Updated Feb 09, 2022

How Does the IPO allotment decided ?

How does the IPO allotment decide?

An IPO (initial public offering) is a significant milestone in a company's history. It's an indication that a firm has finally evolved into a fully-fledged, effective organization with enough market goodwill to begin raising capital from the general public. An IPO is frequently baked into the list of things that a venture-capital-funded firm must accomplish to fulfil the expectations of their investors by providing an 'exit.'

IPOs are usually done on a large scale and result in a few changes in a company's ownership structure. Companies can now increase operations, engage in product development, recruit superior people, and so much more with a fresh inflow of cash. This occurs at the cost of dilution in the ownership structure, and the price at which the stocks trade reflects the investors /owners faith in the company's future potential.

Let’s just say, a firm that has developed enough to declare an IPO has already weathered numerous storms and has established itself as a leader in the market category in which it works. The initial public offering procedure for such companies gets a lot of attention and hype because there will be a lot of potential investors looking to jump on the bandwagon.

The initial public offering procedure has a few quirks that account for mismatches between the number of shares being offered and the number of bids received. To learn more about how these situations are handled, we must first comprehend the IPO allotment procedure.

The Process of Allotment

Before you even consider subscribing to an IPO, you must first have the following:

• Depository account (necessary for buying shares)

• Investing Account (necessary if you intend on selling shares)

• The amount in your Demat account that corresponds to the amount you bid

If you have all of the prerequisites in place, you must begin the application process. It's a rather simple technique that takes place in the following order:

Step 1: Begin the application process.

This can be done both online and offline, and your account must have the funds to pay the bid you submit. Since the 'Blocked amount facility' has been made mandatory for IPOs by market authorities, your bid is unlikely to be accepted if you do not have the funds put aside.

Step 2: Allotment 

This takes place behind closed doors and might go either way depending on the number of bids received or the authenticity of those offers. It's worth noting that not all applicants receive exactly what they asked for, as demand often outstrips supply by a large margin.

Step 3: Approval 

The IPO's registrar completes and confirms allotment of the too successful bidders in around 7 days. The registrar's website can be used to verify the status of an IPO allotment. It's also available on the NSE's and BSE's websites. For the IPO allotment status check, you'll need your PAN and DPID/Client ID number, or the bid application number.

Now that we've seen how the allotment process works, it's time to go deeper into the dynamics underlying the process and how fringe instances are handled.

What Factors Do Registrars Consider When Making Allotment Decisions?

When an IPO application is completed, one of two things normally happens:

• When an IPO application is completed, one of two things normally happens
• The total number of bids exceeds the number of shares offered by the company.

Case 1: The total number of bids exceeds the number of shares offered by the company.

The registrar will not be required to act if this occurs (which does not happen very often). Each applicant who submits a legitimate bid will be given the lot they requested. No one is obligated to walk away empty-handed.

Case 2: The Firm's Total Number of Bids and Shares Offered

This is a more likely scenario, and the registrar will need to plan to determine how the allocation will take place. Thankfully, India's market regulator, SEBI (Securities and Exchange Board of India), has mandated that each applicant receive at least one lot. With this in mind, let's take a look at an example to better understand the allotment process.

The allotment mechanism changes depending on the margin by which the IPO is oversubscribed. The following is how they are dealt with:

• Small Margin: 

If the IPO is only slightly oversubscribed, the minimal lot will be distributed to all applicants. The remaining shares will be distributed proportionally to those who placed multiple bids.

• Large Margin: 

The registrar resorts to allotment via a lucky lottery in circumstances where the shares are oversubscribed by many times the original amount (such as Reliance's IPO in 1977). Investors whose bids do not make it during the draw will not be assigned any shares in such cases.

One of two things could have happened if you applied for an IPO and didn't receive any shares:

• Your bid was rejected due to an error in your PAN/Demat account number.
• Your name was not drawn in the lucky draw.

Conclusion

Back in October 2012, SEBI introduced a new IPO allotment process that ensured that all retail individual investor (RII) applications were evaluated equally. Under the new system, applicants are guaranteed at least the minimum application size, pending aggregate share availability.

The IPO status is a reflection of the stock market's collective trust in the company. An IPO has become a massive event in recent years, attracting enormous media attention and interest from both regular investors and large financial institutions wanting to buck the trend. After the allocation procedure is completed, the shares are listed on the exchange within days, allowing trading to begin.