Must know: How are shares allotted when an IPO is oversubscribed

There are rules governing IPO over subscription; know them

Must know: How are shares allotted when an IPO is oversubscribed
OLM Desk - 27 January 2017

If you are an IPO subscriber, chances are you would have encountered a situation where the offer was oversubscribed. Take for instance the offering from RBL Bank in August 2016; it was oversubscribed three times over on day 2. Another offering, Quess Corp was oversubscribed 147 times in July. More recently, the BSE IPO was subscribed 51times on final day. Yes, it is good to invest in a company whose IPO is being oversubscribed, it indicates how the markets and market players are keen on the company. It is a reconfirmation of the interest in such a stock.

At the same time, investing in the IPO of a company which has been oversubscribed manifolds means that you might get only a few shares compared to the number of shares you had applied for. In every IPO, investor categories are distinguished and a portion is reserved for them. The categories defined are: qualified institutional investors, non-institutional investors, retail investors, and there could be an employee category as well. Typically, oversubscription happens when people apply for more shares than what were on offer.

So, the Rs 1,234.4 crore BSE IPO had existing shareholders selling 15.42 million shares through an offer for sale, representing 28.26 per cent of BSE’s pre-share sale capital. The portion reserved for qualified institutional buyers was subscribed 48.64 times, while that for retail investors were subscribed 6.18 times. The portion meant for non-institutional investors saw a subscription of 77.22 times.

How are shares allotted?

In cases where the issue is oversubscribed, allotment happens as per predefined rules laid out by the Securities and Exchange Board of India (Sebi) guidelines, which states that every issuer must define a minimum application amount, between Rs 10,000 and Rs 15,000. And, depending on the final issue price, the lot size is defined in terms of the number of shares. The finalisation of the basis of allotment for investors will be by Jan 31, 2017. But, it is certain that not every retail investor will get as many shares as they invested for. For instance in the case of Quess Corp IPO, the minimum lot size was 45 shares, which means anyone who applied for lesser number of shares; would have got nothing.

Allocation to retail investors happens based on the total number of shares available for retail investors divided by the minimum lot size, which determines the maximum number of applicants who will receive allotment. Based on this figure, applicants receive the minimum lot regardless of how much they applied for. If the number of applications received is more than this, then a lottery follows. The lesson for you as an IPO investor is that, in case an IPO is oversubscribed manifolds, there are chances that more retail investors will receive nothing.

When applying for an IPO, use the Application Supported by Blocked Amount (ASBA) facility available through banks, wherein your application amount is blocked and debited only when the shares get allotted. Till then, you receive interest on the blocked amount. You could bid more this way than it may be necessary whenever IPOs get highly oversubscribed. There are other advantages in using the ASBA; you can revise and even withdraw your bid by giving an application to the bank as long as the IPO is open and you sense it is lukewarm and not firing as you expected.