The Initial Public Offering (IPO) allotment process is a critical aspect of the financial ecosystem, especially for retail and institutional investors eagerly waiting to become part of a company’s growth story. Understanding how this process works can help demystify the operational intricacies of investing in the share market.
This article aims to explain how the IPO allotment process distributes shares among investors in the Indian context, while also discussing share market timings and providing illustrative calculations in INR.
Understanding the IPO Allotment Process
When a company decides to go public by offering its shares to the general public for the first time, it undergoes an IPO. The allotted shares are distributed among different categories of investors, primarily Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and Retail Individual Investors (RIIs).
The Book-Building Process
The book-building process is central to the IPO allotment mechanism. During this process, investors place bids for shares at various price levels within a specified range. The final IPO price is determined based on demand, aiming to strike a balance between the issuer’s requirements and investors’ interests.
In India, the Securities and Exchange Board of India (SEBI) regulates the allotment process, ensuring transparency and fairness.
Share Distribution Categories
Qualified Institutional Buyers (QIBs)
QIBs, such as mutual funds, hedge funds, and insurance companies, are allotted a significant portion of the shares. Typically, 50% of the total offer size is reserved for QIBs. They are the frontrunners and play a pivotal role in stabilizing post-listing prices due to their long-term interest in the company.
Non-Institutional Investors (NIIs)
NIIs, including corporate bodies and high-net-worth individuals, usually receive around 15% of the total offer size. These investors are willing to invest higher sums in the share market and are typically looking for substantial returns.
Retail Individual Investors (RIIs)
Retail investors are allocated approximately 35% of the total offer size. Each retail investor can apply for shares worth up to INR 2 lakh. Given the high demand in popular IPOs, allotment for retail investors often becomes a lottery system if the IPO is oversubscribed.
Share Market Timings
Before diving into the specifics of allotment, it’s essential to comprehend share market timings, as they indirectly influence IPO investments. In India, the normal trading hours for equity markets are from 9:15 AM to 3:30 PM, with the pre-open session between 9:00 AM and 9:15 AM. IPO announcements, allotment dates, and listing dates fall outside these hours but are intrinsically connected to trading session dynamics.
IPO Allotment Process in Action
Consider a hypothetical IPO of “ABC Ltd.” with a total offer size of 10 lakh shares. The following segment details how shares are distributed among different investor categories:
- QIB Allocation:
– Allocation: 50% of 10 lakh = 5 lakh shares
– If total bids = 20 lakh shares
– Proportionate allotment = 5 lakh / 20 lakh
– Each bidder receives 25% of the applied shares.
- NII Allocation:
– Allocation: 15% of 10 lakh = 1.5 lakh shares
– If total bids = 6 lakh shares
– Proportionate allotment = 1.5 lakh / 6 lakh
– Each bidder receives 25% of the applied shares.
- RII Allocation:
– Allocation: 35% of 10 lakh = 3.5 lakh shares
– If total retail applications amount to 10 lakh shares, with individuals typically applying for the maximum limit of INR 2 lakh shares.
In the retail segment, allotment is often via a lottery due to oversubscription. If the IPO is oversubscribed threefold, investors might expect one out of every three applicants to receive a single lot (minimum allotment unit).
Calculating with an Example
Let’s add a monetary dimension by considering shares priced at INR 100 each, resulting in a hypothetical valuation scenario:
– Total Offer Price for Retail Allotment**:
[3.5 , text{lakh shares} times text{INR} , 100 = text{INR} , 3.5 text{ crore}]
– **Total Oversubscription Applications Value** (10 lakh shares):
[10 , text{lakh shares} times text{INR} , 100 = text{INR} , 10 text{ crore}]
In this scenario, if one investor from the oversubscribed segment applies for INR 2 lakh, given the oversubscription, their actual allotment might only be around INR 70,000 if allotted one-third of their application due to the lottery system.
Factors Influencing Allotment
The allotment process considers several factors, including:
– Subscription Levels: The demand-supply dynamics determine whether all applicants receive shares or face a proportional reduction.
– Regulatory Compliance: SEBI’s framework ensures companies adhere to principles of fairness.
– Lot Sizes: Defined minimal allotment size ensures equitable distribution.
Conclusion
The IPO allotment process is a finely tuned system designed to balance between varied investor interests and company requirements. As IPOs remain a trending investment option, understanding the dynamics of allotments, coupled with factors like share market timings, provides potential investors with a valuable perspective on their investment journey.
Disclaimer
Investors should carefully gauge all pros and cons associated with trading in the Indian stock market. This article does not constitute investment advice, and one should consult financial advisors for informed decision-making.
By clarifying the IPO allotment process, this article aims to equip investors with insights into this popular investment phenomenon, reinforcing informed participation in the financial markets.
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