Procedure for allotment of shares in IPO & Reasons for Non-allotment

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You may have noticed cases wherein a person applied for shares in an IPO but was not allotted any shares but his friend applied for the same amount in the same IPO and he was allotted shares. Such cases are getting increasingly popular nowadays and in this article we’ll be talking about the procedure for allotment of shares in an IPO as well as discuss the reasons for non-allotment of shares.

Procedure for applying in an IPO

Before understanding the procedure for allotment of Shares in an IPO to Retail Investors, it is important to understand the concept of Lot Size.

The total equity shares on offer by a company are divided into various small lots and each application made by retail investors is in lots. This can be explained with the help of an example. For eg: Company A intends to issue 1 Lakh shares in an IPO and has decided a lot size of 10 shares per lot. Therefore, in this case,

                Total No. of Lots offered =                 Total No. of Shares

                                                                                Total No. of Shares in 1 Lot

Therefore, in the above mentioned case, the total no. of lots is 10,000 i.e. (1,00,000/10)

Whenever a retail individual investor will bid for shares in an IPO, he will bid in terms of no. of lots i.e. 1 lot or 2 lots or 3 lots etc. He will not bid in terms of no. of shares i.e. 10 shares for 20 shares or 30 shares but in terms of no. of lots i.e. he will bid for 1 lot or 2 lots or 3 lots.

As per norms laid by SEBI, a person cannot bid for shares less than the lot size. Moreover, a person cannot bid for lots in decimals i.e. an applicant cannot bid for 0.3 lots or 2.4 lots.

Procedure for allotment of shares in an IPO

Once all the bids are submitted, a computer process is run to eliminate the bids which are not properly submitted. Once, these bids are eliminated, we arrive at the total no. of successful lot bids.

Now, there may be 2 cases in this i.e.

  1. Total no. of bid lots (by all the applicants combined) is less than the total no. of lots offered (i.e. less than 10,000 in the above example)
  2. Total no. of bid lots (by all the applicants combined) is more than the total no. of lots offered (i.e. more than 10,000 in the above example)

Case I: Total Cumulative no. of bid lots is less than the Total No. of Lots offered

In case the Total no. of bid lots by all the applicants combined is less than the total no. of lots offered, then in this case – full allotment is done to everyone who had applied for shares.

Case II: Total Cumulative no. of bid lots is more than the Total No. of Lots offered

In case the Total no. of bid lots by all the applicants combined is more than the total no. of lots, then the process for allotment of shares is a bit complicated. In such a case, while allotting the shares – we will have to keep it into consideration that as per SEBI Laws, no individual can be allotted less than 1 lot.

There can again be 2 sub-cases in this i.e.

  1. Small oversubscription
  2. Large oversubscription

Sub-case I : Small Over-subscription

In case of small over-subscription, each successful applicant would first be allotted 1 lot of shares and the balance shares shall be allotted proportionately.

Sub case II:  Large Over-subscription

In case the over-subscription is so large that each successful applicant cannot even be allotted 1 lot of shares, in such a case – SEBI says that the lots shall be allotted on a lucky draw basis. The lucky draw process shall be computerised and there shall be no partiality.

And when we allot shares based on lucky draw, it may happen that a lot of people are not allotted shares as their name was not in a lucky draw. This is the main reason that a lot of retail individual investors are not allotted shares in IPO’s which see a huge over-subscription.

Reasons for Non-allotment of Shares in an IPO

There can be 2 reasons for non-allotment of shares in an IPO. These 2 reasons have been mentioned below i.e.

  1. Your bid was not considered as valid i.e. invalid PAN No. or invalid demat account number or multiple applications submitted from the same name.
  2. Your name was not selected in the lucky draw for allocation of shares (in case of huge over-subscription)

The 2nd reason is the most common reason and applied to 90% of the applicants. In all good IPO’s, the oversubscription is so huge that the lucky draw process is followed and all investors don’t get allotment or get full allotment.

Other Relevant Points regarding IPO Allocation

  1. Shares less than the minimum bid lot cannot be applied for and neither allocated.
  2. Minimum 1 lot of shares (i.e. 10 shares in the above case) is the minimum which can be allotted. Allotment of shares which is less than the lot size is not allowed as per SEBI Norms.
  3. The no. of shares which would be allotted cannot be pre-determined before the closure of IPO issue. It is only after all the bids have been received and the IPO issue is closed that all the bids are cumulated and then the above mentioned process is followed.
  4. The shares would be received in Demat mode only and cannot be received in Physical mode.
  5. The whole process of allocation takes around 10 working days. In case shares are not allotted/ partially allotted, the amount paid would be refunded.
  6. The allotment status of shares in any IPO can be checked online from this link – http://linkintime.co.in/ipo/IPO.aspx
  7. For the shares to start trading on the Stock Exchanges, it normally takes 2 weeks from the date of closure of IPO issue.
  8. All individual applicants who bid for shares worth less than Rs. 2 Lakhs are considered as Retail Individual Investors. If an individual bids for shares worth more than Rs. 2 Lakhs, his status would change from Retail Individual Investor to High Networth Individual (HNI). The above mentioned allotment procedure is only applicable to Retail Investors and not to HNI’s.
  9. It is always advisable to use the ASBA facility while applying for shares in an IPO. ASBA means for Application supported by blocked amount (ASBA) and this facility allows you to bid for shares in IPO without the amount getting deducted from your account. The amount is deducted only when the shares get allotted. Only the amount for which the shares have been allotted would be deducted from the bank and not the total value of shares which were applied for in the IPO.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.