What is Basis of Allocation or Basis of Allotment in IPO?
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- Updated On:26-May-2021
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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:
- In case of oversubscription
- 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:
- 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.
- Due to any incorrect details mentioned in the application like PAN number, name of the applicant, DEMAT account number, etc.
- 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.
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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.
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.
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.
The minimum and a maximum number of shares are defined in Lots in an IPO. The minimum number of Lots that a retail investor can apply in the Retail Segment (RII) is 1 Lot and the maximum number of Lots that can be applied should be less than 2 Lakh Rupees. On the other hand, if one wants to apply for more than 2 Lakh rupees then they can apply in the NII (Non-Institutional Investor) category where the minimum amount for investment is 2 lakhs and the maximum amount is not capped.
Selling the IPO shares on the first day of its listing could get you considerable postive gains. But there is a higher chance for the prices to rise and even fall if you wait for a more extended period.
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.
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.
There are few documents such as a photocopy of the IPO applciation, cheque copy, and the reference number of applciation if submitted online.
One97 Communications, the parent company of Paytm came up with the largest IPO in Indian history but failed to perform well. Firstly the IPO was too big for the retail investors to digest. Then the valuations were extremely high which led to the HNIs and Institutions avoiding the issue. All together the overhype in social media led to massive losses for the retail investors as the stock fell almost 40% in two trading sessions.
Buying the shares of companies that are not listed is an easy task these days, as there are many online platforms that allow retail investors to own shares of unlisted shares or Pre-IPO shares. Buying Pre-IPO shares have some advantages as well as disadvantages, it is discussed in detail below.