Shareholder Quota in IPO

When a company goes public through an initial public offering, it not only provides for buying shares by new investors but also grants certain privileges to the existing shareholders of that company. Shareholder quota is one such advantage. It is a special allocation of shareholding reserved only for existing shareholders and hence is a special advantage in the IPO process. Let's break down what the Shareholder Quota is and how it works.

What is Shareholder Quota?

Shareholder quota is a reserved quota in an IPO, basically set aside for the existing shareholders of the company or its parent company. That means, if you already are a shareholder in a company coming out with an IPO, or its parent company, you may be eligible to apply for additional shares under this quota.

During an IPO, a company may reserve a percentage of its shares for the shareholders of the company or its parent company. Such reservation is referred to as a Shareholder Quota. This allows existing shareholders to make applications for shares under this reserved category and often increases their chances of allotment compared with the general public.

How Does a Shareholder Quota Work?

Now, let us view the whole thing step by step.

Eligibility Criteria: You will need to have the share(s) of that company or its parent company before a specified date, known as the record date for you to be eligible for the Shareholder Quota. This date, in general, is mentioned in the red herring prospectus of the IPO.

Example: When SBI Cards and Payment Services Ltd. went public in 2020, the shareholders of the bank itself—State Bank of India—were eligible to apply under the Shareholder Quota, subject to their holding SBI shares on the record date.

Application Process: Eligible shareholders need to apply separately under the Shareholder Quota. Most of the time, this happens through the same online IPO application process but it is marked specifically under the "Shareholder" category.

Example: In the SBI Cards IPO, the existing SBI shareholders could apply under both the Shareholder Quota and also the quota meant for public shareholders, thereby enhancing their chances of getting allotment.

Allotment Process: The shares reserved under the Shareholder Quota are offered to eligible applicants on a preferential basis. However, in case the same is oversubscribed, the allotment is done only through a lottery system akin to the general public allotment process.

Example: Tata Technologies is undertaking an IPO and is a subsidiary of Tata Motors. Now if, for example, shares are offered under the Shareholder Quota, then shareholders of Tata Motors may apply to the same. In such a case, suppose Tata Technologies is making an offer to the public of 1,000,000 shares in the Shareholder Quota; then any shareholder holding not less than one share of Tata Motors on the record date can apply to up to all 1,000,000 shares.

Why Do Companies Come Up with a Shareholder Quota?

The Shareholder Quota is not just a sort of goodwill but part of the strategic move by companies. 

Here is why:

• Companies want to reward existing shareholders for their loyalty and continued faith in the growth prospects of the Company.
• Companies through reserved quotas incentivize existing shareholders to participate in the IPO, thereby ensuring that a higher subscription is realized.
• Applying under the Shareholder Quota indicates to the market that the Company is considerate of its shareholders. And, such consideration helps in building if confidence in the markets towards the IPO.

Benefits of the Shareholder Quota

More robust Allotment Chances: Making an application under the Shareholder Quota gives much more reasonable chances of allotment of shares to a retail investor, and more so when the IPO is over-subscribed.

Exclusive Opportunity: It is a window of opportunity offered only to existing shareholders to enhance their stake in a company in which they are already invested.

Potential Listing Gains: If the IPO lists at a premium, then the allotment to these shareholders in the current issue would lead to big listing gains.

Maximum Shares Which Can Be Applied Under Shareholder Quota?

Under the Shareholder Quota in India, an investor can bid for a maximum of 15% of the whole lot being offered to retail applicants in an offer, provided that particular offer is oversubscribed. Such a quota is reserved for shareholders who are active in the company and those who meet criteria that are established in the prospectus of the IPO.

The application limit is usually 15% of the total retail portion of any IPO. For example, if the retail portion of an IPO is 10 million shares, up to 1.5 million shares may be reserved for the Shareholder Quota.

Thereupon, shareholders must furnish proof of their shareholding and apply in a form or through a channel specified by the issuing company.

Understanding the T+1 Settlement Cycle and Its Impact on Shareholder Quota Eligibility

The T+1 settlement cycle is the cycle under which most trades in the Indian stock market come to a close. This becomes very important for investors seeking to qualify for the Shareholder Quota in an IPO, particularly when the IPO comprises a company that is an associate or subsidiary of the parent company.

What is the T+1 Settlement Cycle?

T+1 settlement cycle literally means "Transaction date plus one day." It simply says that when you buy shares on a particular day, called the transaction date or "T," the actual transfer of shares to your demat account and its corresponding payment will be complete one business day later.

Example: If you buy a company's share on Monday, the settlement—that is, when the share gets credited to your demat account—will be completed by Tuesday.

How Does This Affect Eligibility for the Shareholder Quota?

Whenever any company comes out with an IPO and shares are issued under the Shareholder Quota, it typically sets a record date—a cutoff date by which you have to be an existing shareholder to be eligible for applying in this quota. Now, here is how the T+1 settlement cycle fits in:

Record Date This is the cut-off date announced by the company in the IPO prospectus. The shares have to be in your demat account by the end of this day for you to be considered an existing shareholder as of this date.

Example: If the record date for an IPO is Friday, August 16th, you must be recorded as a shareholder in the company by the close of this date.

T+1 Impact: Since the T+1 settlement cycle is in place, if you want to get yourself recorded as a shareholder by the record date, your shares have to be purchased at least one business day before the record date.

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