With an increasing number of companies making a stellar debut on the exchanges lately, investors are making a beeline for public offers in the primary market. This is clearly evident from the subscription rates for these IPOs. Of the nine issues thus far in FY21, six were subscribed by over 45 times, and — of these two were subscribed by over a 100 times.

But the retail investor’s odds of winning in the listing gain lottery are often quite limited. This is due to both the availability of limited shares in retail category and the allotment process. On what basis are shares allotted in issues that witness such high subscription rates?

What is it?

SEBI guidelines mandate different rules of allotment for different categories of investors. While qualified institutional buyers (QIBs) and non-institutional investor (NII) categories are allotted shares on a proportionate basis, retail individual investors are required to be allotted a minimum of one lot. Only the remaining shares, after such distribution shall be allotted on a proportionate basis.

In practise though, since most issues are oversubscribed even within the retail category, applications are picked through a draw of lots, and each such applicant is allotted one minimum bid lot of shares.

Why is it important?

While this IPO allotment process may seem unfair to many retail investors, it is still better than the pro-rata allotment which was the norm even in the retail category prior to 2012. This is because, in the pro rata system those who applied for more shares (subject to a maximum of ₹2 lakh per application, for retail investors) stood a better chance of allotment.

Now all retail investors get equal chances of allotment. Irrespective of the number of shares bid for each investor gets allotted a bare minimum of one bid lot of shares.

Take for instance, the recent IPO of Mazagon Dock Shipbuilders. While only 1.06 crore shares were reserved for the retail individual investor category, the issue saw a subscription of over 30.81 times within that category. Of about 22 lakh valid applications in the retail category, about 11 per cent of the applicants bid for more than one lot. However, that did not in any way aid their chances of allotment. The probability of allotment remains same for all within the retail category — about 5 per cent in this case.

Why should I care?

While there is little you can do to boost your chances of allotment within the retail category, you can make sure your application is not rejected entirely. In the above example of Mazagon’s IPO, about 1.5 lakh retail applications were rejected on technical grounds such as improper or incorrect details in the application, wrong PAN being quoted and so on.

If you have subscribed multiple times too, your applications may be rejected entirely based on your PAN number. To increase your chances of allotment you may however apply in the name of your family members, using their PAN numbers. Also, in the event of such over subscription, allotment is only done to applicants who have bid at or higher than the offer price. To stand a chance of allotment, you can try bidding at the cut off price or the upper end of the price band of an IPO, since all other applications below the offer price will be rejected in the event of over subscription.

Another ground on which applications are rejected, is when the retail bidder has used the UPI mechanism and has not approved the request generated by the sponsor bank to authorise blocking of funds.

The bottomline

It is not just listing gains that resemble a lottery in IPOs, allotment is a gamble too.

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