What is Basis of Allocation or Basis of Allotment in IPO?

Short Answer

It is the document issued by the owner of the IPO for share allocated as per the regulatory guidelines in an IPO. This contains all the crucial details about the Initial Public Offering.

Detailed Answer

Allotment of Shares:

It can largely be described as the distribution of shares of an IPO- Initial Public Offering issued by the company to the shareholders (New and existing), third party subscribers, QIBs, NIIs, etc.

Basis of Allocation or Basis of Allotment:

The document published by the registrar or administrator of the Initial Public Offering- IPO which consists of all the important details about the offering like the share allocation ratio, demand or bidding information, and final price of the IPO to the investors of an IPO and shareholders is known as ‘Basis of Allocation’ or ‘Basis of Allotment’.

They are being segregated to various categories of people so that they can pass their bid on the same. Investors get every information in this like number applied, categories involved, Applications received and other details which are valid to them.

Usually during the allotment of IPO shares, the situation of Oversubscription occurs, and the document lists about the same as well i.e., how many times are the shares oversubscribed. If the IPO shares are oversubscribed, it basically means how interested the investors are in this stock and they like the company moving the market upwards for them (company) which can help it to grow.

The companies check for oversubscription by checking in the offered number and the received number in terms of categories and then accordingly allots to them in the final allotment process.

Example of Oversubscription:

When IPO bids were received from Ujjivan Bank on 2nd December 2019, the total number of shares proposed for distribution (supply) amounted to 12.40 crore. Total issued subscription numbers (demand) were 2,053 crore numbers. This is an instance of 165.68 times over-subscribed IPOs.

When shares are oversubscribed then they are allotment as per the rules of Securities and Exchange board of India (SEBI) and its quite obvious that you will receive less shares than requested for. In such cases- whosoever bids gets at least one lot (minimum). For retail investors- SEBI has specified the amount to be between 10000 and 15000. The moment the final price is fixed, they decide the minimum lots based on the number of shares.

There are usually two cases when the IPO shares is to be considered successful:

  1. In case of oversubscription
  1. In case of equal or some number less shares offered.

In cases of very large oversubscription, the shares are allotted as per lottery or lucky draw and it is totally technical and not manually done. In such cases many applicants don’t receive shares due to its excessive demand.

Reasons for Applicants Not Receiving Shares:

  1. In case of excessive oversubscription, the applicant does not get listed in the lucky draw, hence gets rejected as it is totally done by chance.
  1. Due to any incorrect details mentioned in the application like PAN number, name of the applicant, DEMAT account number, etc.
  1. When the applicant has used UPI mechanism to pay but has not blocked the funds from the bank.

What are your views on it? Have you applied for an IPO? Do share your views.

Tagged With: ipoipo allotmentipo allocationshare alltotment
Categories: IPO Basics
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Related FAQs

What is the formula for shares allotment in an IPO?

If a lot of investors show their interest in an IPO, then it is allocated through lottery and in case of a small number of potential investors SEBI defined norms are followed.

Does IPO get allocated to people who apply first?

No, IPO allotment doesn't work like that. It is not dependent on who applied first, rather it is based on the total issue demand. There isn't a formula but a set process based on which the shares get allotted to different category of applicants.

How to Check IPO allotment in Zerodha?

There are many ways to check the IPO allotment status but Zerodha doesn't provide this facility on their website. To check the allotment status you can visit the website of the registrar of the IPO, for example, Link Intime, Karvy. With the help of a PAN number, you can easily check the status.

How to increase IPO allotment chance?

Subscribing for an IPO with multiple accounts, avoiding last-day applications, and choosing minimum bids are few ways to increase IPO allotment chances.

Does applying in an IPO guarantee me to get certain amount of shares?

No, applying for an IPO does not guarantee you nay shares that would be allocated to you. Simply, applying is no surety to getting the shares as well.

What Happens when an IPO is oversubscribed in India?

IPO is alloted by following the pre-defined rule laid down by the SEBI. When an IPO is oversubscribed it gets allocated by considering the minimum lot size. If still not solved, then a computerized draw of lots is conducted.

Is it mandatory to have a Demat account to apply in an IPO?

Yes and no at the same time. Although you can apply for an IPO without a Demat Account in some cases, the allotted shares are tradable through a Demat Account, Thus, a Demat account is recommended for an IPO.

How to apply IPO in Zerodha? Buy IPO Online

If you are a Zerodha customer, you can apply for IPO online through Zerodha Console (Zerodha Back-office). The process for applying an IPO process has been explained in detail above. Here are few other answers to important queries that you may want to learn.

How to sell IPO?

You can sell your shares of an IPO through the stockbroker application or website. Let's see what's the simple process to sell the shares you hold.

What is Market Lot Size and Minimum Order Quantity for an IPO?

Minimum order quantity stands for the minimum amount of shares that have to be purchased to secure an IPO investment. However, an investor purchasing bare minimum shares in a package are coined as market lot size.