Understand New IPO Allotment Rule, It Is Really Beneficial

Gopal Krishan of Lucknow was quite disappointed and equally confused when he got an SMS intimation from his bank for the credit of Rs 180000 as refund of recent Syngen International IPO. Actually he was quite hopeful that he must be allotted more than 100 shares as he applied for this share in a big way by applying three applications of 780 shares each (maximum lot size for a retail investor). What was more annoying for him was that he got 60 shares in just 1 application out of these three. When he shared this news with his friend SK Singhal, his agony doubled as Mr. Singhal informed him that he has been allotted 120 shares, though he has made just two applications of 60 shares each with an amount of Rs 15000 (minimum lot for retail investors). Gopal Krishan was not one off case, actually many retail investors are quite perplexed about getting shares in an IPO process as they are not quite well versed with the current IPO allotment process and in this confusion they are at loss as they still follow the old trend while applying to the IPOs and whole exercise becomes futile for them.

Don’t be greedy and don’t show off

Everybody knows that greed is the biggest menace and for IPO allotment also it is quite true. As the norms changed by SEBI a couple of year ago regarding the procedure of allotment of Shares, retail investors are haven’t quite understood the latest norm and still beating around the bush as far as IPO investment is concerned. Due to this they are at absolute loss both in terms of good stock as well as bad companies tapping primary markets. In fact market experts are of the opinion that retail investors should be much more vigilant while applying for IPOs of substandard companies, as applying to the IPOs without understanding the whole allotment process can be detrimental for their hard earned money. When DSIJ did some deep dive into few of the recent IPOs and their allotment process then we have come to the conclusion, though SEBI had come out with quite transparent and retail investors friendly guidelines for IPOs, but if investors don’t give due importance to these norms then IPO investment may turn out to be a nightmare for investors.

Recent example was that of Syngen International’s IPO, where various investors, though applied in a big way and retail portion has been oversubscribed by 4.78 times, but allotment has made many “big” retail investors perturbed. Usually for any IPO that seems good value proposition and got hype in the market, retail investors become bullish and fascinated towards it and as per the definition of SEBI rules, retail investors are those who apply shares up to Rs 2 lakh for single application while minimum application amount has now been fixed at Rs 10000-15000 (previously it was Rs 5000-7000). This amount will then be divided by shares as per the price band to chalk out lots for the shares. For example if price band of any IPO is Rs 150-170 then its minimum lot size could be 90-100 shares, whereas maximum lot size can be 1300 share. In such a scenario retail investors usually go for higher numbers of lot (maximum upto Rs 2 lakhs) as in the old practice, if there is an over subscription then those investors who has bid at the highest level would be allotted shares proportionately. So in the above case those who bid for Rs 2 lakh application would be allotted shares worth of Rs 40000, if that issue was oversubscribed 5 times. Due to this retail investors always go full throttle open for better valuation IPOs.

SEBI’s norm is an absolute game changer

But in August 2012 SEBI has made regressive changes in the allotment procedures. As per these changes, every retail applicant will get a certain number of shares, though it is subject to the availability. It clearly means that retail investors are now assured to get minimum number of shares at a decided ratio irrespective of the lots they have applied, subject to availability. However remaining shares will be allotted proportionately. “Current procedure is quite encouraging for retail investors as now they have assurance of getting shares in IPO,” quips Shivkant Vaish, equity consultant. As per this practice every investor has equal probability of getting shares in an IPO irrespective of the lots he applied in an oversubscribed issue. Even if he applied for minimum permissible lot he may get minimum number of stocks allotted to shareholders. In fact retail investors who apply for smaller lots may have a better chance of getting more number of shares than the investors who applies for maximum amount permissible.

Second grade issues will eat up your funds

Latest norm for IPO shares allotment seems to a two way sword for retail investors who usually apply for IPOs in big lots. Interestingly on one hand retail investors don’t get share allotted to them when they apply via big lots for “good” issues which got oversubscribed, whereas on the other hand for issues that are quite subdued and are of second grade, retail investors hard earned money may get stuck in such issues as there won’t be any takers for the stock and investors who have applied via bigger lots would be allotted maximum shares. After listing these shares usually list at a discount, thereby putting investors at loss, as happened in the case of MEP Infrastructure Developers where retail participation was quite lukewarm as issue was undersubscribed at 94% in the retail category and on the listing day it tumbled to Rs 52 as against the issue price of Rs 63. In this issue, investors who applied with Rs 2 lakh application would have got sure shot allotment of maximum shares, putting him at loss. Considering this applying with bigger lots now make no sense, rather it would be more appropriate to apply via small lots with different names.

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Investors applying via smaller lots would gain

This is quite interesting as with smaller lots a retail investor may apply through various names of his family members, so his probability of getting shares in lottery improves, while investor who applies with single Rs 2 lakh lot gets is funds stuck in big lot, decreasing his probability of getting shares. Exactly this has happened in the case of recent Syngen International IPO as minimum lot was that of 60 shares worth Rs.15000 at cut off or highest price band of Rs 250/share. For smaller investors who applied for just 60 shares around 2.65 lakh applications had come while for maximum lot size of 780 shares 9253 application came. If we see the allotment procedure for the issue then in totality 313516 correct retail applications at cut off or maximum price were received irrespective of the lots sizes applied. Now under new guidelines if company wants to give minimum assured shares to each retail investors i.e. 60 shares then it would need around 18810960 shares for retail investors but as per SEBI rule 35% of the net issue shares have to be mandatorily reserved for retail category, just around 7000000 shares are available for the retail investors.

Now as per the new norm every investor should be allotted minimum number of shares, subject to availability, so probability of each investor getting shares comes to 0. 372 (availability of 7000000 shares against the demand of 18810960 shares). Here, as per the new norm, story becomes interesting as this probability will be applied to each lot size separately so that each investor stands an equal chance of getting the shares allotted to him. Due to this fact out of 7000900 shares,59.08 lakh (or 84.41%) shares had been allotted to persons who have applied through minimum lot application of 60, whereas just around 2.06 lakh shares (2.95%) have gone to investors who applied maximum lot size application of 780 shares. Considering this it seems much more wise to apply via smaller lots than unnecessary blocking your amount in big lots.