Share Allotment in IPOs : When a company decides to go public, it opens up an exciting opportunity for investors to buy shares and become part of its journey. This process is called an Initial Public Offering (IPO). But as an investor, one of the key aspects you need to understand is share allotment. It’s an important part of the IPO process, and knowing how it works can make a huge difference in your chances of receiving shares. In this blog post, we’ll break down everything you need to know about share allotment in IPOs—from how it works to how you can maximize your chances.
What Is Share Allotment in IPOs?
What Is Share Allotment?
Share allotment refers to the process by which shares are distributed to investors who have applied for them during an IPO. The company issuing the IPO and its underwriters decide how to allocate the shares among different categories of investors, such as retail investors, institutional investors, and qualified institutional buyers (QIBs).
How Are Shares Allocated?
The allocation of shares can vary depending on the type of investor. Broadly speaking, there are three categories of investors:
- Retail Investors: Individuals who apply for shares within a certain price range during the IPO.
- Institutional Investors: Large investment firms, including mutual funds, banks, and insurance companies, that invest significant amounts of money in the IPO.
- Qualified Institutional Buyers (QIBs): These are institutional investors that meet certain criteria set by the stock exchange, such as hedge funds, venture capitalists, and others.
The process can involve a mix of pro-rata (based on demand) and lottery-based systems, especially in oversubscription scenarios.
Why Is Share Allotment Important?
For investors, getting an allotment means you can buy shares at the IPO price, which could potentially be lower than the price once the stock starts trading on the exchange. If the stock performs well after listing, investors who received an allotment stand to make significant profits.
However, the process isn’t always straightforward, especially in cases where the IPO is heavily oversubscribed. In such cases, not all investors may get the number of shares they applied for, or they might not get any shares at all.
The Process of Share Allotment in IPOs
Steps Involved in the IPO Process
The IPO process involves several key stages that ultimately lead to share allotment:
- Filing the Red Herring Prospectus (RHP): This document contains details about the company’s business, financials, and the IPO terms.
- Pricing the IPO: The company and its underwriters set a price range for the shares.
- Subscription Period: During this period, investors apply for shares.
- Allocation and Allotment: Once the subscription period closes, the shares are allotted to investors based on demand and the allocation methodology.
Types of Share Allotment
There are two main ways shares are allotted in an IPO:
Proportional Allotment
In a proportional allotment system, the shares are allocated based on the demand for the IPO. For example, if an IPO is oversubscribed, each investor receives a share of the total available shares proportional to the number of shares they applied for.
Example: If an IPO receives 10 times the demand for shares, and you applied for 100 shares, you might only receive 10 shares, as the available shares are distributed evenly across all investors.
Lottery-Based Allotment
In a lottery-based system, shares are distributed randomly among the investors. This system is often used when demand far exceeds the number of available shares, making proportional allotment impractical.
Factors Affecting Share Allotment
Factors Affecting Your Chances of Share Allotment
The chances of getting allotted shares in an IPO depend on several factors:
Size of the IPO
The size of the IPO plays a major role in determining how many shares are available to investors. Larger IPOs tend to have more shares for allotment, but they also attract more demand, which can increase competition.
Retail vs. Institutional Demand
Institutional investors typically receive a large portion of the shares in an IPO. Retail investors may face more competition for the remaining shares. In some cases, institutional investors, including QIBs, are allotted shares first, with the leftover shares being allocated to retail investors.
Oversubscription
If an IPO is oversubscribed, meaning the demand for shares exceeds the number of available shares, investors might not get all the shares they applied for. In such cases, shares may be allocated on a pro-rata basis or through a lottery system.
Anchor Investors
Anchor investors are large institutional investors who commit to buying a certain amount of shares before the IPO opens. Their participation can influence the allocation for other categories of investors.
How to Maximize Your Chances of Share Allotment
Key Tips for Retail Investors
As a retail investor, there are several ways you can increase your chances of getting allotted shares in an IPO.
Apply for IPOs Early
Timing matters when it comes to IPO applications. Submitting your application early in the subscription period can increase your chances of receiving shares. While many investors focus on applying at the last minute, being early can sometimes give you an advantage, especially in cases of oversubscription.
Diversify Your Applications
If you’re serious about investing in IPOs, applying to a variety of IPOs across different sectors can increase your chances of getting allotted shares. Not all sectors see the same level of demand, so diversifying your applications can help you stand out.
Apply Through Multiple Demat Accounts
Some investors open multiple demat accounts to apply for shares in an IPO, thus increasing the number of applications they can submit. While this can be a way to increase your chances, you must ensure you are not violating any regulatory rules by applying through multiple accounts.
What Happens After Share Allotment?
Post-Allotment Procedures
Once the shares are allotted to investors, there are a few key things to keep in mind:
Allotment Confirmation
If you’ve been allotted shares, you’ll receive a confirmation via email or SMS. The allotted shares will then be credited to your demat account, which is where your investments are stored.
Listing Day and Trading of Shares
On the listing day, the company’s shares are listed on the stock exchange. This is when investors can start buying and selling shares. The listing price will depend on market conditions and investor sentiment. If the IPO has been successful, shares may open higher than the issue price, allowing investors to make a quick profit.
Impact on Long-Term Investment Strategy
Once you’ve received your allotment and the shares are listed, you need to think about your investment strategy.
Selling Your Allotted Shares
You might decide to sell your shares after they’ve been listed, especially if the stock price has gone up. This is a short-term strategy that aims to take advantage of quick price movements.
On the other hand, some investors choose to hold onto their allotted shares for the long term. This strategy works well if you believe in the company’s growth potential and want to benefit from future price appreciation.
Monitoring Performance
After the IPO, it’s important to monitor the performance of your shares. Check the company’s quarterly earnings, news, and market sentiment to decide whether to hold or sell your shares.
Conclusion
In conclusion, understanding the share allotment process in IPOs is key to navigating the complex world of public offerings. Whether you’re a retail investor or an institutional player, the ability to understand the factors that affect allotment, such as oversubscription and the allocation methodology, can make a big difference in your chances of success. By applying early, diversifying your applications, and understanding the risks involved, you can maximize your opportunities for a successful IPO investment.