IPO Allotment Basics: Meaning, Process and Rules

An Initial Public Offering (IPO) is a process through which a private company offers shares to the public for the first time and gets listed on the stock exchange.

IPO allotment is a process through which the company determines how many shares each successful applicant receives. The allotment process follows regulatory requirements, investor categories, and the allotment basis.

This article explains IPO allotment, the rules, how shares are allotted, and what happens in undersubscription and oversubscription.

What is an IPO Allotment?

IPO allotment is the process through which shares offered in an IPO are distributed among investors who have submitted valid applications. After the IPO subscription period closes, the registrar and other intermediaries determine how many shares to allot to investors in accordance with applicable rules.

The IPO allotment process depends on factors such as the number of shares available, total applications received, investor category, and subscription level. The basis of allotment is prepared after considering these factors.

The IPO allotment date is when the final share allocation is determined and made available to investors. Applicants can generally check their allotment status through the registrar and the stock exchanges.

Check out the latest upcoming IPOs

How are shares allotted?

IPO shares are allotted based on investment category and SEBI-mandated allocation percentages.

Qualified Institutional Buyers (QIBs)

QIBs include institutional investors such as mutual funds, insurance companies, and other eligible financial institutions. Usually, 50% of an IPO is reserved for QIBs.

Non-Institutional Investors (NII)

NIIs are investors who apply for more than ₹2 lakh worth of shares, and usually, 15% of the IPO is reserved. The NII category generally includes high-net-worth individuals.

Retail Individual Investors (RII)

RIIs are the general public applying within the prescribed retail investment limit. For retail investors, 35% of an IPO is reserved. Under this category, if the IPO is oversubscribed, shares are allotted through a lottery system.

IPO Allotment Process

The IPO allotment process involves several steps after the subscription period ends. Here is the step-by-step process.

• Application Validation:

The registrar checks the submitted IPO application for validity, including application details, payment status, and other required information.

• Subscription Calculation:

The registrar determines the number of valid applications received and compares them with the number of shares available in each investor category.

• Category Allocation:

Shares are allocated separately among the QIB, NII, and RII categories according to the applicable reservation and allotment rules.

• Basis Preparation:

The registrar prepares the basis of allotment using subscription data and applicable regulatory requirements.

• Finalisation:

The stock exchange approves the basis of allotment, after which shares are credited to successful applicants and refunds are made.

IPO Allotment Rules

Several rules determine how IPO shares are distributed among investors. These rules establish a structured and transparent basis for allotment.

• Valid applications:

Only applications that meet the applicable requirements are considered for IPO allotment; rejected applications do not participate in the allotment process.

• Cut-off price:

Retail investors can generally apply at the cut-off price in book-built IPOs, allowing applications to remain eligible regardless of the final issue price.

• Category-wise allotment:

Shares are distributed separately among investor categories according to the reservation percentages and applicable regulatory provisions.

• QIB category:

QIB allotment follows applicable institutional allocation rules and may involve proportionate allocation depending on the subscription level.

• Basis of allotment:

The basis of allotment determines the final number of shares allocated to eligible applicants based on their category and the subscription level.

What happens when an IPO is oversubscribed?

An IPO is oversubscribed when the number of shares applied for exceeds the number of shares available for subscription. Oversubscription can occur in one or more investor categories.

For example, if an IPO offers 10 lakh shares and receives applications for 30 lakh shares, the issue is subscribed three times. In this situation, every applicant cannot receive the full number of shares applied for.

The allotment process then follows the applicable basis of allotment for each category. Retail investors may receive shares through a lottery process designed to provide eligible applicants with a minimum lot, subject to availability and applicable rules. In highly oversubscribed IPOs, some valid retail applicants may not receive any shares.

For institutional and non-institutional investors, allocation mechanisms can differ by category and under applicable regulations. Therefore, investors should not assume that a particular subscription multiple will automatically determine their individual allotment.

FAQs

Is IPO allotment first come, first served?

No, IPO allotment is not based on the order of applications submitted. All the applications submitted during the bidding period are treated equally. In case of IPO oversubscription, allotment follows a lottery-based mechanism under exchange guidelines.

Is the investment amount deducted before IPO allotment?

The IPO investment amount is not deducted immediately. When you apply for an IPO, the application amount is only blocked in your bank account. It gets debited when you receive the allotment; otherwise, it gets unblocked.

Can I sell shares after IPO allotment?

Yes, you can sell the shares on the listing day after they get credited to your demat account. Before listing, shares are not available for trading.

Can I cancel my IPO application? Will I get a refund?

Yes, you can cancel or modify your IPO application before the bidding closes. Refunds for unallotted shares are usually processed within a few working days after allotment.

Where can I check the IPO allotment status?

You can check the IPO allotment status on the registrar's website by entering your PAN, application number, or demat ID.