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Explained | IPO allotment: How are shares allotted when an IPO is oversubscribed

IPO allotment process: When an IPO is fully subscribed, investors are then allotted the same number of shares that they had bid for but things get complex when an IPO is oversubscribed

July 16, 2021 / 07:37 AM IST

The Indian primary market has seen a strong run in the first half of 2021, and this is expected to continue in July as well. 20 initial public offerings (IPOs) are in the pipeline in the second half of the year.

One of the 20 companies is food delivery platform Zomato, whose IPO opened on July 14.

The Zomato IPO was subscribed 1.05 times on the first day of bidding. Retail investors subscribed 2.69 times, while non-institutional investors put in bids for 13 percent against their reserved portion.

Investors who apply for shares worth up to Rs 2 lakh are categorised as retail investors. Those who can spare more and apply above the Rs 2-lakh limit are called non-institutional investors (NIIs). These can be high net worth individuals, eligible NRIs, companies, and trusts, etc.

Another category of IPO investors is qualified institutional buyers (QIBs) — entities such as pension funds, mutual funds, money managers, insurance companies, investment banks, etc that deal in large volumes of trade in the stock market.

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Also read: Strong primary market show: 10 IPOs lined up for July and at least 20 for rest of 2021

In an IPO, 35 percent of the issue has to be reserved for retail investors, 15 percent for NIIs and up to 50 percent for QIBs, including anchor book.

After an issue closes for subscription, the key thing to watch out for is the process through which shares are allotted. Here is a primer on how the process works:

What is the allotment process for an IPO?

Essentially, an allotment process is a way by which investors are issued the shares of the company whose IPO they subscribed to.

The allotment is based on rules set by the Securities and Exchange Board of India (Sebi), the capital market regulator.

For example, if an issue is fully subscribed, then the investors are allotted the same number of shares that they had bid for. Sebi insists that an issue must be subscribed at least 90 percent for it to list. If the issue falls short even after an underwriter’s assurances, the IPO is scrapped and the money is returned to bidders.

Things get complex when an issue is oversubscribed — the number of applications is higher than the shares available for allotment.

In the case of oversubscription, investors are keen to know how many shares they will finally get compared to the numbers they had bid for.

How is the IPO allotment decided?

According to Sebi, the allotment to each retail individual bidder shall not be less than the minimum bid lot, subject to the availability of shares in the retail individual portion. The remaining available shares, if any, shall be allotted on a proportionate basis.

The equity shares in an offering are divided into small lots and retail investors apply in lots, instead of number of shares. A lot size is determined by the company and mentioned in the application form.

As per Sebi norms, a person cannot bid for shares less than the lot size. When retail investors bid for shares in an IPO, they bid in lots and not shares.

The "proportionate basis" plays a vital role in the number of shares that are allotted.

For instance, the Computer Age Management Services (CAMS) IPO was subscribed 46.99 times. Of the issue size of 1,28,27,370 equity shares (excluding anchor book), 63,22,435 shares were set aside for retail investors. But, they bid for 3,50,98,056 shares — 5.55 times higher than their quota.

For CAMS, one bid lot was 12 shares.

When a public issue is oversubscribed, the number of retail investors who can be allotted shares is computed by dividing the number of equity shares available for allotment to retail investors by the minimum bid lot.

Remember, only those bids that were received at or above the offer price — called the upper end of price band or cut-off price — are valid.

Keeping these rules in mind, only 5,26,869 applications of retail investors (63,22,435 shares available for allotment/one lot of 12 shares) could be considered for allotting CAMS shares.

The total applications received were 21,08,682. As a result, the allotment ratio was 4:1 (21,08,682/5,26,869), explained Parikshit Bansal of Rudra Shares.

The remaining applications get rejected automatically. So, the process seems like a lottery where many investors or applicants do not get any shares.

How much time does it take for IPO allotment to be decided?

Typically, the basis of allotment gets finalised within a week of an IPO closing for subscription.

In the case of CAMS, the issue period was September 21-23 and the basis of allotment finalisation was done by September 28-29.

After the finalisation of the basis of allotment, the result is available either on the registrar's website or on the BSE website.

Also read: Mazagon Dock Shipbuilders IPO: Here are five simple steps to check your allotment status

How to check allotment status?

To know the allotment status, one has to select the Company Name, enter either PAN or application number or DP ID/Client ID, enter Captcha and submit.

If shares are allotted, then one can see Applicant's Name, Securities Applied For (No of shares), Securities Allotted (No of shares), Cut Off Price (Rs 1,230) and Amount Adjusted (Rs 14,760).

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But if shares are not allotted, then Securities Allotted and Amount Adjusted will remain BLANK.

The registrar of IPO sends emails and messages informing applicants about the allotment status.

What if you are not allotted any shares?

If shares are allotted, then the amount gets deducted from a subscriber’s account. And if one does not get any shares, then money gets refunded or unblocked from ASBA account after the basis of allotment finalisation.

When will I get my shares and when can I start trading?

All eligible retail investors get shares in their account on the fifth day from the IPO closing date, so they can trade those shares on the exchanges in the secondary market from the listing day.

 
Moneycontrol News
first published: Oct 7, 2020 03:28 pm

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