An announcement of IPO by renowned companies creates an excitement amongst the investors. IPO or Initial Public Offerings is a process of offering shares of a private company to the public in a new stock issuance that helps company raise capital from public investors.
Companies announce their decision to go public when they need to raise capital for operations or expansion and are confident about their future performance. When the IPO is finally announced in the market, the company generally, keeps the bidding window open for 3days. Within these days the investors apply for shares of that company. Once the applications are submitted within that period, the IPO allotment process takes place which depends on the response the IPO got from the investors. Various factors affect the allotment process.
IPO allotment rules
The process of allocating IPO shares involves careful consideration of various factors. The Registrar, in conjunction with the designated stock exchange, determines the allotment based on the number of shares offered and the bids received from investors in different categories (Retail, NII, QIB).
Key points:
- Valid applications only: Only valid applications are considered for allocation. Invalid applications, such as those with incorrect Demat account numbers or multiple applications with the same PAN, are rejected.
- Cut-off price: Only applications received at or above the cut-off price are eligible for allocation.
- Category-wise allotment: Allotment is typically made within each investor category (Retail, NII, QIB). Under-subscription in one category may be offset by oversubscription in another, subject to the approval of the Lead Manager, Registrar, Exchange, and issuer.
- QIB category: Unsubscribed shares in the QIB category are not available for allocation to other categories.
- Basis of allotment: The Registrar prepares and publishes a Basis of Allotment document that outlines the details of the allocation process and the allotment status of individual investors.
How IPO shares are allotted?
When one considers investing in an IPO, they also want to know how the shares are allocated. Perhaps, they previously attempted to participate in an IPO and didn’t receive an allocation of shares and wants to know why.
The allocation of shares happens according to the rules laid down by the Securities and Exchange Board of India (SEBI). There are three categories according to which the allocation is reserved: Qualified Institutional Buyers (QIB), Non-Institutional Investors and retail investors. It is impossible to know in advance whether an investor will receive an allocation of shares but understanding how the shares are allocated in IPO might help to set the expectations and explain why the shares may not get allocated.
