IPO

How Does the IPO Allotment Process Work? A Complete Guide

Ever wondered why getting IPO shares sometimes feels like winning a lucky draw? That’s because, in oversubscribed IPOs, allotments are often lottery-based, especially for retail investors. But things get trickier for High Net Worth Individuals (HNIs).

From the swelling fringes of retail investors pouring into the mainstream stock markets, investing in Initial Public Offerings or IPOs has grown to become one of the most popular ways of entering the stock market. Yet, still, many people ask how the process of an allotment of an IPO works. So, we will take a step-by-step journey through the whole process and all the mechanics, key terms, and factors that determine allotment results. So, let's get on with it.

What Is an IPO Allotment?

IPO allotment is the number of shares allotted to applicants who have subscribed during the IPO subscription period. As the IPOs are highly oversubscribed, allotment comes with some strict rules and norms for equal distribution.

Types of IPO Investors:

Before we proceed into the process of allotment, let us discuss a brief overview of the investor categories:

Retail Individual Investors (RII): Applicant who applies through his single account for shares worth up to ₹2 lakh. In the case of oversubscription, it is allocated through a lottery system.

HNI: Investors applying for shares worth more than ₹2 lakh.

HNIs are further divided into two types:

Small HNIs (SHNI): Can bid between ₹2 lakh to ₹10 lakh.
Big HNIs (BHNI): Can bid for more than ₹10 lakh.

Important Rule: Even if BHNIs apply for a large sum, they receive only ₹2 lakh worth of shares per allotment in case of oversubscription. The allotment process for HNIs is more aligned with the lottery system, similar to the retail category.

QIB: Mutual fund and insurance companies. High net worth Institutions. QIBs are allotted the share quotas proportionately; however, they are usually huge in quantity.

Anchor Investors: Anchor investors are a portion of QIBs who commit themselves to buying shares before the IPO date. They ensure allotment before the general subscription even begins.

Shareholder Quota Investors: Investors are shareholders of the parent company and apply under the shareholder quota for further eligibility.

IPO Allotment Process in Detail

1. Application

Every investor applies through his bank or broker through the ASBA facility wherein the amount of application is blocked but the balance is not withdrawn till shares are allotted.

2. Subscription Period

The IPO stays open for 3-5 days. Once the same gets closed, the total subscription numbers are published stating how many times the issue has been oversubscribed.

For example, if the issue size is 1 crore shares and receives 5 crore applications, it is oversubscribed by 5 times.

3. How to Handle Oversubscription?

With regards to oversubscription allotment will be allocated based on the category you have applied under:

Retail Category: It is also allotted based on a lottery draw so that retail applicants will get the shares equally.

HNI Category: Even the SHNIs and BHNIs are allotted by holding a lottery, this makes the process even closer to retail than the proportionate allotment

Example: Suppose case 1 crore shares are there, and in SHNI and BHNI categories, 5 crore shares applications come. Then both will go to the lottery.

QIB and Anchor Investors: From here, proportionate to their size of bids, there will not be any lottery in shares.

Lottery Process

Retail Investors

A computerized draw is held and allocations are done in the minimum lot sizes keeping in view equality.

Example: An IPO is offering 1,00,000 equities in lots of 100. Since 5,00,000 retail applications are received, 1 out of every 5 applicants will receive allotment.

HNI Investors

SHNIs and BHNIs will receive shares worth ₹2 lakh per lot through a lottery system in case of oversubscription.

Example: An IPO is offering 1,00,000 equities in lots of 100. Since 5,00,000 retail applications are received, 1 out of every 5 applicants will receive allotment.

Proportionate

Pro Rata Allotment for QIBS

For Non-Retail Categories, The shares are allocated proportionally with the proportion of applied shares against available shares.

Working out example: When an HNI seeks 10,000 units and the issue gets oversubscribed by 2x times, then he will receive an allotment of 5,000 units.

Registrar and Transfer Agents (RTAs)

RTAs such as KFintech and Link Intime ensure the following aspects:

The allotment is done in full public view and also, it ensures that it aligns with the SEBI guidelines.

The unallotted applications will be refunded with speed.

Allotment Status Declaration

IPO allotment status usually is declared on the next working day of closure of the issue.

Investors can check their allotment as follows :

Through IPO Ji App and website
Visiting a registrar's website
Searching through their application/PAN number
E-mails or SMS Alerts through other brokers/banks.

Refunds and Unblocking of Funds

In case you do not get an allotment, the amount gets unblocked or refunded within a few days. In the case of allotment to allotted investors, the amount gets deducted, and shares are credited to their Demat account.

Tips to Boost Chances of Allotment

Apply in Multiple Applications through Family Accounts: Chances increase by making multiple applications through different family members' accounts.
Avoid Maximum Bids in Retail Category: Instead of applying for a bigger lot, you increase your chances of getting selected with the application of small lots as there are not many big lots available.
Apply Applications Early: Applying on the first or second day will be a better bet.

The allotment process through an IPO seems to be complicated, but the whole process ensures a fair distribution of shares across categories of various investors. However, whatever the category, whether it is a retail investor applying with high hopes or an HNI seeking big allocations, it will help you strategize better if you understand the system of the allotments. Look out for allotment status after every IPO and luck with your investments!

Ready for the next IPO? Get updated with upcoming IPOs on IPOji.com and track allotment status easily!