Of late, the primary or Initial Public Offering (IPO) market in India has been sizzling with high voltage action. The frenzy in the primary market has been such that even little known brands have secured a bumper listing on the exchange. The IPOs of close to a dozen companies which include Paras Defense and Space Technologies, MTAR Technologies, Easy Trip Planners, Devyani International, Rolex Rings, Tatva Chintan Pharma Chem and Nazara Technologies have been subscribed over 100 times. According to a news report in business daily Mint, till date, in 2021, as many as 40 companies floated IPOs to raise ₹64,217 crore. This is considerably higher than ₹26,611 crore raised by 15 companies through their IPOs in 2020.
And, by all indicators, the party’s just begun.
According to the same news report published in Mint, in October-November 2021, at least 30 companies could collectively raise over ₹45,000 crore through IPOs. Companies which are expected to announce IPOs between October-November 2021 include Policybazaar ( ₹6,017 crore), CMS Info Systems ( ₹2,000 crore), MobiKwik Systems ( ₹1900 crore), the report said. In fact, in September 2021 itself, Aditya Birla Sun Life AMC will come out with its IPO amounting to ₹2,778 crore.
Clearly, the attraction towards India’s primary or IPO market is not ebbing soon. In fact, it continues to attract attention not only from the savvy institutional investors and High Networth Individuals (HNIs), but also from retail investors. A key reason for this is the high valuation of listed companies in the secondary market. Investors rightly believe the IPO route is a good way to get in on the ground floor of a good investment. But, there is a problem here.
While highly savvy investors know how to earn well in IPOs, there is a large section of retail investors who are not as conversant with the IPO market. Many do not understand the IPO allotment process and oftentimes, because of their ignorance, such investors lose money and interest in markets.
In the context of these facts, let us understand the process of IPO allotment. This will help you make your investment decisions related to the IPO market well.
Investing in an IPO is a ticket to investment success for many investors. This is especially true in a bull market as many investors find it lucrative to apply for an IPO with a view of making listing gains. In the process, sometimes , investors end up bagging a multibagger stock too. Large IPOs such as Tata Consultancy Services, Coal India, Maruti Suzuki India, Avenue Supermart (D Mart) among others have drawn many retail investors to markets. However, as the bull market heats up, the oversubscription numbers increase. That leads to a situation wherein very few investors get allotment of shares in an IPO. This makes many wonder why they don’t get shares in every IPO they apply for.
Let us understand the IPO allotment process step by step. The first step is a computer-based screening. Here, multiple applications linked to one PAN, invalid applications for want of desired details, applications not backed by funds and other invalid applications are weeded out. This leaves only serious investors who are eligible for allotment of shares.
The regulator Securities & Exchange Board Of India (SEBI) has made it mandatory for minimum one lot to be allotted to every individual shareholder. But, that rarely happens, given the high oversubscription even in the retail individual category.
Shares also have to be allotted to Qualified Institutional Buyers (QIB) and non-institutional investors. Here, shares are allotted proportionately based on the number of shares they applied for, the reservation meant for them and the over-subscription numbers.
So, how are shares allotted to individuals in an IPO? And why do so many return, empty-handed? To know that, we must understand the two possible scenarios that could arise with every issue.
Situation A: subscription less than or equal to reserved shares
In this case, each investor is allotted shares equal to what she has applied for
Situation B: Subscription or bids exceed the number of shares reserved for individual investors. This is a tricky situation and investment bankers in question have to handle it carefully. They figure out the overall subscription.
But, then, why do so many retail investors lose out on an IPO allotment?
First, there is some fault at the application stage. Please ensure that your application is complete in every manner to stand a chance of allotment.
The second reason for no allotment is too much oversubscription leading to lottery-based allotment. This also results in many investors going home without getting shares in an IPO.
Besides this, investors also need to be aware of two situations with regard to oversubscription. These are small and large oversubscriptions:
Small oversubscription
In this case, the allotment is done following the SEBI mandate of giving at least one lot to each investor. The remaining shares are then allotted on a proportionate basis.
Large oversubscription
In many IPOs, the retail quota gets oversubscribed many times. In that case, all eligible investors cannot be given the mandatory one lot. In such a situation, the lottery system is followed. This is a computer-based lottery involving no human intervention. This prevents any kind of preferences creeping into the allotment process. Indian rules do not allow for fractional allotment of shares during IPO allotment.
So, the next time, when you apply for an IPO, do keep these factors in mind. And, do not lose heart.
Download the Upstox App Today