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How is allotment done when IPO gets oversubscribed?

Abhinav Lahoti
/ Categories: Knowledge
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How is allotment done when IPO gets oversubscribed?

An IPO is said to be oversubscribed when the number of shares that investors want to buy is higher than the number of shares available in the stock exchanges. In simple words, oversubscription occurs when the number of shares supplied by a company is not enough to meet the demand of the investors.  

During the process of an initial public offering (IPO), the underwriter underestimating the interest in the IPO and price it lower than the market would actually pay for resulting in increased demand for the shares of the company comfortably exceeding the number of shares getting issued. For example, a fixed number of shares offered in an IPO are say, 15,000 shares. A ten-time oversubscription means that investors’ demand for the company shares is about fifteen lakh shares.  

In this case, it is not possible for the company to give shares to every interested buyer. Thus, the allotment of shares is done by predefined rules laid down by Securities & Exchange Board of India (SEBI). In every IPO, investor categories are distinguished and a percentage of shares are allotted to each category.  

The three main investor categories are:  

Qualified institutional investors  

Non-institutional investors  

Retail investors (who have invested less than Rs 2 lakh)  

The allocation of shares is different for every investor category. While 50 per cent of the shares are allocated to qualified institutional investors, about 35 per cent of the shares are allotted to retail investors.   

So, when it comes to retail investors’ allocation in case of oversubscription, the total number of shares available for retail investors is divided by the minimum lot size. This will help in determining the number of retail investors, who will be allocated shares. To ensure fairness in the IPO allotment, if the total number of applications is more than the number of lots available, no application is allotted more than one lot. This means that an investor, who bids for just 1 lot, will be treated on par with another investor, who bids for 10 lots.   

Let us look at the example of BSE IPO in order to understand this well. For example, one IPO is oversubscribed 50 times. That means the total demand was for 50 crore shares while only one crore shares were on offer for the public.  

If one considers the retail section alone, the oversubscription was 6.5 times the allotted shares. Remember that investors can bid for multiple lots. Looking at the lots of retail shares and factoring in the fairness aspect, assume that each investor on average applied for two lots; thus, the total demand was 3.25 times. That means a retail investor had a one in 3.25 chance of being allotted one lot of shares. In other words, one has a chance of roughly 31 per cent of getting the shares allocated.

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