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Allotment Procedure of Shares

This document summarizes the process for allotting shares during an initial public offering (IPO) in India. It explains that during an IPO, companies use a book building process to determine the share price based on bids submitted by investors. Bids are categorized into qualified institutional buyers, retail investors, and high networth individuals. The company allots shares starting from the highest bid price such that all shares are sold. Retail investors have a minimum 25% allocation but demand often exceeds supply, resulting in partial or lottery-based allotments. The document provides tips for investors on maximizing their chances of a full allotment.

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james4819
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6K views

Allotment Procedure of Shares

This document summarizes the process for allotting shares during an initial public offering (IPO) in India. It explains that during an IPO, companies use a book building process to determine the share price based on bids submitted by investors. Bids are categorized into qualified institutional buyers, retail investors, and high networth individuals. The company allots shares starting from the highest bid price such that all shares are sold. Retail investors have a minimum 25% allocation but demand often exceeds supply, resulting in partial or lottery-based allotments. The document provides tips for investors on maximizing their chances of a full allotment.

Uploaded by

james4819
Copyright
© Attribution Non-Commercial (BY-NC)
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Download as PPT, PDF, TXT or read online on Scribd
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ALLOTMENT PROCEDURE

Few things frustrate an investor more than applying for


shares and not getting them, especially when talk of
booming share prices leaves them with stars in their
eyes.
They simply did not get an allotment after they applied
for an Initial Public Offering.
An IPO refers to the first time a company offers its
shares to the public. After the shares are alloted
through the IPO, the stock will be listed on the stock
exchange so that the shares can be bought and sold.
A number of IPOs are in the limelight at the moment.
Since many people apply for an IPO, very few end up
with the shares.
Let me explain why this happens
and how the IPO game works.
The company will 'discover' its price
Earlier, the company determined a fixed price for the stock
issue. The issue was marketed to the general public through
advertisements and a media campaign.
Today, companies prefer a book building process. Book
building is the process of price discovery. That means there is
no fixed price for the share.
Instead, the company issuing the shares comes up with a
price band. The lowest price is referred to as the floor and the
highest, the cap.
Bids are then invited for the shares. Each investor states how
many shares s/he wants and what s/he is willing to pay for
those shares (depending on the price band).
The actual price is then discovered based on these bids.
Who can play the game?
Three classes of investors can bid for the shares:

Qualified Institutional Buyers: QIBs include mutual funds and


Foreign Institutional Investors. At least 50% of the shares are
reserved for this category.

Retail investors: Anyone who bids for shares under Rs 50,000


is a retail investor. At least 25% is reserved for this category.

The balance bids are offered to high networth individuals and


employees of the company.
How the game is played
Individuals who apply for the IPO put in their bids.

After evaluating the bid prices, the company will accept the
lowest price that will allow it to dispose the entire block of shares.
That is called the cut-off price.
Let's take an example.

Number of shares issued by the company = 100.

Price band = Rs 30 - Rs 40.

Now let's check what individuals have bid for.


Bid Number of shares Price per share
1 20 Rs 40
2 10 Rs 38
3 20 Rs 37
4 30 Rs 36
5 20 Rs 35
6 20 Rs 33
7 20 Rs 30

The shares will be sold at the Bid 5 price of 20 shares for Rs 35.
Why?
Because Bidders 1 to 5 are willing to pay at least Rs 35 per
share.

The total bids from Bidders 1 to 5 ensure all 100 shares will be
sold (20 + 10 + 20 + 30 + 20).
The cut-off price is therefore Bid 5's price = Rs 35.

Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't


get an allotment because their bids are below the cut-off price.
How to make bidding work for you

Go for the higher price band.


As a retail investor, you don't have to specify an
exact price.

Make out a cheque for the number of shares you


are applying for at the highest end of the price band.
If you are applying for 10 shares, the amount wll be
Rs 400 (10 x Rs 40 -- the higher end of the price
band).

On allotment, the extra amount paid will be refunded


to you. Since the cut-off price is Rs 35, the 10
shares will cost you Rs 350 (10 x Rs 35). The
balance Rs 50 will be refunded to you.
How the allotment is done
The bids are first allotted to the different categories and the over-
subscription (more shares applied for than the shares available)
in each category is determined.

Retail investors and high networth individuals get allotments on a


proportional basis.

Assuming you are a retail investor and have applied for 200
shares in the issue, and the issue is over-subscribed five times in
the retail category, you qualify to get 40 shares (200 shares/5).

Sometimes, the over-subscription is huge or the issue is priced


so high that you can't really bid for too many shares before the
Rs 50,000 limit is reached.
In such cases, allotments are made on the
basis of a lottery.
Say a retail investor has applied for 5 shares in an
issue, and the retail category has been over-
subscribed 10 times, the investor is entitled to half a
share.

Since that isn't possible, it may then be decided that


every 1 in 2 retail investors will get allotment. The
investors are then selected by lottery and the issue
allotted on a proportional basis among.

That is why there is no way you can be sure of


getting an allotment.
How to make an allotment work for you
Put in bids in the names of your family members. The problem is,
you will need to open demat accounts for them first.

Most regular IPO investors try to calculate how much the issue
will be over-subscribed and then put in their bids accordingly.

For instance, if you want 10 shares and feel the retail portion of
the issue will be over-subscribed three times, you should bid for
30 shares.

You could also apply separately in the high networth category if


you have the money.

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