. That is the safest since you are deemed to be bidding at the discovered price. When you put in your bid, ensure that the bid is not outside the range of price band, in which case also it can be rejected.
- A common reason, and many people do it unwittingly, are duplicate bids which lead to rejection of allotments. If you are applying under the retail quota, you can use your PAN number only for one application. If the PAN is used twice even with slight modifications to the name, then both the applications will be rejected as duplicate applications. Also, if the registrars come to believe that an application is virtually a duplicate application, it can be rejected. You can put multiple applications in names of family members with unique PAN, which is legitimate.
Are there ways to avoid rejection of IPO applications?
When an issue is oversubscribed, you do have non-allotment. But that can be mitigated. Here is how you can do it.
- Be meticulous when you are filling up the IPO forms. Simple checks and balances can go a long way in reducing IPO rejections. For example, once your application is done, verify it thoroughly. Online applications are a lot better since you avoid the hassles of filling up all details and so the chances of small errors creeping in is much lower.
- If you thought that putting the largest allowed lot application is a good idea think again. In the retail quota, that is not a very good idea. Here is why. What you should do is that instead of putting 1 application in retail of close to Rs2 lakh, you can put 4 applications in names of your family members of Rs50,000 each. In a lottery, the first preference is to minimize allottees, so more the applications, better the chance.
- Don’t make the mistake of quoting a price. Rather just bid at cut-off, which is equivalent to accepting the discovered price. That way, your chances of the application getting rejected due to the bid price being lower than discovered price is eliminated. Applying at the cut-off improves your chances of getting allotment and it is also a lot more simpler and more advisable for retail investors.
- Be cautious about when you submit your application for the IPO. Normally, brokers don’t accept applications in the last one or two hours since they may not get the time to lodge these applications in the system. If you are putting in your IPO application on the last day, putting it in the first half. Later you file the IPO application, greater the chances of it not being entered in the system.
- One way to have a better chance of allotment is to check if you qualify for other categories like employees, existing parent company shareholders. These are better, being closed loop categories.