What is the formula for share allotment in an IPO? How does a company decide who to allot and how much?
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- Updated On:02-Apr-2024
- Replies:2
Short Answer
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.
Detailed Answer
There isn't a straightforward formula for share allotment in an IPO.
There are three types of investors in an IPO such as qualified institutional buyers (QIBs), non-institutional investors (NIIs), and retail investors. For the first two types, shares are allotted on a proportionate basis.
In IPO, the share of allotment is done through SEBI norms. The SEBI share allotment rules say that the minimum bid lot is determined based on the minimum application amount, which cannot pass or fall below 10,000 - 15,000 INR. Previously the range was between 5,000 - 7,000 INR.
The retail investors will be given at least one lot. Bids that are at or above the issue price mentioned above only qualify for share allotment. The remaining shares are then allotted based on a draw of lots.
It is very important to understand the dates involved in IPO allotment. Usually people either miss the deadline or do not remember when allotment will be done and when the money will be refunded. IPO allotment is done when the registrar approves.
So, the date allotted to the company for IPO allotment is when you will also be allotted the shares. The whole process has to be completed within 5 days and then the offer is closed. It is also the date when people come to know about over-subscription and under-subscription of shares.
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Discussion (1)
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.
There are various aspects about high P/E ratio that an investor needs to be mindful of before investing in any stock:
- Company's background, goals, objectives, and performance
- Clear mindset before investing
- reasons for increment in P/E ratio
- Volatility of the value.
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.
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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.
arpit seth
Whenever an IPO is undersubscribed in the retail section, you will get a complete allotment of the shares applied. If you apply for 5 Lots, you will receive an allotment for the complete 5 Lots. Whereas if the IPO gets oversubscribed in the retail segment, you are entitled to a maximum of 1 Lot, no matter how many Lots you apply. This is provided you apply at the upper price band or the Cut-Off price.