IPO Allotment Process to Retail HNIs and QIBs-A complete guide

IPO allotment is the process of allocating IPO shares to investors who have applied for or subscribed to the IPO. Not all IPO applicants receive IPO shares, as some investors may receive a full allotment, others nil and still others a partial allotment, depending on the level of subscription. This article serves as an important guide to the allotment of IPO shares to different categories of IPO investors.

An IPO is an attractive investment opportunity for many investors because it is the first time a company issues its shares to the public at an attractive price. This is the reason why IPOs of large companies are heavily oversubscribed. The growing public demand for IPOs can easily be seen from the high subscription numbers. However, the higher the demand for an IPO or the number of subscriptions, the lower the chances of an allocation and vice versa. The IPO allotment method works differently for different categories of investors like retail investors, QIBs, and NIIs.

Let us understand what IPO allotment, IPO allotment method, and rules on how the process of IPO allotment works for IPO applicants in different categories i.e. retail investors, QIBs, and NIIs.

What is IPO Allotment?

When a company announces its IPO, interested parties apply for the issue in various categories. After the issue is completed, the registrar of the issue prepares a basis of allotment for the allocation of shares.

Allotment means the process of allocating shares to persons who have subscribed to the IPO. In other words, it means that the shares of the company are transferred or credited to the demat account of the applicant.

Allotment is usually done within 3 to 4 days of the completion of the IPO offer. The process of allotment depends on how an IPO is received by the investors or the level of public demand as measured by the number of public subscriptions. In an under-subscribed IPO, all applicants receive IPO shares, whereas in an oversubscribed IPO, not all applicants receive an allotment.

IPO Allotment Rules & Regulations

Certain regulatory conditions must be met before IPO shares can be allotted to investors:

• Minimum Subscription Amount: As per SEBI guidelines, every public issue must receive at least 90% subscription, failing which the IPO will be canceled and subscription money will have to be refunded to all bidders. For example, in an IPO worth Rs. 50 crore, bids worth at least Rs. 45 crore must be received for allotment of shares.
• An IPO offer that is more than 90% subscribed but does not receive an oversubscription will be allotted to all those who applied for the IPO.
• If a public offering is oversubscribed, the allotment process will depend on the number of shares offered and applications received.
• The IPO allotment process varies depending on the investor category - retail, QIB, NII, and anchor investors.
• Only valid IPO orders are considered for the allotment of shares. Multiple IPO bids with the same PAN number or incorrect details in the IPO application form etc. will be considered as invalid bids and hence rejected.
• IPO bids placed at the cut-off price or above will be considered for allotment of shares.
• If a public issue is undersubscribed in one category except QIBs, it may be offset by oversubscription in another category.
• The IPO Registrar, in consultation with the stock exchange and the issuer, prepares an allotment basis for the allotment of shares.

IPO Basis of Allotment

The registrar is responsible for the allocation of IPO shares. Once an IPO window for subscription is closed, the bids received are grouped into different categories, i.e. qualified institutional investors, non-institutional bidders and retail investors.

Thereafter, the Registrar to the Issue prepares a document called Basis of Allotment (BoA), which contains complete information on the number of bids or applications received from qualified institutional investors, non-institutional investors, retail investors and anchor investors, rejected or invalid applications, the final offer price of the IPO and the ratio of allotment of shares in the various categories.

The allocation of IPO shares is not subject to the "first come, first served" rule. Now let’s understand how the IPO allotment mechanism works or how shares are allotted to different types of investors in an IPO.

IPO Allotment to Retail Investors

IPO applicants who bid for less than Rs 2 lakhs in an IPO are called retail investors. Before we learn about the process of allotment of shares to retail investors, we must first understand the concept of lot size in IPO.

When a company announces an IPO, the entire share offer is divided into lots, with each lot containing a certain number of shares. IPO bids or applications are only made for multiples of the lots. Let’s assume an IPO has a lot size of 15 shares, i.e. an applicant can bid for at least 1 lot, i.e. 15 shares. All IPO orders are placed in multiples of lots such as 1 lot, 2 lots etc.

In case of allotment of shares to retail investors, the maximum number of bidders for allotment is first calculated by dividing the number of shares offered to retail investors by the number of shares in a lot.

For example, if 5 lakh shares are reserved or offered for retail investors in a public issue and the lot size is 50 shares. The maximum number of retail investors is then 500,000/50 = 10,000 investors. Thus, the IPO can distribute shares to a maximum of 10,000 retail investors.

Now there are different scenarios for the allocation to retail investors:

1. Under-subscription

When a public offer is under-subscribed means the total number of bids received is less than the number of lots offered, everyone who had bid for the IPO will get full allotment.

Suppose, in the above example, a total of 9,000 applications were received for 4,50,000 shares, all the bidders will be allotted with shares they had applied for.

2. Over-subscription

In case of over-subscription, allotment gets done on a lottery or pro-rata basis based on the total number of IPO applications received from retail investors.

When retail applications are higher than the maximum number of allotees, allotment will be done through a computerized lottery system. Suppose, a total of 11,000 retail investors had subscribed to the issue for 5,50,000 shares. Here as the applications received is greater than the maximum allotees of 10,000, shares will be allotted through a lottery process where winners will be allocated with 1 IPO lot irrespective of their IPO application size how big or small it is.

On the other side, if the number of IPO bids from RII is less than the maximum allotees, every bidder will get 1 lot and the remaining shares will be allotted on a pro-rata or proportionate basis.

