Why am I never allotted shares in an IPO?

Seeing a Refund Intimation email after applying for shares in an IPO can be disheartening - let’s understand what are the reasons for non-allotment of shares. 

The capital markets have been buzzing with IPOs lately - in fact, 2021 is on track to be a record breaking year with companies predicted to raise over INR 1 lakh crore  from the primary market. And with IPOs often being oversubscribed, you’re not the only one waiting with baited breath to see if you’ve received the coveted allotment of shares. But why is that you are not allotted shares? And what are the tips to improve your chances of getting an IPO allotment? Read on to find out. 

Important terms: 

• IPO: An initial public offering (IPO) is the first time a company opens up the issue of shares to the general public. This is when a privately-owned company decides to go ‘public’ and have its shares traded in the open market.
• Oversubscription: The situation where a company receives more applications from share buyers than the number of shares made available for public.

Now that we’re familiar with the basic terms, let’s understand why sometimes you are not allotted shares even when your friend who applied for the same shares got them. There are three major reasons why this happens: 

1) There were errors with your application that made it invalid

2) The price you bid for the shares was lower than the final issue price of the shares

3) Your application was not selected by the computerised lottery system due to oversubscription. 

When is an application for an IPO, invalid? 

Each application for an IPO is scrutinised for accuracy and it’s important to get the technical details right to have your application accepted. Your application could be considered invalid if there’s a mismatch in the PAN, bank account, or demat account details. 

Another factor that makes an application invalid is if there are multiple applications by the same person, each PANcard holder can have only one application. An invalid application automatically results in non-allotment of shares. 

What happens if the final issue price for an IPO is higher than my bid price? 

In the stock market, the final price of an IPOs is decided through the ‘book building process’ where a price band is announced and investors can place bids within this range. The issue price, also called the cut-off price, is decided based on the bids received. Only bidders who bid higher than or equal to the cut-off price can get allotment of shares. So if you’ve bid lower than the cut-off price, shares are not allotted to you. 

What happens when an IPO is oversubscribed? 

Oversubscription is the most common reason for non-allotment of shares in an IPO. If the company receives more applications than the number of shares on offer, it holds a computerised lottery. Here, each applicant has an equal opportunity to be allotted the shares. If your application is not picked in this lottery system, then shares are not allotted to you and your application amount is refunded. 

So what can you do to maximise your chances of getting an allotment? Here are 4 steps you must keep in mind while applying for IPOs: 

1. Get your details right: Double check that all the details on your application including bank account number, demat account number, and PAN are correctly listed. 
2. Only one application per demat account: Do not put in multiple applications from the same demat account and PAN, it will lead to instant rejection. One handy tip you can use is setting up demat accounts for all eligible members of your family and putting in one application from each account to increase your overall chances of allotment. 
3. Cut-off price: it can be confusing to decide how much to bid when applying for shares in an IPO. One handy tip for retail investors is to always select the cut-off price as your bid. This way, you don’t lose out because you bid too low and in case the issue price is lower than the cut-off price, the balance will be refunded to you. 
4. Don’t wait for the last moment: if Murphy’s Law is to be believed, anything that can go wrong, will go wrong. So don’t wait for the last minute to put in your application, you never know when your bank’s transaction system decides to act up. 

Overall, investing in IPOs can be a lucrative investment. So, do your research thoroughly and follow through on the tips above to give it your best shot.