Missed The IPO Bus? Do Not Do It Next Time
3/30/2017 9:38 PM Thursday
Resident of Viman Nagar in Pune, Swapnil Shinde has been blaming his 'luck' last three months. He had filed applications thrice to subscribe IPOs floated by three different companies including the most buzzing one of a hyper-mart chain and never he got a single share allotted in his Demat account. He picked up the right ones, filed the applications as per procedure laid down by market regulator SEBI, opted for ASBA facility through his bank but on the day of listing he realised, 'luck' did not work in his favour. Shinde has now decided not to apply for IPO as he is not 'lucky enough.'
Hailing from Mehsana district in Gujarat, Jagdishbhai Nathabhai Patel had borrowed a good sum of money from his friends to apply for a recent IPO. Two days before the gala listing ceremony took place on the bourses and the stock of that company rocketed up by over 120 per cent, Patel was shocked to receive a text message from BSE telling him that he did not get a single share allotted. Patel had made his graduate son fill up the physical form to subscribe the IPO, got it checked by a local stock-broker's assistant, made the cheque payment as needed--everything was in line with this expectations except zero allotment.
So is it all about 'luck'--is it yet another 'lucky draw,' where some fortunate ones only qualify to get the bounties or is it pure science of calculations? Even as the Dalal Street is caught in never-before IPO euphoria in last 10 years, these days lakhs are filing IPO applications among whom only a few getting shares allotted and they have hence reasons to feel 'lucky.' Our neighbours, friends, family members, extended family members, enemies and colleagues talk in the same language these days--'did not get a single share.' So where do these shares go, who are the people who get allotments and how do they manage to get it. Some will even start smelling a corruption angle in it, some will pray before God that next time they get it, some simply give up and look for picking up stocks through markets but not IPO, some get envious of people around them who got allotted. We make a sincere attempt here to decode the entire IPO allotment process, functions involved in it, why some investors manage to get it, why some never get it.
Why the euphoria--BSE IPO index has caught investors' attention, as the index is up by 34.34 per cent over one year. The BSE IPO index is a gauge of the performance of the newly listed companies and the numbers reveal their quantum of profit-making just by subscribing to some of the IPOs, if not all. While the allottees managed to clock straight away 34 per cent plus profits on the very days of listing on an average, during the period under consideration, Sensex has delivered less than half of it, in terms of returns from investments. During the similar period, the Sensex has delivered 15.43 per cent returns.
Interestingly out of 26 companies, almost 17 companies have beaten the BSE Sensex's performance, suggesting that investors would have done better for themselves had they focused on IPOs alone when compared to Sensex investing.
Indeed, FY17 has been a positive year for the IPOs as some very good quality brands with strong financials and efficient business models were listed in the markets. Avenues Supermarts, Quess Corp, RBL Bank, Ujjivan Financial Services, Advanced Enzymes, Infibeam Incorporation, Mahanagar Gas are few of the newly listed companies that delivered a whooping three digit returns for the investors.
So did you get it? The answer for the question for the majority investors, is a clear 'no.' There are various IPOs coming in these days and listing with handsome gains. The IPO fever is not going to end soon rather we can say that it is building up an investment environment.
How does it happen behind the curtain? Reservations are done on a competitive basis. IPO allotment is done through reservation on competitive basis and this can be extended to the following categories:
Employees of the Company Going Public: The persons who are shareholders of the promoting companies in the case of a new company and shareholders of group companies in the case of an existing company get preference over the normal applicant. The person should be shareholder as on the date of filing the draft offer document with SEBI are associated with the issuer as depositors, bondholders or subscribers to services of the issuer.
In a public issue by a listed company, the reservation on competitive basis can be made for retail individual shareholders and in such cases the allotment to such shareholders shall be on a proportionate basis.
There is no any discretion in the allotment process. All allottees except anchor investors and retail individual investors are allotted shares on a proportionate basis with in their respective investor categories.
BASIS OF ALLOTMENT
After the closure of the issue, the bids received are aggregated under different categories, such as reserved allotments, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIIs) and Retail Individual Investors.
Number of days for an investor to receive the Refund Order/Allotment Advice
The issuers are required to allot and then application money to be refunded within 15 days from the date of closure of the issue. The issuers are required to pay interest at the rate of fifteen percent per annum if the allotment letters or refund orders have not been dispatched to the applicants.
