How does IPO allotment work?

The IPO allotment process is often seen as mysterious. True, the aspects are similar to a lottery, but the allotment approach can vary depending on the type of investor you are. 

Let us then jump right into decoding IPO allotments. 

The allotment depends primarily on the category you apply in. There are usually 3 investor categories in an IPO. Each category of investors is entitled to a reservation in the allotment process. Here is a table with the category types and reservation portion of each category:

In case a company that has not been profitable for the last three financial years is launching an IPO, the QIB reservation increases to 75%, and the retail reservation reduces to 10%. The HNI category, in such cases, stays unchanged.
There are two types of allotments:

1. Lottery basis for retail, sHNI, and bHNI categories. 
2. Pro-rata basis for QIB.

How does the lottery basis work? 

Assume 10 retail investors have applied for an IPO at the cut-off price, i.e., the offer price at which the shares get issued to the investors. Each of these investors has placed a bid in the range of 1 to 5 shares. 

The list of these investors and shares applied would look something like this:

If the total number of shares to be allotted is 5 then the allotment could be made in the following manner:

Investors (2), (3), (5), (9), and (10) have won the lottery conducted by the registrar and will receive shares against their IPO application. If an investor had applied at a price below the upper price band, then the bids would not have been considered for the allotment lottery.

Got it. Now, how does pro-rata allotment work?

This one is fairly straightforward. 

If one applies in the pro-rata allotment category, one receives shares proportionate to the application and the total subscription. For example, if an IPO in the given category is subscribed 10 times and you apply for shares worth Rs. 50 lakhs, you’ll be allotted shares worth Rs. 5 lakhs (Rs. 50 lakhs divided by 10).

Hopefully, this run-through has made the allotment process a little easier for you to understand. 

Cheers & Happy Investing,