What is Initial Public Offering Allotment?
Issuing shares of a private firm to the public in a fresh stock issuance is called allotment of shares or an initial public offering (IPO) allotment. An initial public offering (IPO) allows a firm to raise funds from the general public. The move from a private to a public firm, which often involves a share premium for current private investors, can be a crucial opportunity for private investors to completely realize the rewards from their investment. Meanwhile, public investors are allowed to participate in the offering. A red herring prospectus comprises information on the IPO, such as the number of shares to be issued, the share price/price band, and previous company performance.
How IPO Allotment Process Works?
IPO share allotment is a complex, time-consuming process that most businesses find difficult to navigate on their own. A private firm seeking an IPO share allotment must prepare for a massive increase in public scrutiny and file a mountain of paperwork and financial reports to satisfy the Securities and Exchange Commission (SEC), which regulates public corporations. That is why a private firm planning to go public engages an underwriter, usually an investment bank, to advise them on the IPO and assist them in setting an initial price. Underwriters assist management in preparing for an IPO by generating important investor documents and conducting roadshows with potential investors.
If everything checks up, the company must file a registration statement with the proper exchange commission, such as the SEC. The stock market then reviews the application, which either accepts it – often with conditions – or rejects it.
Procedure for Allotment of IPO Shares
With so many people interested in IPOs, it is crucial to understand that investors will be given the same number of shares they bid for if the issue is fully subscribed. However, in a circumstance where the issue is oversubscribed, such as when the IPO was 20 times oversubscribed, the number of investors increased by tenfold. In such cases, all investors would be unable to get at least one lot per share. Here, a computerized lottery draw is used to distribute the prizes. This is how shares are allotted in IPOs, through an impartial and randomized lottery system in which few will be fortunate enough to receive one lot each, while others may not.
Reason for Non-allotment of IPO Shares
There are three primary causes for non-allotment.
Wrong Information:
Each IPO application is scrutinized for correctness; therefore, it's critical to have correct technical information. An application also becomes invalid If the PAN, bank account, or Demat account details are incorrect or if it is submitted by the same person many times.
When the Bidding Price was less than the Final Issuance Price -
The final price of an IPO is determined in the stock market through the 'book building process,' in which a price band is issued, and investors can put bids within that range. The issue price, also known as the cut-off price, is determined by the number of bids received. Only those bidders with a higher than or equal to the cut-off price will be assigned shares.
Oversubscription
If the number of applications received exceeds the number of shares available, the corporation runs a computerized lottery. In this case, each candidate has an equal chance of receiving the shares. If your application is not chosen in this lottery system, you will not be assigned shares, and your application fee will be reimbursed.
How to Increase Chances of IPO Allotment
Apply using Several Demat Accounts:
Submitting multiple applications using different demat accounts increases the chances of IPO allotment. Since an IPO application can be made with a single PAN number, encouraging your family and acquaintances to apply for the same IPO on your behalf several times using many Demat accounts boost your chances of receiving at least one allotment.
Bid at Cut-off Price / Higher Price Band:
The difference between the bid price and the cut-off price is frequently misunderstood by investors. The term "cut-off price" refers to an investor's willingness to pay whatever price the company decides at the end of the book-building process. After applying the Cut-off price, the investor must bid at the highest price range. If the price is lower than expected, the extra amount is reimbursed.
Big Applications Should Be Avoided:
As previously stated, SEBI's current allotment process processes all retail applicants (under INR200,000) in the same manner. As a result, there is no benefit in submitting a large application of INR100,000 in the event of an oversubscription. Big applications make sense only in huge IPOs with a decent chance that the retail segment will remain undersubscribed.
Purchase Parent Company Stocks:
Buying at least one share of the parent business in your Demat account is a smart strategy to make your IPO a good deal. This makes you eligible to apply for a position as a shareholder.
IPO Allotment Process Online
• The IPO allotment time process can be done online through Enrich Money. It's just that you need a Demat account and a PAN card.
• Visit the bank's or Depository Participant's website for information on applying for the IPO.
• You must be a bank client or a Depository Participant to bid on shares.
• Bid for the number of shares you want to buy using Enrich's 16-digit depository participant ID (the brokerage). Complete the relevant fields and submit your application.
• The bank uses the ASBA (Application Supported by Blocked Amount) system to set aside funds for the bid. You won't be able to access the money moved to the prohibited account.
• The shares are automatically placed in your Enrich Demat account after they are allotted.
