1. How does IPO allotment to retail investor happen? Here is cutting through the confusion

How does IPO allotment to retail investor happen? Here is cutting through the confusion

A week ago, four friends were discussing the recently concluded initial public offering (IPO) of Cochin Shipyard. They were trying to figure out the allotment process of IPO in retail category.

Published: August 30, 2017 2:52 AM
IPO, Cochin shipyard, retail category, Public offering A week ago, four friends were discussing the recently concluded initial public offering (IPO) of Cochin Shipyard. They were trying to figure out the allotment process of IPO in retail category.(Image: IE)

A week ago, four friends were discussing the recently concluded initial public offering (IPO) of Cochin Shipyard. They were trying to figure out the allotment process of IPO in retail category.  All four had made two applications in the IPO under Retail Individual Investors (RII) category. However, each of them had a different outcome. One of them did not get any allotment, one got allotment against both applications, and the other two got allotment in one out of two applications. They wanted to know why they got different allotment outcomes despite making the same number of applications?  Sitting on the next table, I decided to pen down a note on this as many of us may still not understand how it works.

Cap on retail individual investors  The cap for RII is `2 lakh and each IPO must have reserved quota for this category. But Securities and Exchange Board of India (Sebi) realised that within this category also there is a wide range. And the process of proportionate allotment may work against small retail investors. The markets regulator made an important change in the second half of 2012 in the allotment process to ensure ‘maximum RII allottees’. Let us understand how it works. In Cochin Shipyard’s IPO for instance, 1.16 crore shares (35% of total IPO) were kept reserved for RII. The minimum lot-size was 30. The price-band was `424-432 with 5% discount on issue price for RII. That means, one could apply for minimum of 30 and maximum of 480 shares under RII category.

A total of 19.42 lakh applications were received under RII category with varying size. In fact, 16.87 lakh applications  were for lot-size of 30. Similarly, 18,000  applications were for maximum lot-size  of 480 shares. The issue was oversubscribed by 7.81 times under RII category, which means, everyone was not going to get the  allotment.

How does allotment happen?

The total number of shares finally allotted to retail category was 1.18crore due to lukewarm response under employee quota. By allotting only 30 shares to all applicants, only about 3.94 lakh applicants got the allotment. The basis of allotment was decided as 86:423, which means one in every five applicants would get allotment. To decide on the allotment, the company bunches all RII applications and then goes for lottery system, say, based on Permanent Account Number (PAN) of the investor.  So, if your PAN number is selected, you will get the allotment. So, those 3.94 lakh lucky applications got the allotment and the rest did not. It can happen in an IPO, where the number of applications is more than the maximum number of RII that can be issued the smallest lot.

So, next time if you do not get allotment from your five applications but your friend gets allotment on his solitary application, it is a matter of pure luck!  Now, of course, even if you are the lucky one, you will get only minimum lot-size, which is 30 in this case. It does not matter, whether you have applied for 30 shares or 480 shares in this case. Everyone gets the same number of shares which is equal to smallest bid lot-size as that is the only way to ensure maximum RII allottees.  The ideal application size in RII category for a good IPO is always smallest lot-size. No wonder, the four friends with different allotment outcomes got equal number of shares allotted despite different application size. The author is faculty member in finance department at DSIMS, Mumbai

by Nehal Joshipura

  1. H
    h k
    Aug 30, 2017 at 11:01 am
    It is not mention that whether SEBI or any stock exchange ever audit the process of allotment. As if certain application is not included in the list there is high probability of allotment for selected group.It is general myth that computerized process does not have any lacuna. Every high profile IPO , small investor has doubt about Registrar of Issue company promoter for some foul play.
    Reply

    Go to Top