IPO allotment in India: Leave the queue to lead the race of IPO

IPO queue


Initial public offering (IPO), the first place to get fresh shares. Recent years has shown investor’s huge interest in IPO, particularly of retail investors. The increased participation of retail investors and the profit margin they book is encouraging more of the retail investors to get allotment through IPO.

You might have observed some recent IPOs like Dmart, RBL bank, Mahanagar Gas, Quess Corp etc. Have given three-digit return to retail investors who were lucky enough to get an allotment.

Yes, you read it right.

You need to be lucky enough to get an allotment in the IPO. With increased participation of retail investors, it also leads to increased competition among them. And as there is a fight for shares there will be winners and losers.

So there needs to be a fair system that enables participants to get a fair deal and reserve their right.
But when investors fail to book their part of the share, the question arise on the authentication of the system of allotment. Some may even smell the flavor of corruption.

SEBI has laid a well-defined process for allocation which at present day ensures that each investor gets the chance of allotment, irrespective of any fraud or preferences to the elite group of people.

But first, we need to know is it really so important to book allotment and fight for a seat in an IPO when you can easily book profit through secondary market.?

IPO can make you millionaire

As already mentioned some recent IPOs have given a three-digit return to retail investors. If you look at BSE IPO index vs BSE Sensex you will never miss any IPO in future. Statistics shows that IPO has given 34.34% return as compared to Sensex which gave only 15.43% return in the same period.
If this is the case who wants to invest their money in trading. But when the race begins people fail to even book their share.

Then you need to know the system and plan accordingly and stop blaming your luck or the system.

IPO allotment process

When the event of IPO is scheduled investors need to apply for the subscription for their portion of shares.
To deal with so many subscription SEBI defines a system where the share allotment is categorized in three different reserved categories.

All the bids received after the closure of issue gets sorted in these categories. They include Qualified Institutional Buyers (QIB), Non-Institutional Buyers and retail individual buyers.
So investors like you and me come under retail investors who can invest in a bracket of 10,000 to 15,000 bucks while the maximum limit is up to 2 lakh in a single IPO.

So I will showcase you with some scenarios.

Issue not subscribed fully in retail category

So this is a case where no one suffers. Each investor who bids for the share that can be of worth 2,00,000 INR or 20,000 INR will receive their portion of shares.

Basically, all the applicant receive their portion of shares for which they applied for, this is also termed as the firm allotment.

Retail category oversubscribed

Here the problem starts when a number of applicants applied for a number of shares are more than the available shares in the retail category.

Basically, SEBI has laid a rule which says that investor cannot be issued with shares less than the lot size. A lot size comprising of a minimum number of shares need to be issued, shares less than this value will not be issued.

So if a company has a lot of 15 shares, the company is not authorized to issue less than 15 shares to a single investor.

So what company does is make minimum shares allotment to all the applicants irrespective of the bids they have done.
After this, the remaining shares are allotted proportionately to those who have bid for more than minimum lot size.
So if you have bid worth 1,00,000 INR you will receive one minimum lot plus shares proportionate to your bid price.

So practically each of us is going to receive shares in IPO

Looks quite fair but actually, this does not happen. Investors fail to book even the minimum lot.

The formula in which it works is like

The maximum number of applicants to receive IPO= total number of shares available in retail category/ minimum lot size.

So if the available shares are 25000 and minimum lot size assume to be 250, the maximum number of investor who will receive IPO will be 100.

This clearly states that the rest apart from those eligible 100 investors will face the crisis of shares.
Now a fair judgment needs to be made. Who will decide those 100 investors.?
Some have the confusion that it works on the basis of time or quantity.

So is it really true?

Let me frame you one example:

So if you are willing to buy 10 lot of shares each lot comprised of 10 shares, then you are bidding for 100 shares for say XYZ company. Now if the IPO is oversubscribed by 8 times then you will receive 100/8 that is around 13 shares. This value is more than the minimum lot size that is 10 shares. If the value comes out to be less than 10 shares than it may happen you may not receive single share allotment in IPO.

In a case of multiple times, oversubscription allotment shall be determined on the basis of lottery system which in computerized and there is no room for partiality or corruption.


Bottom line

Though this seems to be a fair enough, the allotment of shares in an IPO, but there is also a flavor of luck that needs to work.
But then the world does not work depending on luck and leaving everything in the hands of GOD.
I will help you let you know what strategy you can think of to find a place in those elite investors who feel lucky enough to receive IPO.
Stay tuned with us to know the magic behind the curtains. Subscribe to us if you want to be the first one to get the wand of magic.

Post Author: Sushant Putatunda

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