IPOs are raining these days. Thanks! To the bull market which has increased the confidence of investors to apply for the IPOs and be a part of a company in its initial listing days. While writing this article, a sum total of 32 companies have listed now along with Power Grid Investment Trust this year on the Indian bourses. More IPOs are lined up to gain the benefits of listings or to augment their borrowing and capital requirements. Many investors are a part of the stock market now. Normally, they are inactive when there is no IPO but they get active when any IPO arises. It seems that a new kind of investment idea has been created this year.
Well, the IPO market is in momentum but a lot of investors are unable to reap benefits due to failure in the allotment process. This has created anxiety in the minds of investors and they have started believing that companies are partial towards some retail and institutional investors. Some IPOs have received tremendous response as they have been subscribed more than 100 times. From this, retail investors have started believing that only institutional investors receive allotment and retailers take unnecessary pain of IPO application. It’s time to break the myth and understand the whole allotment process.
While applying for an IPO, there are two situations whether the issue will be over-subscribed or under-subscribed.
a) In case of under-subscription, all investors will receive allotment due to higher availability of shares.
b) While, in case of oversubscription, investors are allotted shares on a pro-rata basis. The market regulator SEBI has mandated that at least one lot should be allotted to every individual who has applied.
It is worth-mentioning that a lot of investors bid IPOs wrongly and those bids are removed by the companies initially.
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Registrars to the Issue are bound to follow the stipulations inked by the market regulator SEBI and as per the situation they work accordingly. In case of over-subscriptions, two situations arise: small oversubscription and large oversubscription.
Case 1
In case of small oversubscription, companies adopt pro-rata allotment procedures to distribute shares. Every shareholder receives a portion of its total subscription. For Example: A retail investor can apply for a maximum of 13 lots as per the guidelines of SEBI. Suppose an issue of a company has been subscribed 13 times in its retail quota and all investors have applied for 13 lots, then every investor will receive one lot each.
It is not possible that every investor has applied for 13 lots. As per the case, 1:13 ratio will be applied in which every 13 applied lots will receive allotment one lot. Suppose 4 investors have applied for 13 IPOs in total: Person A, B, C and D have applied for four, four, three and two lots respectively. Randomly, any one investor will receive one lot only.
Case 2
These days IPOs are receiving stellar responses from the investors. A lot of IPOs have been subscribed more than 100 times. In this scenario, the pro-rata method fails to solve the equation as investors receive allotment in multiples. Well, this case is tackled by the company through a lucky draw method. Companies execute a lucky draw program and investors are allotted shares without any partiality. During the process, a lot of investors don’t receive applications. Odds of receiving a lot are very low under these circumstances.
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