How Are Shares Allotted In An IPO?

IPO or initial public offer is the means taken on to by companies for mopping up funds for various requirements such as for corporate purposes, pre-payment or repayment of debt, expansion etc. Now the IPO may be inclusive of both the fresh issuance of shares as well as OFS or offer for sale wherein promoters of the company reduce their share (this share of proceeds not available to the company), now after the issuance of public offer is completed which is usually for three days, there is allotment of shares.

How Are Shares Allotted In An IPO?

Share allotment in an IPO

IPO Process

In the overall IPO process, share allotment is the final stage after the previous 6 listed steps out here:

1. Appointment of underwriter or investment banker
2. IPO registration via the DRHP
3. Verification by SEBI
4. Making an application to the Stock exchange
5. Advertising of the IPO, FPO, Rights issue
6. IPO pricing
7. Allotment of shares

Timeline for IPO share allotment process

Typically the process of share allotment as per the SEBI rules is completed within 10 days of the last bidding day.

What does BSE site says on share allotment norms?

As per the BSE site, a company is required to complete the allotment of securities offered to the public within 30 days of the date of closure of the subscription list and approach the Designated Stock Exchange for approval of the basis of allotment.
In case of Book Building issues, allotment shall be made not later than 15 days from the closure of the issue, failing which interest at the rate of 15% shall be paid to the investors.

Investor interest checked as IPO issuing company required to deposit 1% issue amount with the stock exchange

Not many would know that investor interest is also taken care in an IPO is the public offer issuing company needs to maintain 1% of the issue amount with the Designated Stock Exchange before the issue opens. This amount is liable to be forfeited in the event of the company not resolving the complaints of investors regarding delay in sending refund orders/share certificates, non-payment of commission to underwriters, brokers, etc

Everything about IPO share allotment process:

When an investor from any of the category are to make bids for IPO subscription there is some minimum amount and also the lot size which has to be bid for, nonetheless it is never the case that all of the investors shall be allotted the shares and in the quantity they applied for. This is because when the IPO is issued it is for some pre-defined size i.e. there are elements including IPO size, the number of shares that will be issued and despite the number specified, there is oversubscription to the issue.

Now, in the Draft Red Herring Prospectus (DRHP) only, the company specifies the quota that is reserved for each investor category including retail investors, institutional buyers, non-institutional buyers etc.

IPO oversubscribed by retail investor class: What does it mean?

In comparison to the planned issue size, seeing the prospects of the company there is more demand for its shares and likewise the underwriter may adjust the price of the issue to garner more funds. Say if a fund received bids for thrice the number of shares than it was planned, the issue is said to be oversubscribed by 3 times.

In cases in order to raise more funds, the company coming up with the public issue may even raise the issue price and offer higher number of shares than planned earlier.

In case of oversubscription, share allotment varies for different investor category:
Say it gets altered for each of the investor category, meaning to say oversubscription impacts share allotment for all:

For the QIB: Say if the issue has been oversubscribed by 4 times than the QIB who applied for 1,00,000 will be allotted 25000 shares and likewise.

In the case of HNI investors also share allotment or number of shares allotted will be determined by number of shares applied for in the IPO/ number of times the IPO has been oversubscribed.

Allotment of shares to retail investors in case of oversubscription

In a case the issue is oversubscribed then the allotment happens via a computerized process/ draw wherein applicants are picked randomly for the share allotment.

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