Process of IPO allotment | How IPO allotment Work

With the revival of IPO market, we have got several queries related to IPO allotment process in India. Amid the strong response to the public offer of Mazagon Dock which has already got oversubscribed, investors are wondering how the IPO allotment process works in India, if they should apply for one lot or more and if applying early will improve their allotment chances. In this article, we take the example of Mazagon Dock IPO and here are some vital details of the public offer.

 IPO Open: 29 September 2020
 IPO Close: 01 October 2020
 IPO Size: Approx ₹443 Crores
 Face Value: ₹10 Per Equity Share
 Price Band: ₹135 - ₹140 Per Share
 Listing on: BSE
 Retail Portion: 35%
 Equity: 30,599,017 Shares
 Employee Discount: ₹10

We have taken this recent example to understand how the IPO allotment process works for retail investors. In short, the allotment for retail investors is based on a formula that treats every applicant equally irrespective of the application size. The formula allocate at least one lot to every applicant provided there are enough shares in the aggregate. For a longer explanation, read on.

IPO allotment process: Retail quota and lot size  

As one can see, Mazagon is offering  30,599,017 shares in the IPO in the price range of INR135-140 per share. Out of these, 160,000 shares are reserved for employees and 20,000,000 shares are offered to Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs) and Retail Individual Investors (NIIs).
As mentioned above, retail investors have a 35% allocation in this IPO which works to 7,000,000 shares. It is important to note that this arrangement is not set in stone and for companies without a profitable history, retail investors will be eligible for only 10% allocation.
Since IPO applications are made in multiples of lot size, one can either apply for minimum 103 shares or 206 shares, 309 shares and so on.
Note: The lot size is applicable only for IPO allotment and after listing, investors can sell their shares in market in any quantity.

IPO allotment process: Cut-off price

The price band in this case is INR 135-140 per share which means investors can make their applications at any price point within this range. The downside of selecting a specific price is that if there are more buyers above your price point, your application will be out of consideration. Investors can also choose cut-off option which is a way of saying that the investor is willing to pay any price within the price band.
Following the IPO subscription dates, the ball moves in the court of the registrar of the offer. The IPO registrar is in charge of finalizing the allotment on the basis of guidelines prescribed by SEBI. In October 2012, the market regulator made some changes in the IPO allotment process and the new guidelines treat all Retail Individual Investor (RII) applications equally. Under the new system, applicants are allotted at least the minimum application size, subject to availability of enough shares in the aggregate. Following this guideline, two broad scenarios emerge and the system works in both cases.

In case of under subscription

If the aggregate demand of shares is less than the number of shares available in the retail category, every investor will get full allotment, irrespective for their application size.

In case of over subscription

In the event of aggregate demand exceeding the number of shares available, the registrar will try to accommodate everyone by issuing one lot to as many applicants as possible. For our example, 7 million Mazagon shares need to be divided in the lots of 103 shares (under the current guidelines, no allotment is less than the minimum bid lot size). As a result, maximum number of retail investors who can receive allotment = 70,00,000 /40 = 175,000.
At this point, two situations may arise.
The IPO is oversubscribed but not by a wide margin. Given that there are some investors applying for multiple lots, the number of applications is less than the maximum allottees. For our example, let’s assume there were 150,000 applicants, including 30,000 who applied for two lots while the remaining 120,000 applied for one lot of 40 shares. In this case,  
Total demand = (120,000*40) + (30,000*80) = 7,200,000 shares
What this means is that everyone will get one lot and there will still be 1 million shares left. These shares will be proportionately allotted to the 30,000 investors who applied for two lots.
The IPO is oversubscribed by a wide margin. In this case, the number of applications is higher than the maximum possible allottees. In our example, let’s assume the number of applications received is 200,000. Since the registrar has to treat all applications equally, the 175,000 applicants will be randomly selected and this means 25,000 applicants will get no allotment.

Role of luck

As one can see, it is purely a matter of luck in case of oversubscription. Since IRCTC has already received 6X subscription in the retail quota, there are going to be more unsuccessful applicants than the successful ones. Unfortunately, most IPOs deserving your investment would be oversubscribed!
Despite the important role luck plays in IPO allotment, investors can follow some simple steps and boost their chances in IPO allotment. In case you landed on this page looking for latest allotment status, head to this page. IPO allotment is an important step in the overall IPO process which is quite a long and exhaustive procedure.