The employee category in an IPO provides employees with an opportunity to be part of their employer’s growth journey. Companies usually set aside a portion of their IPOs for their employees to participate in. For example, the recent Tata Capital IPO was oversubscribed by 2.92 times in the employee category. This exhibits the employees’ confidence in the company’s performance and long-term vision. That’s why employees are given this opportunity to participate in the company’s IPO.
In this blog, we will explore the employee category in an IPO, its eligibility criteria, steps for application, allotment method, and tax implications, along with some real-life examples to better understand it.
What is the Employee Category in IPO
When a company launches its IPO, it offers its shares to a varied category of investors: retail, institutional, non-institutional, etc. Apart from these categories, some portion of the shares is reserved by the company for its own employees. This reserved portion is known as the employee category in an IPO. Not all IPOs need to have an employees category. However, it is a common practice for companies to reserve some portion of the IPO for their employees.
The key features of the employee category in an IPO are:
Exclusivity: A specific portion of the shares is exclusively reserved for the employees of the company.
Separate Bidding Category: The employee must apply under the “Employee Category” and not under the retail or institutional investor category.
Reservation Share: As per the Securities and Exchange Board of India (SEBI) regulations, the portion reserved for employees of the company can’t exceed 5% of its total post-issue paid-up capital.
Discounted Pricing: Shares under the employee category are offered at a discount compared to the price offered to the public. For example, in the Lenskart IPO, the price band was set between ₹382 to ₹402 per share. The employees got a discount of ₹ 19 , making their investment cheaper.
Enhances Participation: By applying under the employee category, the employees are vouching for the positive growth trajectory of the company. This, in turn, enhances their participation in the company.
Transfer of Rights: The benefit of the employee quota is only for the employee, and it can’t be transferred to family members or friends.
The employee quota has the following advantages:
1. Boosts Morale: Ownership improves the employees’ emotional and financial ties to the company. It helps in motivation and improves job satisfaction.
2. Employee Participation: Employees are offered at a discounted rate, which makes the investment easier for them and increases their participation in the IPO.
3. Preferential Allocation: The quota for employees is separate from that of retail and institutional investors, which gives them a better chance of allotment.
4. Lower Attrition Rate: Attrition rate means the number of employees leaving a company over a specified period of time. Owning the shares develops a sense of commitment among the employees, and they’re more likely to stay with the company for the long term. This lowers the attrition rate of the company in the long run.
5. Improved Market Perception: When employees make bids in the IPO, it shows their confidence in the company. It leads to a positive market sentiment and better credibility.
For example, the recent Urban Company’s IPO saw the employee category being oversubscribed by 42.55 times, which improved the market perception and led to an oversubscription of 108.98 times overall.
6. Employee Wealth Building: As the share prices increase over the years, the employees get the benefit of capital appreciation.
Eligibility Criteria for Employee Category
To apply for an IPO under the employee category, one must meet the following criteria :
- Permanent Employee: Only full-time, permanent employees of the company can apply; contractual or temporary staff is excluded
- Payroll Status: The employee must be on active payroll of the company; resigned or terminated individuals can not apply.
- Direct Association: The employee must be working directly for the company or its subsidiaries. Employees from holding or group companies are not eligible.
- Residence: In most cases, only Indian residents are eligible, but separate rules may apply for some companies.
- PAN Card: A valid PAN card linked to the employee records is required.
- Demat Account: For digitally holding the shares.
Can I Apply for the Employee Category in IPO?
You can only apply for the employee category in an IPO if you meet the eligibility criteria.
To apply for the employee category in an IPO, you must be:
- Full-time, permanent employee of the company.
- On the payroll of the company or any of its subsidiaries
- Resident of India.
Steps to Apply in the Employee Category
If you wish to apply for the employee category in an IPO, you need to follow the given steps:
Step 1: Check the IPO Prospectus
First, you need to carefully go through the IPO to check if there is an employee category available and whether or not you are eligible for it.
Step 2: Log In To Your Account
The next step is to log in to your brokerage account, which will be used for the application.
Step 3: Select The IPO
From the IPO section on your broker’s portal, select the IPO you want to apply for.
Step 4: Select The Category
Now, under the investor type, select the “employee” category.
Step 5: Enter Bid Details
After selecting the employee category, enter the bid details- number of lots you want to apply for.
Step 6: Submit The Application
After carefully reviewing all the details, click on the ‘submit’ button.
Step 7: Approve Payment
After you click on the submit button, you will receive a payment mandate request. Once you approve it, your application will be successfully submitted.
Allotment Rules for Employee Category
The following rules affect the allotment under the employee category:
1. Fixed Reservation
- A specific number of shares, usually up to 5% of the total issue, is reserved for the employee category.
2. Application Limit
- Initial Limit: Investments up to ₹ 2 lakh can be made under the employee category.
