Understanding IPO Allotment: Why Retail Investors Often Miss Out
When a company decides to go public, it raises funds through an Initial Public Offering (IPO) by selling its shares to the public. While the excitement around big IPOs is often palpable, many retail investors find themselves disappointed when they don’t receive any shares despite investing. Let’s explore why this happens, the various investor categories, and the share allotment process.
The Largest IPO in India’s History
Recently, the country has witnessed its largest IPO, with 6.2 crore shares expected to raise a whopping ₹870 crores. This surpasses even the Life Insurance Corporation (LIC) IPO in May 2022, which was valued at around ₹21,000 crores. The new IPO has generated massive interest from investors, including institutional, non-institutional, and retail investors alike.
However, despite the buzz, many retail investors may walk away empty-handed. But why? Let’s first understand the key categories of investors in an IPO.
Categories of Investors in an IPO
There are typically four main categories of investors who participate in an IPO:
- Qualified Institutional Buyers (QIBs):
These are institutional investors like mutual fund houses, banks, and foreign portfolio investors. QIBs are often allocated 50% of the total shares in an IPO. - Non-Institutional Investors (NIIs):
Also known as High Net-Worth Individuals (HNIs), NIIs are divided into two subgroups:- Investors with bids between ₹1 lakh and ₹10 lakh.
- Investors bidding more than ₹10 lakh. NIIs are allotted 15% of the total shares.
- Anchor Investors:
These are large, institutional investors who fall under a subcategory of QIBs. Their shares are locked in for a specific period after the IPO, helping stabilize demand and pricing. - Retail Individual Investors (RIIs):
This is the common retail category. Retail investors can invest up to ₹2 lakhs, and about 35% of the total shares are reserved for them.
IPO Allotment Process
The process of share allotment in an IPO is managed by the company’s Registrar and involves several rules and criteria. Here’s how it works:
- Subscription and Bidding:
Investors submit bids at or above the cut-off price. If one category (like QIB or NII) doesn’t receive enough bids, shares can be reallocated to other categories. However, QIB shares cannot be transferred to other categories if undersubscribed. - Oversubscription:
If an IPO receives bids for more shares than are available (i.e., oversubscription), the allotment becomes competitive. A successful IPO is generally one that is subscribed up to 90%. - Allotment for NIIs:
For NIIs, the reserved shares are split—one-third is allocated to those who invest between ₹1 lakh and ₹10 lakh, while two-thirds go to those investing over ₹10 lakh. If this category is undersubscribed, any leftover shares can be reallocated, based on demand.
Retail Investor Allotment and Challenges
Now, let’s focus on the retail investors, who often face the highest disappointment.
- Lot Size and Retail Allocation:
IPO shares for retail investors are allotted in lots, which are fixed units of shares with a total value usually around ₹1 lakh. For example, if 7 lakh shares are reserved for retail investors and the lot size is 7 shares, only 1 lakh retail investors will receive shares. - Lottery System for Oversubscription:
When retail demand exceeds the number of available shares, a computerized lottery system is used to randomly allocate shares. Each winning applicant receives only one lot, while others get none. This system is why retail investors often miss out, especially in highly oversubscribed IPOs. The chances of winning are 50-50 in these cases. - Unsubscribed Retail Category:
If the retail category is undersubscribed, all applicants receive shares. However, in popular IPOs, this is rarely the case, leading to the use of the lottery system.
Why Do Many Retail Investors Miss Out?
The primary reason retail investors miss out in large IPOs is oversubscription. Big IPOs attract significant interest from institutional and non-institutional investors, and while 35% of shares are reserved for retail investors, this pool quickly becomes oversubscribed. The lottery system leaves a large portion of retail investors without any allotment.
Conclusion
The allotment of shares in an IPO depends heavily on the level of demand and the investor category. For retail investors, oversubscription is a common challenge, often resulting in disappointment. While the allure of participating in a high-profile IPO can be tempting, it’s important to understand the process and manage expectations. In the end, whether you receive shares in a big IPO is often down to luck, particularly for retail investors who are at the mercy of the computerized lottery system.
Despite these challenges, investing in IPOs remains a popular way for retail investors to potentially earn returns. But always keep in mind the oversubscription factor and consider diversifying your investment strategies to manage risk.