IPO Allotment Process in Case of Oversubscription

 BY: Pankaj Bansal , Founder at Newspatrolling.com

The IPO (Initial Public Offering) allotment process in the case of oversubscription typically follows a structured procedure, governed by regulations set by financial authorities. Here’s an overview of the key steps involved:

1. Understanding Oversubscription

• Oversubscription occurs when the demand for shares exceeds the number of shares available for sale in the IPO.
• For instance, if a company offers 1 million shares and receives bids for 2 million shares, the IPO is oversubscribed by 100%.

2. Allocation Methods

• Pro-rata Basis: Shares are allocated to investors in proportion to the number of shares they applied for, but this method may lead to fractional shares. In such cases, the shares are typically rounded down.
• Lottery System: In some cases, especially for retail investors, a lottery system may be used where a random selection is made to allocate shares to applicants.
• Institutional Investor Priority: Often, institutional investors receive priority in allocation, and retail investors may receive a smaller proportion of shares.

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3. Retail and Non-Retail Categories

• Retail Investors: Usually defined as individual investors applying for shares below a certain threshold (e.g., ₹2 lakh in India).
• Qualified Institutional Buyers (QIBs): These investors typically have a higher allocation percentage due to their substantial investment capabilities.

4. Allotment Process

• Bidding: Investors submit their bids during the IPO subscription period.
• Finalization of Basis of Allotment: After the subscription period ends, the registrar to the issue finalizes the basis of allotment based on the total demand and available shares.
• Communication: Successful applicants are informed about their allotment, while unsuccessful ones are notified as well. Refunds for unallocated amounts are processed.

5. Listing of Shares

• Once the allotment is complete, the shares are listed on the stock exchange, and trading commences.

6. Regulatory Oversight

• The entire process is monitored by regulatory bodies, such as the Securities and Exchange Board of India (SEBI) in India, to ensure transparency and fairness.

Example in India

In India, if an IPO is oversubscribed, the allotment is usually done as follows:

• Retail Investors receive a fixed percentage (usually 35-50% of the total offer).
• Institutional Investors may receive a higher proportion depending on demand.
• Lot Size: Investors are required to apply in multiples of a specified lot size, which can further complicate allocation.

Conclusion

The allotment process aims to balance supply and demand fairly while adhering to regulatory guidelines to protect investors’ interests.