Initial Public Offering or IPO is a process through which a privately held company goes public by making its shares available for purchase among the general investors. IPO application is made available to investors for bidding through assigned banks and online brokerage platforms. Investors who have applied for shares of an IPO in the past may have observed that at times they may have not been allotted any shares, while a friend is allotted some shares of the same IPO application. The question that arises then is, why do IPO shares get allotted to some and not to other investors? How do IPO shares get allotted?
Let’s have a look at the IPO allotment process in detail and understand some of the reasons why investors may have zero allotments.
Why is an IPO needed?
IPO is a mode for companies to access additional capital for furthering their growth process. The main objective of an IPO is to raise capital by issuing shares of the company to the public. IPO, as the name suggests, is the first public invitation by the company in the stock markets. Buying shares through an IPO allows investors to gain ownership of a company, depending on the value of the shares owned.
Once a company launches an IPO to the general public, all the bids for the company’s shares are registered online. Through an online mechanism, all invalid bids that may be incorrectly submitted are taken out of the total number of bids. Thus, the company will arrive at the final number of successful bids for the IPO.
Post this, there can be two scenarios that a company may face:
- The total number of successful bids is lower than or the same as the total number of shares offered by the company – In this case, the entire allotment of stocks takes place and every applicant who has applied for shares gets assigned shares.
- The total number of successful bids is beyond the total number of shares offered by the company – In this case, the allotment process usually requires additional planning. As per SEBI or Securities and Exchange Board of India mandate, at least one lot of shares has to be allotted to every individual who may have applied.
To understand the second scenario better, let’s have a look at an example:
Let’s assume that a company offers 5 lakh shares to investors and the minimum lot size that is set is 50. Thus, the maximum number of investors to get at least one lot is = 5 lakh shares / 50 = 10,000.
Hence, 10,000 investors can be allotted at least one lot. There are two types of allotments in scenario 2:
- Small oversubscription
The minimum lot is distributed amongst all applying investors, and the remaining shares get assigned proportionally to investors who bid for more than one lot.
- Large oversubscription
In case there is an oversubscription scenario where even one lot is not possible to be allotted to each applicant, the allotment is done via lucky draw. This type of lottery draw is usually computerised to avoid any partiality. Thus, in the case of large oversubscriptions, some investor names do not get drawn through the lottery and shares may not be assigned to many applicants.
There are two primary reasons for no shares being allotted to an applicant:
- An applicant’s bid for the IPO could have been termed invalid as a result of incorrect information such as the wrong Demat account number, PAN number, or an applicant may have applied multiple times for the same IPO
- An applicant’s name wasn’t selected in the lucky draw during large oversubscription
Here are the steps to be followed for buying shares through an IPO:
- An applicant may need the physical application form, which can be sourced from a broker or a distributor or a bank branch. It can also be accessed online.
- An applicant must then fill the form with relevant details, including personal, bank account and Demat account information
- Applicant must state the total investment amount
- The shares are generally allotted within 10 working days from the date of offer closing
Important factors to note before applying for IPO subscription
It is very important for investors to know the basics of the market before investing in shares. Also, investors must carefully read the company prospectus and specially go through the financial details. This can offer insight into the amount of capital that the company plans to raise and the types of shares to be issued. It also makes sense to understand how the company intends on using the capital raised through the IPO and its future expansion plans. All these factors can help investors to make an informed investment decision.
Conclusion
By subscribing to shares through an IPO, an investor can become one of the first shareholders of the company. With the growth of the company, the share prices may rise and investors can therefore stand a chance to profit. However, there is also a high level of risk associated with stock markets. The investment returns depend upon the company’s growth potential and, in case the company fails, the investor may risk losing the funds invested. Especially when it comes to unlisted companies, an investor must be very careful since these companies are not mandated to publish their financials, making it difficult to analyze their historical performance.
FAQs
IPOs allow investors to gain early access to a company’s potential growth story. This form of investment can help one meet long-term goals. These can be bought cheap while aiming for bigger returns in the future
When an IPO is fully subscribed, each investor gets the number of shares he/she has applied for.
No, IPO is not based on a first-come, first-serve method. The allotment of shares depends on the general investor interest. If many investors show interest in a particular IPO, the share allocation to retail investors may be done through a lottery.
Yes, an investor can sell IPO shares immediately after listing of the stocks. There are no restrictions on selling IPO shares.
There is no established link between an IPO oversubscription and listing gains. IPO oversubscription may be a reflection of the positive outlook of investors for the company’s stocks. However, an oversubscribed IPO does not necessarily mean confirmed listing gains.
