IPO Allotment Explained: How Shares Are Assigned to Investors

When a company decides to go public and offers its shares for sale through an Initial Public Offering (IPO), investors, big and small, rush in to try and secure a portion of the company’s stock. But have you ever wondered how these shares are actually distributed? What is the process behind IPO allotment, and how do investors know if they’ve received shares? If these questions have crossed your mind, you’re in the right place! In this article, we’ll break down the process of IPO allotment in simple terms, so you can understand how it all works and what to expect as an investor.

What is an IPO Allotment?

IPO allotment is the process of distributing shares to investors after they’ve applied for them in an IPO. When a company goes public, it sells a certain number of shares to raise capital, but the demand for these shares can often exceed supply. In such cases, not all investors who apply for shares will receive the full number (or any) of shares they requested. The allotment process determines who gets the shares and how many.

Why Does Allotment Happen?

When a company launches an IPO, they decide the total number of shares they want to offer to the public. However, there are usually far more people who want to buy shares than the company can provide. This is where allotment comes in. The process ensures that the shares are distributed fairly among different types of investors, such as retail investors (individuals), institutional investors (like mutual funds and banks), and high-net-worth individuals (HNIs).

Categories of Investors in an IPO

Before we dive deeper into the process of allotment, it’s important to understand the types of investors that typically participate in an IPO. Companies divide investors into different categories, each with its own share quota:

1. Retail Individual Investors (RIIs): These are individual investors who apply for shares in small quantities. The investment limit for retail investors is usually capped at ₹200,000.
2. Non-Institutional Investors (NIIs): Also known as High-Net-Worth Individuals (HNIs), these investors apply for larger quantities of shares. There’s no cap on how much they can invest, but they generally have to apply for shares worth more than ₹200,000.
3. Qualified Institutional Buyers (QIBs): These are large institutional investors, such as mutual funds, banks, and insurance companies. They typically get the biggest portion of shares in an IPO.

The IPO Allotment Process

Now that we understand who participates, let’s look at the steps involved in IPO allotment:

1. Investor Submits Application: Once the company announces its IPO, investors have a set period (usually 3–5 days) to submit their applications to buy shares. This is done through brokers or directly using IPO application platforms. Investors specify the number of shares they want and the price they are willing to pay (within the price range set by the company).
2. Subscription Level is Determined: After the application period closes, the company calculates the level of subscription. Subscription refers to the total number of shares requested by investors compared to the number of shares available. For example:

• Undersubscribed IPO: If fewer people apply than the number of shares available, everyone typically gets the full amount of shares they requested.
• Oversubscribed IPO: This is when more people apply than the number of shares available. In this case, the company has to use an allotment process to decide how the shares are distributed.

1. Allotment for Oversubscribed IPOs: When an IPO is oversubscribed, not all investors will get the shares they applied for. Here’s how the allotment is handled for each category of investors:

• Retail Investors (RIIs): The allotment for retail investors is done using a lottery system. Since retail investors apply for small amounts, the Securities and Exchange Board of India (SEBI) ensures a fair process by randomly selecting applications. This means, as a retail investor, you either receive all the shares you applied for or none at all. It’s purely based on luck!
• Non-Institutional Investors (NIIs or HNIs): Shares for HNIs are allocated on a proportionate basis. This means that even though you may apply for more shares than what is available, you’ll get a portion of what you asked for, depending on the level of oversubscription.
• Qualified Institutional Buyers (QIBs): QIBs generally receive the largest portion of shares in an IPO. Allotment for them is also done proportionately, but since they are large investors, they have a higher chance of receiving a significant number of shares compared to retail or HNI investors.

1. Listing and Refunds: Once the shares are allotted, they are credited to the investors’ Demat accounts (an account where securities are held electronically). If an investor does not receive any shares, their money is refunded. For those who receive a partial allotment, the amount for the shares not allotted is also refunded. This process usually happens within 10–15 days of the IPO closing.
2. IPO Listing: After allotment, the company’s shares are listed on the stock exchange (such as the NSE or BSE). On the day of listing, the shares are open for trading, and their market price can fluctuate based on demand and supply

How to Increase Your Chances of Getting IPO Shares

While IPO allotment is often a game of chance, especially for retail investors, here are a few tips to increase your chances of securing shares:

1. Apply with Multiple Demat Accounts: Investors can apply through different Demat accounts under family members’ names. Since the lottery system is random, more applications mean more chances of being selected.
2. Avoid Large Applications: Retail investors are often better off applying for smaller amounts. Since the allotment is done randomly for small investors, applying for the minimum lot size increases your chances. Large applications may not improve your odds.
3. Apply Early: Although there’s no official rule that applying early gives you an edge, it’s a common belief that early applications tend to get processed first.

Conclusion

Understanding IPO allotment is essential for anyone looking to invest in public offerings. It can be disappointing if you don’t receive the shares you applied for, especially in a hot IPO, but the process is designed to be as fair as possible. By knowing how the allotment process works and applying strategically, you can maximize your chances of securing shares in the next big IPO. Happy investing!