Why IRCTC’s initial public offering was a missed opportunity for the government
IRCTC’s IPO was oversubscribed by about 112 times overall. The retail portion of the offer witnessed oversubscription of 14.94 times.
This hyper demand has taken the grey market premium to Rs 220 per share (according to unofficial grey market websites) as on October 9, 2019. This indicates that investors can look forward to some sort of listing gains on the stock on October 14, the listing date.
While the oversubscription implies listing gains, it also means slimmer chances of allotment. With the lead bankers finalising the counting of applications on Wednesday, the shares of IRCTC are likely to be allotted to investors by Friday, October 11.
But how does the allotment in an issue that is overwhelmingly subscribed, work?
Procedure for allotment
According to SEBI guidelines, if an IPO is oversubscribed in the retail category, the shares are to be allotted in a manner that ensures that every retail bidder gets at least one minimum lot. The remaining shares, if any, are then allotted on pro rata basis.
Read: IRCTC IPO: How to check your allotment status
However, in the event of the IPO being oversubscribed to an extent, where the minimum allotment to each retail bidder is not possible, the applications are picked on lottery basis and shares are allotted to them.
In the IRCTC IPO, the latter scenario is likely to play out. Since the subscription was enormous across categories ― retail, QIB, non-institutional and employee reservation categories ― the allotment could resemble gambling.
According to the red herring prospectus, at least 70 lakh shares or 35 per cent of the net offer should be reserved for retail investors. Since all other categories were also oversubscribed by over 100 times, no spillover is expected from other categories.
In terms of the number of applications, the retail category saw 14,64,584 applications. This implies a subscription of 8.37 times the shares reserved for the retail category ― if at least one lot were allotted to each application. Clearly, this indicates that bidders stand a very low chance of allotment.
Hence, irrespective of the number of lots applied for, every retail bidder picked by the lucky draw will now be eligible for one lot only, that is, 40 shares in IRCTC’s IPO. That is, only 1.75 lakh applications will be picked by the lottery system and each will be allotted 40 shares (one lot). Your chance of getting one lot of 40 shares is therefore, 12 per cent.
No chance at all
While the chances of getting allotment is uncertain, will a subscriber not get to participate in the draw at all? Yes, applications have a chance of being rejected on various grounds. According to sources, at least 10 per cent of the applications in every IPO are rejected on various technical grounds. These include improper or incorrect details, wrong PAN being quoted, etc.
The most common and recent such ground on which applications are rejected where the retail bidder has used the UPI mechanism and has subsequently not approved the request generated by the sponsor bank to authorise blocking of funds.
Also, bidders who have submitted multiple applications would be rejected based on their PAN numbers, as their bids would be invalid, according to SEBI guidelines.
That apart, if the bidders bid for the shares at a price lower than the cut-off price, their applications will also be rejected, in the event of an oversubscription. As per data on the NSE website, IRCTC’s IPO saw 2,80,12,840 bids at other than the cut-off price, in the retail category. This accounts for approximately 27 per cent of the total retail bids received. How many among these were bid lower than the cut-off is however, not known.
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