How to Increase Chances of IPO Allotment

IPO investors often wonder why am I not being allotted any shares in an IPO? or inspite of applying for an IPO through multiple applications, why is the end result negative?. Well, it is certainly clear that in highly popular IPOs, luck plays a big role in who gets shares. Sometimes, even those who apply just once get shares allotted, while others who apply multiple times may not get any. This suggests that the allotment process is automated, and luck plays a significant part in determining who gets shares.

Increasing your chances of Initial Public Offering (IPO) allotment involves several strategies, although it is important to note that IPO allotment is often subject to randomization and can depend on various factors. 

Let us first understand the concept behind the IPO allotment process

IPO allotment refers to the process where shares of a newly issued company are allocated to investors who have applied for them during the Initial Public Offering (IPO) process. After the IPO subscription period closes, the allotment process begins, typically conducted by the registrar of the issue. The registrar verifies the applications, ensures compliance with regulations, and then allocates shares based on predetermined rules.

The IPO allotment process aims to distribute shares fairly among applicants. It often involves several criteria such as the size of the application, whether the investor applied for shares within the retail or institutional category, and sometimes even through a lottery system if demand exceeds supply. Once the shares are allotted, the registrar informs successful applicants through allotment letters or emails, detailing how many shares they have been allotted. Unsuccessful applicants receive refunds for the application money they had deposited.

Here are some steps you can consider to potentially improve your chances

Apply for Multiple Lots: Many IPOs allow investors to apply for multiple lots. Applying for more lots increases your chances of getting allotted at least one lot.

Invest Through Multiple Demat Accounts: If you have access to multiple demat accounts, you can apply through different accounts. Each application is considered separately, increasing your chances.

Check Retail vs Non-Retail Quotas: IPOs often have separate quotas for retail and non-retail investors. Retail investors typically have a higher chance of allotment compared to non-retail (institutional) investors.

Monitor Subscription Levels: IPOs are oversubscribed often. Monitoring the subscription levels can give you an idea of the demand. Higher oversubscription may mean lower chances of allotment per application.

Invest in Popular IPOs: Popular IPOs tend to be oversubscribed quickly. While this means higher competition, it also increases the likelihood that the IPO will be allotted.

Use the Cut-off Price Option: Some IPOs offer a cut-off price option where you bid without specifying a price. This can potentially increase your chances as the price is determined later.

Apply with Maximum Bid Amount: Some IPOs have a limit on the number of shares you can bid for. Applying with the maximum allowable bid can improve your chances.

Apply Online: Apply directly through your broker's online platform. Online applications are processed faster and are less prone to errors compared to physical applications.

Follow SEBI Guidelines: Ensure you follow all guidelines set by SEBI (Securities and Exchange Board of India) and the IPO issuer to avoid any rejection.

Consider Grey Market Premium (GMP): The IPO Grey Market often provides an unofficial indication of the premium at which IPO shares are trading. A higher GMP suggests strong demand, but be cautious as it's not always accurate.

Remember, while these strategies can improve your chances, IPO allotment involves a degree of luck due to randomization processes. It is essential to invest wisely and not solely rely on IPO allotment as a primary investment strategy.

How to calculate the probability of an IPO allotment?

To calculate the probability of an IPO allotment, divide the number of lots you applied for by the total number applied for across all applicants. 

Let us consider an example to illustrate how the probability of IPO allotment might be estimated:

Total Shares: A company is offering 1,00,000 shares in an IPO.

Number of Applicants: There are 10,000 applicants.

Lot Size: Each lot consists of 10 shares.

Retail Quota: 50% of the shares are reserved for retail investors.

Steps to Estimate IPO Allotment Probability

Calculate Total Demand: If 10,000 applicants apply for shares, and each wants on average 2 lots (20 shares), the total valuation is 10,000 * 20 = 2, 00,000 shares.

Determine Retail Quota: Assuming 50% of the offered shares (50,000  shares) are reserved for retail investors.

Calculate Oversubscription Ratio: Divide the total demand by the retail quota to get the oversubscription ratio:

Oversubscription Ratio = Total Demand / Retail Quota = 2, 00,000 / 50,000 = 4

This means the IPO is oversubscribed by 4 times

Probability Calculation: To estimate the probability of getting allotted shares, divide the retail quota by the number of applicants:

Probability = Retail Quota / Number of Applicants = 50,000 / 10,000 = 0.5 or 50%

Therefore, in this hypothetical scenario, each applicant has a 50% chance of receiving at least one lot of shares.

In conclusion, while the above example provides a simplified calculation, actual IPO allotment probabilities can vary significantly based on market conditions, investor demand, and the specific rules of IPO issuance.