Of late, the primary or Initial Public Offering (IPO) market in India is seeing a lot of 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 several companies which include Paras Defense, MTAR Technologies, Easy Trip Planners, Devyani International, Rolex Rings, Tatva Chintan Pharma Chem and Nazara Technologies have been subscribed over 100 times. As per reports, 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 14 companies through their IPOs in 2020.
And, several indicators point out that the IPO party may have just begun.
As per reports, 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), MobiKwik Systems ₹1,900 crore), Nykaa ( ₹4,000 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 the lack of awareness , such investors lose interest and opportunities 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 better .
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.
There are two categories in which a company's allotment process may fall, they are:
Scenario 1: The total successful bids is less than or equal to the number of shares offered by the company
Here, the total number of bids made by the investor is less than or equal to the number of shares being offered, then complete allotment of stocks will take place. Thus, every investor who has applied will be assigned shares.
Scenario 2: The total number of successful bids is more than the number of shares offered by the company
Let’s understand this with an example.
Assume that a company who has come up with an IPO offers 5,00,000 lakh shares and the lot size is fixed at 50 as part of it’s issue. As per the SEBI mandate, the maximum number of investors who are bound to get at least one lot will be 10,000 (5,00,000/50). So, 10,000 applicants will definitely receive at least one lot.
The allotment procedure varies depending on the margin by which the IPO is oversubscribed. Let’s continue this with an example mentioned above to understand how this process pans out.
1)Small oversubscription: If the IPO is subscribed by a small margin, then the minimum lot (50 as per our example) will be distributed among all applicants. The remaining shares will be assigned proportionally to the investors who have bid for more than one lot.
2) Large oversubscription: If the IPO is oversubscribed, then the allotment takes place via lucky draw and the whole process is computerized.
Let’s understand how this works for retail individual bidders.
As per SEBI (Securities Exchange Board of India), the allotment to each individual retail bidder shall not be less than the minimum bid lot, subject to the availability of shares in the retail individual portion. The remaining available shares, if any, shall be allotted on a proportionate basis.
The proportionate basis plays a critical role in the number of shares that are allotted.
Let's understand this with another example:
The Computer Age Management Services (CAMS) IPO was subscribed 46.99 times. The issue size of 1,28,27,370 equity shares (excluding anchor book), 63,22,435 shares were set aside for retail investors. The total bid for retail individuals stood at 3,50,98,056 shares — 5.5 times higher than their quota.
For CAMS, one bid lot was 12 shares.
When a public issue is oversubscribed, the number of retail investors who can be allotted shares is computed by dividing the number of equity shares available for allotment to retail investors by the minimum bid lot.
Remember, only those bids that appear at or above the upper band offer are considered valid. So, here is how the allotment goes:
A) Total retail applications selected as per price band= 5,26,869 could be considered for allotment to retail investors
(Shares for retail investors 63,22,435/ 12- One lot)
B) Total application received was 21,08,682. So the total allotment will be 4:1
( Applications received 21,08,682/ 5,26,869)
The remaining applications are rejected automatically. So, the allotment process seems like a lottery where applicants do not get any allotment.
So, the next time, when you apply for an IPO, do keep these factors in mind.
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