How IPO allocation process takes place?
Before understanding the IPO allocation process, it is important to know the different categories of investors. Some parts of the IPO are reserved for each category.
Types of Investors
There are three types of investors
- Qualified Institutional Buyer(QIB)
- Non-Institutional Investors(NII) or High Network Investors(HNI)
- Retail Investors
Let us discuss all these types in detail
Qualified Institutional Buyers
They are the organizations or companies who invest either for their investment portfolio or for other peoples. These includes
- Insurance companies
- Mutual Funds
- Pension Funds
- Provident Funds
QIB’s generally consists of huge corporations and they come with a huge capital. Special quotas are reserved for this category.
QIB’s are financially sophisticated and are recognized by the security regulators. 50% of the entire IPO are reserved for this quota.
This means half of the IPO are reserved for the QIB’s. They own and invest a minimum of $100 million. This is the reason the QIB’s get the first preference.
Non-Institutional Investors are also called as High Network Investors. These investors invest more than $3000(more than 2 lakh INR).
- Individual Investors
Minimum of 15% of the entire IPO is reserved for this category.
They include the general public like you and me, who place a bid for less than $3000(2 lakh INR). If you place a bid for more than 2 lakh, you’ll come under High Network Investors.
35% quota is reserved for the retail Investors. Just a few days after the bid ends, shares are allotted to the investors.
IPO Allocation for Retail Investors
The IPO allocation process for the retail investors is quite different than the other two. Let us see how this works.
As you know, we buy shares in a lot in IPO. The lot size is decided by the IPO issuing company. Now let us understand this with an example:
Suppose, there’s a company XYZ and the cost price of one share is $15. The lot size decided is of 10 shares.
Therefore, the cost of 1 lot will be $150 (i.e. 15*10=150). You’ve to buy one lot in minimum if you participate in IPO.
What does Oversubscribed mean in an IPO?
Oversubscribed occurs when the total number of bids placed exceeds the total number of shares issued by the underlying company.
Let me explain this by taking the above example. Company XYZ reserved 100000 shares for its retail investors. But the demand was twice the scheduled issue which was 200000.
The shares got oversubscribed by 2 times. If the demand increases by 5 times more than the scheduled issue, then the retail category will be oversubscribed by 5x.
In simple language, oversubscribe occurs when the demand is higher than the supply.
Sometimes, when the retail category is oversubscribed by too many times, then the shares are allotted to the investors in lottery basis.
In the case of High Network Investors(HNI), when the shares get oversubscribed, the shares are allotted proportionately.
i.e. Shares = Applied Shares / Shares Oversubscribed
Suppose, the same company XYZ reserves 100000 shares for HNI category, while the total demand was of 200000 shares, that means HNI category was oversubscribed by 2 times.
If you placed a bit for 1000 shares, you would only receive 500 shares(1000/2=500).
This is because the category has been oversubscribed y 2 times. After allotting the shares to its investors, it is listed in the stock exchange within 7 days.
The allocation process seems to be a little complex, but it’s not. Sometimes, it comes to the matter of luck when the IPO gets oversubscribed.
- We understood the different types of Investors participate in IPO.
- Reserved quota for each category.
- IPO Allocation process of the retail investors.
- Allocation when shares get oversubscribed.
Also read: What is IPO? Why IPO necessary?