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IPOs are commonly perceived as opportunities with massive potential for financial gain among investors. It goes without saying that companies announcing IPOs are looking to grow and expand.
Since there are a lot of investors who are looking to be a part of the growth of such companies, they usually get a lot of attention from IPO announcements. Investors from separate categories get the chance to apply for shares after an IPO is announced.
In this article, we will look at how an IPO allotment works, what an oversubscription is in an IPO, and how the allotments take place in the case of an oversubscription.
Understanding Initial Public Offering (IPO)
An initial public offering (IPO) is an event where an unlisted business lists its stocks on a stock exchange and allows the general public to buy them.
Many consider initial public offerings as large-scale financial opportunities, with companies making news when they go public due to major spikes in their stock prices. For example, Tata Technologies made news after going public with its IPO from November 22 to November 24, 2023. Tata Tech acquired around ₹3,042 crores at the ₹500 issue price per unit and saw an oversubscription of 69.43 times
In addition to preparing for a huge amount of public review, private companies considering an IPO must submit a lot of paperwork and financial disclosures to comply with SEBI (Securities and Exchange Board of India). However, despite their undeniable popularity, you should be aware that initial public offerings can be risky investments with uncertain long-term returns.
What is the IPO allotment process?
After a company announces to go public, the bidding process is usually open for 3 days, during which investors may apply for shares of the given company. The IPO allotment process starts after the applications are submitted within the said period. Allotment is the process of companies accepting applications and crediting shares to the investor’s demat account.
Here is how IPO is allotted
The allotment of shares takes place according to SEBI’s guidelines. The allocation is primarily reserved for three categories: QIB or qualified institutional buyers, RII or retail investors, and non-institutional investors.
The following minimum IPO share allotment quota is set aside for the applicants, according to SEBI:
|Minimum allocation %
Possible events during IPO allotments:
- If fewer than 90% of the shares are subscribed for, the initial public offering (IPO) would be cancelled, and the applicants’ funds would be refunded.
- Over 90% of the shares are subscribed for, meaning that, if their application is accepted, they will receive all of the lots they requested.
- In the scenario of oversubscription, shares may be distributed by lottery or in a proportional manner.
Understanding how IPO allotment is done helps investors be prepared to receive a lesser number of shares in case of oversubscription.
What is oversubscription in an IPO?
An IPO may experience oversubscription if the demand for the number of shares is more than the supply, i.e., if the number of shares applied for is more than the number of shares offered for sale. IPO oversubscription occurs when potential investors are eager to fund a business and make larger offers than the business is prepared to take.
In these situations, stock prices usually go up by the issuing businesses. For example, after trading at a premium of 140% on its initial listing, Tata Technologies shares surged 168% from their issue price to ₹1,334 on the BSE in only a few minutes.
Process for allocation in case of oversubscription
IPO allotment for QIB
When it comes to QIBs, each candidate receives a proportionate share allocation. For example, if a QIB is applied for 10 lakh shares, they will be allocated only 1 lakh shares if the shares are oversubscribed by 10 times.
IPO allotment for RII
Retail investors may apply for up to Rs. 2 lakh per initial public offering (IPO). In case of oversubscription, a lot draw is used to select the eligible investors for the minimum bid lot. Since this is a computerised procedure, bias does not exist in this matter.
IPO allotment for HNIs
A high-net-worth individual may not receive the exact number of units for which he/she has applied. If they have applied for more lots than the issue that was oversubscribed, shares will be allocated proportionally. In case of fewer lots than the number of times the issue was oversubscribed, the allotment is done percentage-wise, compared to the total subscription.
IPOs are often favoured by investors due to the potential for their prices to go up dramatically both on the day of the IPO and in the following days. On a few occasions, this can result in significant gains, but it can also result in significant losses. This is why shareholders must ultimately evaluate each IPO based on their financial situation, risk appetite, and the prospectus of the business that is going public.
No, IPO allotment is not on a first-come, first-serve basis. In case of subscription within the issued limit, the allotment happens as per subscription. In case of oversubscription, allotment happens either on a lottery system or on a pro-rata calculation.
IPO allotment usually happens 5-7 days after the IPO closing date. It could happen earlier or later based on the company’s discretion. The details of the allotment will be published by the company in its prospectus and other related documents.
For instance, ABC Ltd. registers 100,000 shares for the IPO. However, it later emerged that the investors had a 2,000,000-share demand. We may state that there were 20 (2,000,000/100,000) oversubscriptions for the issue, or the IPO was oversubscribed 20 times.
Some common causes for oversubscription of IPOs are:
When companies underestimate the market and issue a small size of shares to the public.
When the market is booming, and investors are optimistic about the market.
When the company’s financial performance is strong and has less number of listed competitors.
Companies use two methods to decide the IPO listing price – the fixed price method and the book-building method.
A fixed price method is where prices are decided before the IPO, based on different aspects of the company.
A book-building method is where companies decide on a price range and invite bids from the public. The final price is decided after IPO bidding based on the bids and demand.