The process through which a privately owned company makes its shares available for purchase to the general public is known as an initial public offering, or IPO. For candidates to bid, this application is made accessible in designated banks and online. If you’ve ever applied for shares in an initial public offering (IPO), you’ve probably noticed that you weren’t given any. Perhaps your buddy was allocated some shares in the same IPO application at the same time. So, how do IPO shares get assigned to applicants and why does this happen? Let’s take a closer look at numerous topics of IPO allotment process
What is the procedure for submitting an application to an IPO?
The procedure for submitting an application to an IPO is as follows:
It’s crucial to grasp the notion of Lot Size before learning about the mechanism for allotting shares in an IPO to retail investors.
Each application filed by retail investors is in lots, and a company’s entire equity shares on offer are divided into numerous tiny lots. With the assistance of an example, this may be explained. Consider the following example: Company A plans to sell 1 lakh shares in an initial public offering (IPO) and has set a lot size of 10 shares per lot. As a result, Total No. of Lots Offered = Total No. of Shares/ Total No. of Shares in 1 Lot in this situation.
As a result, in the example above, the total number of lots is 10,000, or (1,00,000/10).
When a retail individual investor bids for shares in an IPO, he does so in terms of lots, such as 1 lot, 2 lots, 3 lots, and so on. He will not bid in terms of the number of shares, such as 10 shares for 20 shares or 30 shares, but rather in terms of the number of lots, such as 1 lot, 2 lots, or 3 lots.
A person cannot bid for shares that are fewer than the lot size, according to SEBI rules. Furthermore, bids in decimals are not permitted, therefore an applicant cannot bid for 0.3 or 2.4 lots.
What is the procedure for Allotment of Shares in an Initial Public Offering?
All bids for shares are registered online once an organisation issues an IPO to the general public. The erroneous bids that were entered wrongly are then removed from the total number of bids using an online process. As a result, you now have the total number of successful bids for the IPO.
There are two scenarios in which a company’s condition might fall into:
- The total number of successful bids equals or is less than the number of shares offered by the company.
If the total number of bids received by the applicants is less than or equal to the number of shares being offered, the stock will be fully allocated. As a result, shares will be issued to each candidate who has applied.
2. The total number of successful bids exceeds the number of shares available from the company.
If the total number of bids received by applicants exceeds the number of shares available, the share allocation procedure will require further planning. The Securities and Exchange Board of India (SEBI) requires that each person who has applied get at least one lot.
Assume that 5 lakh shares are being offered to investors, with a minimum lot size of 50. The maximum number of investors eligible to get at least one lot is = 5 lakh/50 = 10,000.
As a result, at least one lot will be allocated to each of the 10,000 investors.
Now there are two scenarios
1. There is a small oversubscription.
The minimum lot will be provided to all applicants, with the remaining shares being distributed proportionally to investors who have bid for several lots.
2. There is a significant oversubscription.
When the number of applications for an IPO exceeds the number of shares available for allotment, it is said to be oversubscribed. In such circumstances, a lottery is used to distribute shares to investors. This lottery will be computerised and will not be biased in any way. As a result, when there is a big oversubscription, some names are not picked in the lottery method, and many applicants are not awarded shares.
What are the reason for no share allotment?
If no shares were assigned to you, there are two possible explanations:
- Your IPO bid was declared invalid owing to an inaccurate Demat account number, an improper PAN number, or numerous IPO applications.
- In the event of a huge oversubscription, your name was not drawn in the fortunate draw.
How the bidding lot is determined?
The minimum bid lot is determined by the minimum application amount, which cannot exceed or fall below Rs 10,000-Rs 15,000, according to the SEBI share allotment guidelines (earlier it was Rs 5,000-Rs 7,000).