IPO (Initial Public Offer) is a phenomenon through which private entities go public and make their shares available to the general public for buying. This application is made available online and in some assigned banks for investors to bid. In the financial year 2020, there were many IPOs that gave astonishing results and since then, bidding for IPOs has become very popular. But you must have noticed cases wherein you and your friend or relative applied for shares in an IPO, your friend was allotted the shares but you were not. Such cases are becoming very common with the increasing popularity of IPO and bids made by the investors. 
In this article, we will talk in detail about the reason behind this and other aspects of the whole IPO allotment process. 

HOW TO APPLY FOR IPOs?

Before starting with understanding the procedure for allotment of shares in an IPO, it is very significant to understand the basic concept of the application procedure and Lot Size. 

The total number of equity shares offered by a company is divided into various small lots and each bid or application is in lots. For instance, the company XYZ Ltd. intends to issue 10 Lakh shares in an IPO and has decided on a lot size of 100 shares per lot. Thus, in this case, the total number of lots will be 10,000. (10,00,000/100).

The formula to ascertain the lot size is:

Total number of lots offered =  Total number of shares/Total no. of shares in 1 lot

While bidding for shares in an IPO, retail investors will bid in terms of the number of lots like 1 lot or 2 or 3 and so on. As per the rules and mandates laid by SEBI, an investor can't bid for shares less than the lot size. Also, investors are not allowed to bid for lots in decimals like 0.5 lot or 2.5 lots.
For example, In an IPO, one lot is equal to 30 shares. So you can bid only in multiples of 30 and not like 13, 17, or 33 shares. 

WHAT IS THE IPO ALLOTMENT PROCESS?

After the bids are placed by the investors based on the lot size, the allotment of shares is done on a pro-rata basis. Before understanding the concept of pro-rata, let us have a quick look over the 3 types of investors, which are given specific percentages or quotas in the allotment of shares. They are as follows: 

1. Institutional Investors:

This category involves entities that invest in individual or investment portfolios. These entities are often given a reserved quota of around 50% in IPOs and they invest with very huge funds. Some examples of this are Insurance Companies, Mutual Fund houses, etc.  
Note: the percentage of reserved quota may vary from IPO to IPO.

2. Non-Institutional Investors:

This category includes investors who bid for more than Rs. 2,00,000. They are most often termed as HNI. The quota reserved from them varies in different IPO offerings.

3. Retail Investors:

These are retail investors who bid for less than Rs. 2,00,000. The quota reserved from them varies in different IPO offerings.

After launching an IPO, all bids are registered online. Then through an online process, all the invalid bids are eliminated. With this, now you have the final number of successful bids for the said IPO. 

Now there exist two scenarios amongst which the situation of the entity may fall in, that are:

1. The total number of filtered and successful bids is equal to or less than the number of shares offered by the entity. 

• The full allotment is made to all the applicants who had successfully applied for shares.

2. The total number of filtered successful bids is more than the number of shares offered by the entity. 

• In this case, the process becomes a bit complex. While allotting the shares -  the entity has to keep into consideration that as per SEBI Laws, no individual can be allotted less than a lot.

Again in case of B, there can be 2 subcases that can emerge, that are

1. Small Oversubscription

• In this case, each successful applicant will first be allotted 1 lot of shares and the balance shall be allotted proportionately. This is typically what pro-rata is.

2. Large Oversubscription

• In this case, where the subscription is so high that each successful applicant can not even be allotted one lot, SEBI quotes that the lots shall be allotted on a lucky draw basis. The lucky draw process shall be computerized with no partiality and favoritism. While doing this, it may happen that a lot of applicants are not allotted shares as their names were not in the lucky draw. This is the reason that a lot of retail investors are not allotted lots in IPO’s with huge oversubscription.

REASON FOR NO ALLOTMENT 

There are basically 2 reasons if no shares were allotted to you in an IPO, the reasons are as follows:

1. Your name was not in the lucky draw in the case of huge oversubscription.
2. Your bid for the IPO was invalid due to an incorrect Demat account number, incorrect PAN, or multiple applications for the IPO.

The first reason is seen in most cases and applied to 90% of the investors. In all good offerings, the oversubscription is so huge that the lottery/lucky draw process is adapted and many applicants don’t get any allotment. 

KEY POINTS TO REMEMBER WHILE IPO ALLOCATION 

1. The number of shares that would be allotted cannot be predetermined before the closure of the issue. It is only after all the bids have been received and the issue is closed that all the bids are examined and then the above-mentioned process is followed.
2. The shares would be received in Dematerialised mode only and cannot be availed in physical mode.
3. For the shares to start trading in the market, it normally takes 2 weeks days from the date of closure of the IPO issue.
4. This whole process of IPO allocation takes around 10 working days. In case shares are partially/not allotted, the amount paid would be refunded in the source account.

More Information:

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