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0 Investing in an IPO (Initial Public Offering) can feel like your ticket to early financial gains. However, the process of actually securing shares isn’t always easy. With thousands of investors vying for a limited number of shares, understanding how the IPO allotment process works is important. It can help you make better decisions and walk through the competitive market with confidence. Let’s break down the step-by-step process that determines how shares are distributed in an IPO, along with the different types of issues and investor categories.
Types of IPO Issues
When a company offers shares to the public, there are two primary methods of pricing those shares in an IPO. The method chosen depends on the strategy the company uses to measure demand and set the price.
- Book Building Issue:
In this type, the price of shares is determined based on investor bids within a price range. Investors bid at different price levels, and the final price is determined after the demand is assessed. - Fixed Price Issue:
Here, the price of shares is predetermined by the company and remains fixed throughout the IPO.
Categories of Investors
IPO shares are distributed among different categories of investors, namely:
- Qualified Institutional Buyers (QIBs): Large financial institutions such as mutual funds or banks.
- Non-Institutional Investors (NIIs): High-net-worth individuals or companies.
- Retail Investors: Individual investors who apply for shares below ₹2 lakh.
The IPO allotment process differs slightly for each category based on the number of shares they request and the overall demand for the IPO.
ASBA Process
Applications for an IPO are made using the ASBA (Applications Supported by Blocked Amount) system. Here, the investor’s funds are blocked in their bank account. Only when the shares are allotted is the corresponding amount debited from the account. If shares are not allotted, the funds remain intact. ASBA helps ease the process and is mandatory for retail investors in India.
Oversubscription and Allotment for Retail Investors
In case the number of applications exceeds the number of available shares, usually termed as oversubscription, the allotment for retail investors is often done through a lottery system. This ensures a fair distribution when the demand is high. This is particularly common in highly anticipated IPOs, where demand far outweighs the available shares.
- If the IPO is oversubscribed more than 10 times, each applicant is generally allotted one lot of shares through a lottery.
- If the IPO is oversubscribed by less than 10 times, shares are distributed on a proportional basis. Let’s say, if you apply for 2 lots, you might receive 1 lot, depending on the oversubscription ratio.
Proportional Allotment for QIBs and NIIs
For QIBs and NIIs, the allotment is done proportionally based on the shares they bid for. The higher their bid (in terms of number of shares), the greater the chance they will receive a higher allotment. There is no lottery system for these investors.
Refunds and Final Allotment
After the IPO allotment process is completed, investors who did not receive any shares will have their blocked funds released. For successful applicants, the shares are credited to their Demat account, and the corresponding funds are debited from their bank account.
How is IPO allotment done?
The IPO allotment process varies depending on the level of demand for shares.
- Under Subscription (Less than 90%): If the IPO receives applications for less than 90% of the available shares, the IPO is typically cancelled. In this case, all funds received from applicants are refunded.
- Subscription of More than 90%: When applications exceed 90%, all valid applicants receive the full number of lots they applied for (assuming their application meets all necessary criteria).
- Oversubscription: In cases where the IPO is oversubscribed (i.e., applications exceed the number of available shares), shares may be allocated using one of two methods:
- Proportional Basis: Shares are allotted in proportion to the number of shares applied for. This ensures a fair distribution among applicants.
- Lottery Basis: For retail investors, especially when oversubscription is significant, a lottery system may be employed. This approach randomly selects successful applicants to receive shares.
Who Gets to Decide the IPO Price?
The price of shares in an IPO is primarily determined by investment banking firms (underwriters), who evaluate the issuing company’s value based on several key factors:
- The company’s financial health
- Future growth potential
- Historical performance
- Industry trends and growth rate
- Performance of competitors within the same industry
- Projected demand for the company’s shares
To arrive at a fair price, underwriters use financial models like Intrinsic Valuation (IV) and Relative Valuation. These methods are specifically designed to assess the true value of a company and are quite complex processes that investment bankers specialise in. It ultimately helps the company decide the most appropriate price for its IPO shares.
Wrap Up
The IPO allotment process is carefully designed to ensure fairness while balancing demand among different types of investors. For retail investors, it often comes down to luck through a lottery system in cases of oversubscription, while larger institutional investors rely on proportional allotments. Understanding the ins and outs of this process ensures you are better equipped for future IPO investments, especially during high-demand periods. It doesn’t matter what you are aiming for, i.e., short-term gains or long-term investments, knowing how IPO shares are allotted can help you make more informed investment choices and set realistic expectations.
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