Companies are mostly like a complicated system. They require fuel for their operation and maintenance. They can acquire this fuel by issuing IPOs (Initial Public Offering) or by listing on the Stock Exchange.
IPO or Initial Public Offering refers to the issue of shares by a company to the general public for the first time. The motive behind an IPO is to raise funds for the company for expanding their operations or meeting other business needs.
The IPO allotment process involves issuing of shares with a predefined mechanism.
Let’s have a look at how this entire process is carried out.
What is the IPO allotment process?
The process of bidding in IPO is not done randomly. We cannot go ahead and offer for any number of shares we want. A predefined lot size is decided by the IPO issuing company.
Based on this lot size, the allotment of shares is done on the basis of pro-rata allotment. (we shall read about this later in this article) This means that, if a company decides a given lot size (say 5), we can bid for only that amount of lot or its multiples. Furthermore, the IPO allotment process involves three types of investors, which are given specific quota (or percentage) in allotment of shares. They are given as follows:
Qualified Institutional Buyers (QIB):-
QIB involves companies or organizations that invest in people or investment portfolio. These companies are given a reserved quota of 50% in IPOs, and they invest with very high capital. Some examples of QIBs are Insurance companies, Mutual funds, etc.
Non-Institutional Investors (NII):-
NIIs include individuals who bid for more than 2 Lakh rupees. They are also known as High Net Worth (HNI) investors. The minimum quota of 15% is reserved for Non-Institutional Investors.
These are guys like you (maybe) and me, who bid for less than 2 Lakhs. If we do get super-rich by some miracle and invest more than 2 Lakhs, we'll jump into the NII category. A minimum reserved quota of 15% is given to Retail Investors.
Sometimes there's a surplus in demand for IPO of a company, and this demand exceeds the shares offered by companies. This situation is called the over-subscription of IPO.
In situations like these, IPO shares are distributed proportionally (in case of QIB and HNI) or through allotting one lot to each investor and sharing the rest of lots proportionally, or through a lottery draw (in case of Retail Investors).
Now let's have a look at the allotment of shares through the IPO allotment process to the general public.
Pro-Rata allotment: allotment of shares done for the common public
Suppose there's a company, say 'XYZ.' This company will decide the price of 1 share as some amount and will decide the fixed lot size for allocation. A lot is composed of more than one share (say one share = 3 Rs, so if lot size = 10 shares, then one lot is going to cost 30 Rs).
As we've discussed before, we can't bid for any number of shares we want. So, if we bid for the number of lots that'll worth less than 2 Lakhs, then we can apply as Retail Investor. However, if we're buying lots worth more than 2 Lakhs, then we've got to apply as Non-Institutional Investor.
In case of over-subscription of shares, two situations are possible:
- Firstly, if the over-subscription is somewhat less, then one lot is allotted to all the investors, and the remaining lots are distributed proportionally to the investors who'd purchased more than one lot. A fancy word for this proportional distribution is a pro-rata basis or pro-rata allotment.
- Second, if the over-subscription is enormous, then the allotment is done based on the lottery system. This system is based on a computer algorithm, which randomly decides the investors eligible for getting the lots.
The frequency of applications for IPOs decides the number of days it takes for allotment of plots. Usually, it takes around three days from the closing date.
Ujjivan Small Finance Bank Allotment Status
The share price of Ujjivan Small Finance Bank has risen by 56.76%. Its shares have listed at Rs 58.10 on the BSE, with an increase of 56.76% to its issue price of Rs 37/share.
The finalization of the IPO allotment status was done on December 9.
Investors who'd applied for Ujjivan's shares can check their IPO allotment status by providing their PAN, bid application number, or by their client ID/DPID.
The IPO of Ujjivan Small Finance saw an enormous subscription of around 165 times. Due to its excellent prices of shares and the reliable quality of the asset, Ujjivan Small Finance attracted lots of investors.
ASBA (Applications Supported by Blocked Amount)
ASBA is a process designed by SEBI, India's Stock Market Regulator. This process is essential to apply for an IPO.
If we apply for an IPO through ASBA, the amount in our bank’s savings or current account is blocked for the subscription of an IPO issue. The amount is debited to an applicant’s account, only if his/her application is selected for the allotment. e-application for the ASBA process is also available on NSE's website if you're looking to apply for an IPO.
The IPO allotment process is becoming more of a lottery, as the number of investors is increasing for every lot. However, the IPO allotment process still possesses a factor of 'chance' in them.
So, we can utilize this factor for our benefit. All we need to do is to keep the following points in our mind:
- If an issue is receiving quite an overwhelming response, always bid for the upper limit in the price band.
- If possible, ask your friends or family members to bid for the same IPO you are bidding with the same upper limit of the price band. This increases the chance of allotment of shares in case of over-subscription.
- Finally, fill your IPO application form correctly to avoid any technical errors. Sometimes, subscription of an issue significantly reduces due to these technical errors.
- Also, invest in the IPO on the last day of closing. I’m saying this because you should analyze investor sentiments and subscription rates before investing. This will give you a rough idea about the success of the IPO.