Buying shares in an Initial Public Offering (IPO) can be exciting. With so many new companies entering the market, it’s important to understand how the allotment process works to improve your chances of getting shares. Participating in an IPO can be a great opportunity for investors looking to get in early on a company’s growth story. We bring to our reader a step-by-step guide on how to allocate shares via IPO, which will help navigate the process efficiently and optimize investment potential.
What is IPO Allotment?
IPO allotment is the procedure through which the shares of a newly listed company are allocated amongst the investors who are applying during the subscription period. The reason for this is that typically there are applications for an IPO that far exceed the shares allotted at issuance, such that allotment must be done based on certain criteria by the regulatory authorities and the company itself.
Step-by-Step Guide to IPO Participation
Step 1: IPO Application
To participate in an IPO, investors must apply through their Demat accounts using the ASBA (Application Supported by Blocked Amount) facility, available via banks or brokerage platforms. The bid may fall within a price range stipulated by the company.
Step 2: Subscription Process
Once the IPO is open for subscription, applications are received from various segments of investors such as retail, non-institutional investors (NIIs), and qualified institutional buyers (QIBs). If the demand exceeds the number of shares available, the IPO becomes oversubscribed, leading to a lottery-based allotment for retail investors.
Step 3: Basis of Allotment Finalization
Once the subscription period concludes, the registrar of the IPO finalizes the basis of allotments. This involves:
The verification of applications and exclusion of invalid bids.
Classification of applicants into categories according to type of investor.
Allocation of shares proportionally to applicants or via a lottery system in oversubscription cases.
Step 4: Lottery System for the Retail Investors
If an IPO is massively over-subscribed, the allotment process is then taken through a computerized lottery system where each valid retail investor application is assigned with a number while shares are apportioned randomly to maintain fairness.
Step 5: Proportional Allotment for Institutional Investors
For QIBs and NIIs, allotment will most of the time be proportional based on several applied shares. Generally, institutional investors receive more than retail investors when it comes to the percentage of counters allocated as they requested.
Step 6: Refund and Debit Process
In the case of allotment commensurate amount is debited from their banks.
For unsuccessful applications, the blocked funds are generally released within a few days of allotment finalization.
Step 7: Listing and trading
After the shares are allotted, they get credited to the respective Demat accounts before the listing day. On this day, the newly issued stock is made available for trading on the stock exchange. Investors, therefore, can decide whether to keep their shares or, if the market is favorable, sell them off. This is often the moment many investors look forward to, especially if the stock lists at a premium compared to the issue price.
Factors That Affect IPO Allotment
Level of Oversubscription: The greater the demand, the lesser the chance for allotting shares to retail investors.
Lot Size: Lot sizes are fixed for IPO allotment, and applications that do not meet the minimum lot size criteria are usually rejected.
Investor Category: Priority allotment is usually given to QIBs and NIIs as compared to the retail investor.
Grey Market Premium (GMP): The popularity of an IPO in the gray market indicates a high probability of oversubscription.
Tips to Improve Your Chances
Apply in Multiple Demat Accounts: You may be able to improve your chances by submitting applications via different family members’ accounts.
Bid at Cut-Off Price: In the case of an oversubscribed issue, your application will still be valid at such a price.
Avoid High Application Sizes in Retail Category: Multiple smaller bids instead of a big bid may work better in oversubscribed IPOs.
While allotment isn’t guaranteed, these strategies may help you improve your odds without taking on additional financial risk.
Watchlist: Upcoming IPOs
The buzz around the Indian stock market has only gotten louder, particularly as multiple IPO companies have already started releasing their results. Many upcoming IPOs are expected from sectors like fintech, pharmaceuticals, and consumer goods. Investors will have to keep an eye on the official announcements of stock exchanges to stay informed of the latest IPOs.
Conclusion
By knowing how the IPO allotment works, the investors can scale up their investment strategy and chances of getting shares in offerings like these. With planning and informed decision-making, investors can capitalize on the side benefits of the stocks as soon as they are listed. Track upcoming IPOs and follow best practices to optimize investment journeys.
