The IPO Allotment Process: How Companies Give Out Shares

Putting money into an Initial Public Offering (IPO) is an exciting way to invest in a new company. But after you apply, you might wonder what happens next. The steps from applying for shares to getting them is called the IPO allotment process. This guide will explain this process simply, so you know exactly how companies give out IPO shares.

What is IPO Allotment?

The IPO allotment process is how a company gives out its shares to investors who applied for them. This key step decides who gets shares and how many. A separate, neutral company called a registrar manages this process. They make sure everything is fair and clear, following rules from the Securities and Exchange Board of India (SEBI).

You should know that applying for an IPO does not guarantee you will get shares. The result depends on how many people want the shares. If the demand for shares is less than or equal to the supply, everyone who applied will get them. But most popular IPOs are "oversubscribed." This means far more people want to buy shares than the company is selling.

How to Apply for an IPO: The First Step

Before the company can give out shares, you first need to apply for them. This is called the IPO subscription process. Here is a simple guide on how to apply for an IPO:

1. Have a Demat and Trading Account: You need a Demat account to apply for an IPO and hold shares. You also need a trading account if you want to sell the shares later.
2. Apply Online: The easiest way to apply is on your stockbroker's website or app. You can also use your bank's online banking website.
3. Fill in Your Details: You will need to choose the IPO, enter how many lots you want, and decide on your bid price.
4. Block Funds with UPI or ASBA: The money for your application is not taken out right away. Instead, the bank blocks the amount in your account. You will often do this by approving a request on your UPI app. The money is only taken if you get the shares.

What is an IPO Lot Size?

You cannot apply for just one or two shares in an IPO. Instead, you must apply for a set group of shares called a lot. The IPO lot size is the smallest number of shares you can apply for, and the company decides this number. If you want to apply for more shares, you must apply in multiples of the lot size. For small investors, the total value of your application is usually limited to ₹2 lakh.

How Are IPO Shares Given Out?

After the application period ends, the registrar starts the allotment process. How the shares are given out depends on the demand and your investor type.

Investors are usually grouped into these types:

• Retail Individual Investors (RIIs): People who invest up to ₹2 lakh. A large part of the IPO shares, often up to 35%, is set aside for this group.
• Non-Institutional Investors (NIIs) or High Net-worth Individuals (HNIs): People who invest more than ₹2 lakh.
• Qualified Institutional Buyers (QIBs): These are big financial groups, such as mutual funds and insurance companies.

The Rules for Giving Out Shares

A document called the basis of allotment in IPO explains the rules for giving out shares. This document shows how many shares people in each group applied for and the ratio for allotment. Let's see how this works, especially when many people want the shares.

How Shares Are Given Out to Small Investors When Demand is High

When small investors apply for more shares than are available, the process is designed to be fair. Here is what usually happens when giving shares to small investors:

• One Lot for as Many People as Possible: SEBI's rules for IPO allotment say that the goal is to give at least one lot to as many applicants as possible.
• Lottery System: If there are many more applicants than available lots, the company uses a computerized lottery system to give out shares. In this case, getting shares is based on luck. It does not matter if you applied for one lot or many.

Pro-Rata Allotment

Companies often use a different method for large investors (NIIs and QIBs) called pro-rata allotment. In this system, investors get shares in proportion to how many they applied for. For example, if the demand from large investors is 10 times the supply, someone who applied for 1,000 shares would get 100 shares (1,000 / 10).

How to Improve Your Chances of Getting Shares

There is no sure way to get shares in a popular IPO. But here are a few tips that may improve your chances of getting shares:

• Apply from Different Demat Accounts: You can apply for one lot from the Demat accounts of your family members. This increases the total number of applications.
• Bid at the Cut-Off Price: When you apply, choosing the "cut-off" price (the highest price possible) makes sure your application is accepted, no matter what the final price is.

How to Check Your IPO Allotment Status

The company usually announces the allotment status a few days after applications close. Here are a few ways you can check your IPO allotment status:

• Registrar’s Website: The IPO's official registrar (such as KFintech or Link Intime) has a website where you can check. You will need to enter your PAN, application number, or Demat account ID.
• Stock Exchange Websites: You can also check your status on the BSE and NSE websites.
• Your Broker’s Website or App: Many brokers now show the allotment status right in your account.

What Happens After You Get Shares?

You checked the status and got shares. Great! Here is what happens after you get the shares:

1. Shares are Added to Your Account: The shares you received will be added to your Demat account.
2. Money is Taken from Your Account: The bank will now take the blocked money from your account to pay for the shares.
3. Money is Returned: If you did not get any shares, or only got some of what you applied for, the bank will unblock the remaining money in your account.
4. Listing Day: The company will list its shares on the stock exchange on a set date. This is usually within three business days. On this day, you can sell your shares or keep them.

Understanding how IPO shares are given out can help explain what happens behind the scenes. The process might seem complicated, but it is designed to be fair and clear. It gives everyone a chance to share in a company's growth.