These days many people have started investing in the stock market. Earlier, most of us avoided investing in the stock market due to high volatility and high risk. But now the times have changed and people are ready to take risks for higher returns. IPOs are considered to be a decent return generating short-term or long-term investing option. Most of the investors sell their shares within the first week of the listing of the IPO. By looking at a series of recent IPOs, good participation by the retail investors can be seen. And because of this, the quota of Riis in many recent IPOs was over-subscribed. When an issue is fully subscribed then all the investors who had applied for the issue will get the applied shares. But when an issue is over-subscribed the allotment of shares depends on various situations and conditions.
There are a few things that one should know before understanding the allotment procedure.
- All the categories of investors who wish to apply for the IPO can do so but in lots. For e.g. A company has come up with an IPO offering 10,00,000 shares with a lot size of 50 shares. So if an investor wants to apply, then he can do so in lots like 1 lot or 5 lots and cannot bid on the basis of no. of shares.
- As per the norms of SEBI, a person cannot bid for shares less than the lot size.
The process of allotment when the issue gets over-subscribed:
Allotment to Qualified Institutional Buyers (QIB)
Merchant bank holds the discretion to allot shares with regards to QIBs. Shares, in any case, are always allotted proportionately to applicants. So, if the shares are oversubscribed by 5 times, then an application of 10,00,000 shares will receive only 2,00,000 shares.
Allotment to Non-Institutional Investors
Non-Institutional Investors are also categorized as High Net worth Individuals (HNIs). These types of investors usually invest in the large amount in an IPO. Even financial institutions provide funding to HNIs to invest in an IPO. In case of over-subscription shares will be allotted proportionately. For example, A particular HNI client has applied for 10 lakh shares and the HNI quota is oversubscribed by 150 times. The total shares that will be allotted to him will be 6666. This number is ascertained by dividing the total number of shares applied for by the number of times that it has been oversubscribed.
Allotment to Retail Individual Investors (RIIs)
The procedure of allotment of shares in case of over-subscription is a bit complicated.
The first step in the procedure of allotment is the scrutiny of the applications. It means that all the applications which are not filed properly or a single person has applied more than once etc. are eliminated.
There can be 2 scenarios:
- The issue is either fully subscribed or is partially subscribed but greater than the required minimum subscription
- The issue is over-subscribed i.e. the no. of lots offered is less than the no. of lots bid lots.
In the 1st scenario, full allotment will be done to all those applicants who had applied for the shares.
In the 2nd scenario where there is over-subscription, there can be two situations that can arise
- Small over-subscription: In case of small over-subscription each successful applicant will be allotted at least 1 lot and the balance will be allotted proportionately to the Riis who have bid for more than 1 lot.
- Large over-subscription: When the over-subscription is so large that even 1 lot cannot be allotted to all the successful applicants, then according to SEBI, lots shall be allotted on the basis of a lucky draw. And due to this reason, a lot of RIIs are not allotted shares in IPO’s which see a huge over-subscription. In case of lucky draw some people might not get even 1 lot as applied for the maximum lots.
Reasons for NON-ALLOTMENT of shares in an IPO
There are 2 reasons for non-allotment of shares in an IPO:
- The application filed was invalid i.e. invalid PAN no. or invalid account no. or multiple applications submitted from the same name.
- In case of a lucky draw your name was not selected due to large over-subscription.