- Maximum Limit: In the case of undersubscription, the limit is raised to ₹ 5 lakh.
3. Allotment Method
- In the case of under or equal subscription, full allotment is given to all the applicants under the employee category.
- In the case of oversubscription, allotment is done on a pro rata basis; each investor receives allotment in proportion to their bid size.
4. Lock-In Period
Unlike the shares under Employee Stock Option Plans(ESOPs), the shares allotted under the employee category do not have a lock-in period. They can be sold on the day of listing.
Comparison with Other IPO Categories
If we compare the employee category with other IPO investor categories, we come across the following differences:
| Category | Meant For | Reservation | Share Pricing |
| Employee | Employees of the company issuing the IPO | 5% | Shares offered at a discount |
| Retail Investor | Investors who invest less than ₹ 2 lakh | 35% | Same as the issue price |
| Non- Institutional investors | Investors who invest more than ₹ 2 lakh | 15% | Same as the issue price |
| Institutional / QIBs | Large investors such as banks, FPIs, mutual funds, etc. | Up to 50% or even more | Same as the issue price |
Tax Implications for Employee Shares
When an employee receives IPO shares under the employee category, they must consider the given taxes:
1. At the time of allotment
No tax is paid at the time of allotment of shares under the employee category.
2. At the time of sale:
- If the shares are sold within 12 months of the listing date, they are counted as short-term capital gains and are taxed at 20%.
- If the shares are held for more than 12 months, they qualify for long-term capital gains and are taxed at 12.5%.
- For long-term capital gains, the threshold is ₹ 1,25,000, and tax is applicable over it.
3. Difference from ESOPs:
ESOPs are taxed two times: when they are exercised and when they are sold. But the shares under the employee category are liable to only capital gains tax.
Real-World Examples
Let’s take a real-world example to better understand the employee category in IPOs. In this example, we will take a look at FSN e-commerce ventures, popularly known as Nykaa.
IPO Date: The FSN E-commerce venture IPO opened on Oct 28, 2021, and closed on Nov 1, 2021.
Employee Reservation: Out of the total shares offered, 2,50,00 shares were reserved for the employee category.
Discounted Price: The employees were given a discount of ₹ 100, making their subscription price ₹ 1,025 instead of the market price of ₹ 1,125.
Listing Price: On the listing day, Nov 10, 2021, the listing price was ₹ 1,900 – meaning the investors enjoyed listing gains of over 80%
This proves that the employee category in IPO not only improves employee participation but also provides them returns and helps the employees align their investment interest with the company’s growth.
Tips for Maximising Employee IPO Allocation
If you are looking to apply for an IPO under the employee category, the following tips can maximise your chances of allocation:
Use the employee quota
The first step for eligible investors is to apply under the employee category. This category has a reserved portion of shares, so there is a higher chance of allocation.
Apply early
Try to apply as early as possible, ideally on the first day of IPO bidding. It allows for smoother processing of your application. Doing this makes sure that you don’t miss the deadline or face any problems due to technical glitches.
Apply for the maximum shares allowed
When you apply for the maximum amount of shares allowed in your category, it increases your chances of allotment. In the case of oversubscription, a higher application means more shares will be allotted on a pro rata basis.
Combine with different categories
Along with the employee category, you can also apply in the retail category. It improves the chances of your allotment. If you don’t get allotment in one category, you might receive it in another.
Conclusion
The employee category in IPO provides a unique opportunity for the workers of the company to become a part of its long-term growth. This special reservation, which comes with discounted share prices, encourages employee participation in the IPO and fosters a sense of unity throughout the company.
The category not only provides listing gains but also develops commitment in the employees and aids them in their long-term wealth creation. If you’re eligible for it, you should also consider the tax implications along with the benefits it provides.
The employee category is not just a reservation: it is a tool that binds the employees with the company’s journey.
FAQ‘s
The employee category is a portion of the shares reserved for the employees of the company during its IPO.
Yes, you can apply under the employee category in an IPO if you meet the required criteria: permanent employee on the company’s payroll, and a resident of India.
Full-time, permanent employees on the company’s payroll or its subsidiaries are eligible for the employee category in an IPO.
In case of under or equal subscription, full allotment of shares is given to the investors. In the case of oversubscription, the allotment is done on a pro rata basis, the shares allotted in proportion to the investor’s bid size.
The employee IPO shares are subject to short-term or long-term capital gains tax, based on their holding period. For short-term capital gains tax, a rate of 20% and for long-term capital gains tax, a rate of 12.5% is applicable.
No, the family members can’t apply under the employee category. It is reserved only for the employees of the company.
The employee category is only for the employees of the company, with their portion reserved up to 5%. Whereas the retail investor category is open for any interested investor who wants to apply for the company’s IPO, their portion is reserved up to 35%.
