An IPO is divided into 3 categories of investors which are the QIB (Qualified Institutional Buyers), NII (Non-Institutional Investors), and RII (Retail Individual Investors). The allocation for each category is different. The allocation is highest for the QIB category at a minimum of 50% as they have greater financial knowledge and risk appetite and the allocation for Retail Investors is a minimum of 35% and for the NII category, a minimum of 15% is reserved.
An IPO is a process through which a private company gets itself listed on the Stock Exchanges such as NSE (National Stock Exchange) & BSE (Bombay Stock Exchange) by selling some of its Equity shares to the investors and raising money from it. IPO is usually done when the company wants to raise some additional capital to meet its Short and Long term goals and for the expansion of the Business.
According to SEBI (Securities and Exchange Board of India), an IPO needs to be subscribed to at least 90% in order to proceed further with the allotment process.
An IPO is divided into 3 categories for 3 different types of investors to bid from. They are-
The QIB or Qualified Individual Buyers are investors which include, Mutual Funds, Banks, Foreign Investors, Financial Institutions, and other Large Institutions that have the required Financial expertise and fulfill the criteria for being a financial adviser. QIB’s are typically large institutions Firms and not individual hence the majority part of an IPO is reserved for them as they have higher expertise and better Risk taking capacity. A minimum of 50% is allocated for the QIB category.
NII or the Non-Institutional Individuals are investors who have higher investing power than the retail investors. This category of investors does not require any Financial Certifications for investing as the QIB category. The minimum amount of investment for the NII category is 2 Lakh. Any retail investor can apply from the NII category if they are looking to bid for more than 2 Lakh can apply from the NII category. A minimum of 15% of the total IPO is reserved for the NII category.
RII or the Retail Individual Investor category is the most common Category of any IPO because most individual investors fall under this category and apply from this category. One can bid for a minimum of 1 Lot under the RII category and a Maximum of 13-14 Lots or up to 2 Lakh rupees, whichever is lower. Any individual who is willing to bid for more than 2 Lakh has to apply in the NII category. In the RII category, a minimum of 35% is reserved.
As seen above, a minimum of 35% is reserved for the Retail Investors in any IPO. This rate is not fixed and is changed according to the company. If any company falls under the category of “Risky”, due to certain factors such as continuous Loss posted by the company for a couple of quarters or for other reasons, in these cases the allotment for the Retail Category is reduced to 10%, and the QIB allocation is increased to 75%. For example, if a company "Q" is selling 1000 shares through an IPO then the allocation for the Retail Investors would be 35% which turns out to be 350 shares.
To sum it up, generally, the allocation of shares for the Retail Investors (RII) is 35% but in some cases, the overall percentage is reduced to 10% base on some norms of SEBI.