What is IPO Allotment Process?

When a company launches its initial public offering (IPO) for the investors, the investors can apply for those IPO shares. This process of assigning the shares and crediting is known as IPO allotment. These shares are added to an investor's Demat and trading account. Understanding the IPO allotment process is important for investors because it determines who will receive the IPO shares. There are several factors like the demand for shares, the type of investors and the rules set by SEBI regulators. It can affect how the shares are allotted. In this article, let’s understand what is ipo allotment and look into the key aspects of the IPO share allotment process.

IPO Allotment Process

For investors, understanding the IPO allotment process is crucial. This process follows the rules which are set by the Securities and Exchange Board of India (SEBI). These rules categorise investors into three groups: Qualified Institutional Buyers (QIB), Non-Institutional Investors, and retail investors. Although it's not guaranteed that an investor will get shares in an IPO, knowing about how IPO allotment works can help investors manage their expectations. It can also help them to understand why they might not have received the IPO shares.

Procedure for Allotment of Shares in an IPO 

Before getting into the IPO allotment process, it is crucial to understand the concept of the "Lot Size." This refers to how a company divides its total available shares into equal-sized lots, with retail investors placing bids for these lots rather than for individual shares. 

For example, if a company named XYZ decides to issue 50,000 shares in an IPO bid and then sets the lot size at 20 shares per lot, the total number of lots can be calculated by dividing the total number of shares by the number of shares per lot. This results in 2,500 lots. Instead of a specific number of shares, investors can bid for these lots in multiples such as 1 or 2. After all the bids are submitted, improper submissions are filtered out.

After the bids are processed, there are two possible outcomes, as mentioned below.

1. Total Bid Lots < Total Lots Offered:

If the total number of bid lots is less than the total number of lots offered, each investor receives the exact number of lots they bid for. In this scenario, every eligible investor is allocated shares without any adjustments, as the demand for shares does not exceed the supply.

2. Total Bid Lots > Total Lots Offered:

When the total number of bid lots exceeds the number of lots offered, the process becomes more complex. SEBI (Securities and Exchange Board of India) regulations come into play to ensure a fair distribution of shares among all investors:

• Small Oversubscription: Small oversubscription in a lottery system includes assigning one lot to each bidder who is valid with any remaining lots distributed proportionately which is based on their bid size. It ensures that each investor receives at least one lot while also maintaining fairness in the distribution of additional shares.    
• Large Oversubscription: In such cases of significant oversubscription, where the demand exceeds too much compared to the supply, there is a computerised lottery system which is used to allocate lots with the fair system and randomly select investors to receive one lot each. This ensures that no single investor is favoured and also compliance with the SEBI regulations  

Understanding the IPO allotment process is essential for retail investors. It ensures a transparent and equal distribution of shares which are followed by SEBI regulations. It provides every investor with a fair chance of receiving shares. 

IPO Allotment Chances

Here are some strategies below to increase chances of IPO allotment.

• Avoid large applications: In the case of oversubscribed IPOs, SEBI treats all retail applications equally. To maximise your chances in the IPO allotment process, opt for minimum bids across multiple accounts, each falling below the threshold limit.
• Bid at the cut-off price or higher: By choosing the cut-off price when applying for an IPO, you allow the company to decide the final price of the shares. During the IPO application process, when you bid at the highest price band, then it provides flexibility but when you bid the final price lower, any excess funds get refunded which leads to minimising financial exposure.
• Avoid last-minute subscriptions: Application of IPO subscription at the earliest is important for the investors. Applying on the last minute IPO applications may result in issues which include high subscription volumes, potential delays in IPO processing, or technical glitches. Timely submissions can help improve the smooth processing of the IPO application.
• Fill details accurately: It’s essential to fill out IPO forms properly. Pay close attention to details which include the IPO bid amount, your name, DP ID, and bank information of the investor. Using the ASBA (Application Supported by Blocked Amount) method through your bank makes the application process smooth and secure. It can help understand how IPO allotment works.
• Purchase parent or holding company shares: This strategy works when the parent company of the IPO is already listed on the stock exchange and has a reserved share category for its shareholders. As a result, your chances of getting shares in the IPO improve.
• Qualifying for the Shareholder Category in an IPO

Holding and purchasing shares of the parent company in your Demat account can get you qualified for the shareholder category. This is beneficial when the parent company is already listed and has a specific reservation for shareholders.

This strategy is relevant when the IPO company's parent is already listed on the stock exchange with a shareholder reservation. Consequently, the chances of allotment significantly improve in the shareholder category.

What Happens After the IPO Allotment?

Once the allotment process of IPO is completed, here is what comes next after that: 

• Credit for Shares: After the allocation of IPO shares, companies give credit for the to all the eligible applicants accounts. If you are not an eligible receiver, you will receive your bidding amount back to your registered Demat account. 
• Listing on Stock Exchanges: Once IPO shares are successfully allotted, they will be listed on stock exchanges like NSE and BSE. The company must meet specific requirements which are set by the stock exchange before the shares can be listed on the stock market.   
• Start of Trading: After the listing is done, the allocated shares are available to trade.  Consequently, investors can purchase or sell these shares via online trading platforms or through brokers. Because of the volatility in share market prices, the price of newly listed IPO shares may go up or down.

IPO Allotment Date

During the IPO allotment process date, the distribution of shares among investors occurs through a lottery system. The process is closely supervised by the registrar. This method ensures transparency in allocating shares among the participants. By understanding how IPO is allotted, investors may get some useful insights regarding the number of shares allotted to them. To check this allotment status, investors have the option to visit the BSE platform or the registrar's official website. This provides investors with all the relevant details regarding the outcome of their participation in the IPO.

Reason for no Allotment of Shares in IPO

The following are the three common reasons you might not receive an IPO allotment.

1. IPO oversubscription and computerised lottery

• When the number of applications exceeds the shares available in an IPO, it’s considered oversubscribed.
• A computerised lottery is then used to randomly select who gets the shares.
• Due to the high demand, not all investors will receive an allotment.

2. Invalid application

IPO application forms are carefully reviewed by the registrar for accuracy and completion. 

Common reasons for rejection include:

• Submitting multiple applications using the same PAN number (only one application per PAN is allowed).
• Incorrect or incomplete information on the application form.
• A mismatch between the name on the PAN card and the bank account.
• If the application is invalid, the investor will not receive any shares.                                                   

3. Bid price lower than the Issue price

• In a book-building IPO, investors bid within a specified price range.
• The final issue price can be set after all the bids are properly reviewed.
• If an investor’s bid price is lower than the final issue price their application may not get qualified for an allotment.  

Conclusion
The IPO allotment process is crucial for determining who receives shares in an initial public offering, following SEBI guidelines. It categorises investors into Qualified Institutional Buyers, Non-Institutional Investors, and retail investors. Understanding factors like bid lots and oversubscription rules helps manage expectations. Strategies like avoiding large applications, bidding at cut-off prices, and accurate form details enhance allotment chances. Shares are credited to investors' accounts and trading begins once listed on stock exchanges. The IPO allotment process is crucial for investors in Initial Public Offerings (IPOs) as it determines share distribution. You can begin your journey in investing stocks, IPO and more with the BlinkX online trading app.