Individuals who apply in an Initial Public Offering, are often confused as they may end-up without shares getting allotted.
This happens when the quantity applied for them is for the minimum bid size and the issue has been heavily oversubscribed. Sometimes it may so happen that despite applying for a large amount, you may be disappointed that there are no shares given to you.
So, your obvious question would be: How is allotment in an IPO actually done?
There are certain rules to be followed and the process has been changed by the Securities and Exchange Board of India a number of times in the past.
Let us understand how the process works for an IPO.
a) Allotment done to Qualified Institutional Investors (QII)
Here the Merchant Banker gets involved and the allotment is not very complicated. It is done proportionately. Let us say that a QII applies for 100 shares and the QII component is oversubscribed 10 times. In this case he would get allotment for 10 shares.
b) IPO allotment done to retail investors
First and foremost let us understand, who a retail investor is: A retail investor is one who applies for less than an amount of Rs 2 lakh in shares.
Now, in the first scenario if the retail portion is just oversubscribed, investors would get full subscription. However, there are problems and the calculation is not easy, if the retail portion gets heavily oversubscribed. In this case one has to take the minimum bid lot that has been prescribed by the IPO and divide the same by the total number of shares that have allocated for the retail investor.
Now what happens when there is just a marginal oversubscription of shares. In this case shares are first allotted to all the shareholders based on the minimum lot and the rest is distributed to retail investors who have applied for more than the minimum lot.
Important things to note in an IPO allotment
1) Investors who are not given any shares will get the entire amount of refund. Others will get the refund based on the amount allotted to them. For example, if you had applied for 300 shares and have received only 200, you will get the refund for the remaining shares that have not been allotted to you.
2) The Book Run Lead Managers will get actively involved in the process and might work with the registrars and the company for refund and listing compliance.
3) The investors who have bid for lower than minimum bid price, would not be allotted any shares.
4) Before applying for shares it is extremely important for investors to go through the Draft Red Herring Prospectus. This would have all the disclosures that a company needs to make with regards to all relevant matters including pending cases, profit and losses etc.
5) The allotment and refunds are done very quickly these days as systems have improved dramatically.
6) Also, it is very important to seek professional advise before investing. If you simply invest without understanding the fundamentals of the company, you might end-up making losses.