DECODING RETAIL CATEGORY ALLOTMENT
Not subscribed fully in retail category: If the issue isn’t oversubscribed in the retail category, then all applicants will receive shares in the proportion that they have applied for. This is called firm allotment. For example, if you have submitted bids for shares worth Rs. 2 lakh, you will receive full allotment, and so will someone who has bid for shares worth Rs. 20,000
The issue is oversubscribed: According to the rules laid down by market watchdog SEBI, the company cannot allot lower than the minimum lot size to anyone. Hence, the first thing the company does is allot minimum lot shares to everyone who has applied, regardless of how many you have applied for. The remaining shares are distributed proportionately to those who have bid for higher than the minimum lot. If you have bid for shares worth Rs. 2 lakh, you will receive the minimum lot, plus shares proportionate to your bid.
Suppose, the total number of shares bid for in minimum lots is bigger than the issue size. The minimum lots are allotted on a computerised draw of lots. Therefore, it’s quite possible that an applicant who applied for a minimum lot, gets his entire share, whereas someone who has applied for the maximum lot gets nothing. It also means that bidding for the maximum lot does not increase your chances of getting an allotment, or even a greater number of shares.
For public issue, the investors are categorised into three different categories viz. retail- individual customers up to Rs. 2 lakh, HNI/Non-Institutional bidders - Individual customers/companies, trusts, etc more than Rs. 2 Lakh, QIBs - Companies, Financial institutions, etc registered with SEBI – large quantities. The ratio of IPO application category wise depends as per SEBI circular for the particular IPO. E.g. 35:15:50
Many of the investors have a misunderstanding that allotment of IPO happens giving preference to time, quantity, etc. But it is not so, there is something more to it that we may need to understand. These applicants will receive the minimum lot regardless of how much they applied for. If the number of applications received is more than this, then a lottery follows. For e.g.: If the size of an IPO is 1000 shares and if 35 per cent is available for the retail category, then retail investors can apply for 350 shares. Now if the number of shares applied is up to 350, which means not oversubscribed, then everyone would get the number of shares applied for.
Assuming that there are 25000 shares to be allotted in retail segment and the IPO is oversubscribed. i.e. the number of shares applied is 1 lakh. Assuming the minimum lot size is of 250 shares, only a maximum of 100 applicants will be receiving the minimum lot size of 250. Because as per SEBI, no RII can be allotted less than the minimum bid lot, in case of over subscription. So, the maximum allottees in this case would be 100 investors.
Suppose, there is a case of multiple times oversubscription, allotment shall be determined on basis of draw of lots or the lottery system. The draw of lots is now a computerised process and thus there is no room for partiality. There is no bias and allotment does not depend on amount, time, broker, etc.
THINGS TO KEEP IN MIND DOs
Read the Prospectus/ Abridged Prospectus and pay special attention to:
- Risk factors
- Outstanding litigations and defaults, if any
- Financials of the issuer
- Object of the issue
- Company history
- Background of the promoters
- Instructions for making an application.
In case of any doubts/problems, contact the compliance officer named in the offer document.
In case you do not receive, within due period, the physical certificates/ credit to Demat account or refund of application money, lodge a complaint with the compliance officer of the issuer company and with the post-issue lead manager listed in the offer document.
Don’t fall prey to market rumours.
Don’t go by any implicit/explicit promise made by the issuer or anyone else.
Don’t invest based on the prevailing bull run of the market index or of scrips of other companies in the same industry or scrip of the issuer company/group companies.
Don’t bank upon the price of the shares of the issuer company to necessarily go up.
How to submit your bids
Applying for the maximum amount in IPOs may be counter-productive. In the case of IPOs where the demand is low, you will be stuck with a greater number of shares; and in IPOs with good demand, you may not get anything at all. A better strategy can be to get your family to participate in the IPO. Hence, instead of making a single application for the maximum lot, you could be better off making four applications for the minimum lot (for your spouse, your parents and you, for example). If an issue is oversubscribed many times, most applicants are likely to get nothing. So, in such cases it’s best to apply for the minimum bid if the broker feels that the issue is going to be popular. Even with that, chances of getting an allotment will reduce as oversubscription increases.
THE IPO PROCESS
POST ISSUE ACTIVITIES INVOLVES FOLLOWING TASKS
1. Basis of allotment is finalised by lead manager and worked out within two weeks from the date of the closure of the issue.
2. Share allocation in Demat accounts by the registrar is done within 15 days from the date of closure of the issue.
3. Listing of shares by the issuer company is carried out within 7 days from the finalisation of the issue
The primary market is most energetically and enthusiastically followed by most of the retail investors. There are various questions in the mind of the participants as they are not getting an allotment. There are certain criteria set by SEBI and we have tried to clarify each and every minute things of the IPO process till the allotment. When entire market is enjoying the listing gains of various new companies in the league, one should be thinking over why she or he is not getting an allotment these days. At the end of the report you must have understood the basic things including how to apply for an IPO strategically, what are the timelines and maximising probability of IPO allotment.
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