You might have heard often that because of oversubscription, all the bidders could not be given shares in the IPO stock market. So, let’s learn more about this process of allotment and distribution of shares in this article.
Types of Investor
Companies allot shares to different types of categories of investors according to their quota of allotment. Each category has a reserved quota for itself. These categories are –
|Type of Investor||Description||Specific Reserve Quota|
|QIB||QIB or Qualified Institutional Buyers, investors with expertise in the market and invest high amounts in IPOs. Along with that, Mutual funds, commercial banks, public financial institutions, and overseas portfolio investors, among others, can submit applications under the QIB category.||50% of shares|
|NII or HNI||Non-institutional investors, also known as non-SEBI investors, can apply for shares without registering with SEBI. HNIs, or High Net Worth Individuals, are individuals who invest more than Rs. 2 lakh.||15% of shares|
|Retail Investors||Individuals with a maximum application amount of 2 lakh are retail investors.||35% of shares|
Lot Size and Distribution
Investors can never buy IPO shares in individual numbers. A company decides its lot size, and each investor has to apply for at least one lot for participation. So, the amount of this lot size decides the category of investors you would fall into.
When a company gets an application for more than the shares it wants to sell, it is termed an oversubscription. For example, if a company ABC has reserved 1 lac shares for the retail investors but receives applications for 2 lac shares, the company is oversubscribed twice.
Companies reserve a minimum percentage of shares for each category. Therefore, even if all the categories get oversubscribed, the minimum quota would still be provided to that category.
Thus, even if the retail applications make 40% of the IPO, they are still given 35% of the IPO, as reserved for them.
Allocation of shares during oversubscription
There are two probable situations in the allotment of shares.
- If the applications are higher only by a small margin,
For example, if 25,000 lots are reserved for the retail investors’ category and the company receives applications for 35,000 lots. First, all the investors would be given at least one lot in this case. After that, the company divides the remaining lots proportionately among the investors who bid for more lots.
- If the applications are very high,
If the company has reserved 25,000 lots for the retail category but receives applications for 1,00,000 lots. In this case, even the allotment of one lot would not be possible for all the investors. Thus, the company uses a lottery basis to allot shares in this category. Additionally, whatever the number of lots you have bid for, you only get one.
This lottery system is fully computerized and automated. To summarise, the higher the subscription, the lower the chances of your share allotment.
Allotment of shares in case of oversubscription depends on your luck. You might get a lot, and sometimes you’d be refunded your bid amount.
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