Let’s say a total of 9,500 applications are received for a total of 550,000 shares, each retail investor will get atleast 1 lot regardless of how many lots they had applied for and the remaining 50,000 shares will be allotted on a proportionate basis.

IPO allotment to Non-institutional Investors (NIIs)

Non-institutional investors are those who make an IPO bid of more than Rs 2 lakhs. Allotment of shares in the NII category is done on a pro-rata basis or on a lottery system.

Allotment of shares to NII investors is done in such a way that each NII or HNI applicant gets at least a minimum lot. For example, if a company conducts an IPO at an offer price of Rs 425 and the lot size is 35 shares. In such a scenario, an investor needs to bid at least 14 lots to apply for the HNI category, where the total amount of bids is 425*35*14 = Rs 208,250.

NIIs are further divided into two categories: small NIIs and large NIIs, where small NIIs subscribe to the IPO for a bid amount of Rs 2 lakhs to Rs 10 lakhs, while large NIIs bid not less than Rs 10 lakhs.

In the above example, investors who have applied for 14 to 67 lots are small NIIs, while all NIIs applying for 68 or more lots belong to the large NII category.

In each public issue, 15% of the total shares are reserved for the NII category, with one-third or 5% reserved for small HNIs and two-thirds or 10% for large HNIs.

Prior to September 22, IPO allotment in the HNI category was done on a pro-rata or proportional basis. This means that if an issue is subscribed more than 100 times and an HNI investor has applied for 1000 lots, he/she will be allotted 10 lots. However, this pro-rata allotment rule for NIIs leads to distortions as more investors try to make larger applications to get a high pro-rata allotment. As a result, a few NIIs with higher bids were allotted all shares, while others with lower bids received no allotment. The pro-rata allotment process encourages more and more NIIs to invest a lot of money or subscribe to as many lots as they can bid for in order to receive a successful allotment of shares.

As a result, on September 22, the market regulator SEBI introduced a new lottery-based allotment rule for HNIs, where allotment is done through draw of lots. Thus, the size of the application, whether large or small, does not matter. Those whose application is selected through lottery will get allotment for the minimum amount of Rs 2 lakh for small HNI and Rs 10 lakh for large HNI.

The new lottery-based allotment process will help tackle the excessive oversubscription in the NII category and enable more people to participate in the public issue. The impact of the new lottery allotment process can be easily seen from the IPOs as many IPOs in 2021 like Paras Defence were subscribed 950 times, followed by Latent View, Tega Industries and MTAR Technologies which were massively subscribed over 600 times by NII investors. However, Idea Forge as one of the highest subscribed IPOs in 2023 with a huge GMP was subscribed only 80 times in the NII category.

HNI IPO Allotment Method and Rules

• The allotment of shares in the NII category is based on the proportionate basis or lottery system.
• If a public issue in the HNI category is not subscribed for as many shares as are offered, all bidders in the NII category will receive the shares they have applied for.
• Guaranteed minimum allotment to all NII applicants whose bid or application is equal to or greater than the number of times an IPO is oversubscribed.
• After the minimum allotment of lots to small and large NIIs, the remaining shares will be allotted on a pro-rata basis.
• In case of large oversubscription in the NII category, allotment is done through lottery.
• The HNI bids will be divided or ranked into SHNI and BNII based on the number of lots applied for. The allocation quotas are roughly the same for investors in these two categories.
• IPO bids cannot be submitted in the NII category at the cut-off price.
• Only bids submitted above the cut-off price will be considered for allotment.
• All bids below the cut-off price will be rejected.
• HNI or NII bidders cannot withdraw or cancel their bids.
• There is no lock-in period for small and large NII investors in an IPO.

IPO Allotment to Qualified Institutional Investors (QIIs)

QIBs are registered financial institutions, mutual fund companies, insurance companies, foreign institutional investors and other similar entities. In a public issue, most of the shares are reserved for QIB investors as they have a 50% reservation.

Allotment of shares in the QIB category is done on a pro-rata basis. If an issue of QIBs is not fully subscribed, all applicants will receive full allotment. However, in case of oversubscription, a proportionate allotment of shares will be made to all QIB investors.

The unsubscribed portion of the QIBs cannot be offset against other categories. In the case of QIBs, 5% of the total QIB quota will be allotted to the mutual fund companies and the remaining 95% will be allotted to the other QIBs on a pro-rata basis.

IPO Allotment to Anchor Investors

Anchor investors are those who place an IPO bid of not less than Rs 10 crore. In other words, they invest a large sum of money in a public issue. In an IPO, a maximum of 60% of the QIB share can be allocated to anchor investors. Out of this 60%, one-third or 20% is allotted to domestic mutual fund companies.

An IPO is opened for subscription by anchor investors one day in advance so that the allocation is made one day before the opening day of the IPO.

• Investors who applied for anchor quota get guaranteed allotment.
• Anchor investors can bid at any price within the price band.
• There is a 30-day lock-in period applicable on anchor quota means anchor investors cannot sell shares before 30 days after allotment.
• If the price fixed is higher than the price at which shares were allotted to anchor investors, they have to pay the price difference. On the contrary, if the price fixed is lower than the allotted price, excess money will be refunded to them.
• An IPO can have a minimum of 15 anchor investors in an IPO with an issue size below Rs 250 crore. However, an IPO above Rs 250 cr can have 25 anchor investors.