IPO Process: Basis of Allotment

Earlier in Unit 5 of this module, we briefly discussed the basis of share allotment. In this section, let us elaborate- How the shares are allotted in an IPO? 

Basis of Allotment or Basis of Allocation is a document that provides information about final price fixed for an IPO, issue subscription (bidding) information, or demand of an IPO and shares allocation ratio. It is published by the registrar of an IPO to stock exchanges and investors. 

After the closure of the issue, the bids received are aggregated under different categories i.e., Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), Retail, etc. 

Oversubscription happens when overall share applications received from investors are more than the size of issue. For example, Mazagon Dock Shipbuilders Limited IPO (29th Sept-1st Oct 2020) received bids for 481.65 crore against the total issue size of Rs 3.06 crore. The IPO was subscribed more than 157 times.

In case of oversubscription, allotment happens as per SEBI guidelines. Oversubscription ratios are then calculated for each of the categories as against the shares reserved for each of the categories in the offer document.  In the case of QIB, shares are allotted proportionately. Thus, if shares are oversubscribed by say, five times then an application for 10,00,000 shares will receive only 2,00,000 lakh shares.

In the case of retail investors, SEBI has mandated a minimum application amount between ₹10,000 - ₹15,000. Once the final issue price is fixed, minimum lot size is defined in terms of the number of shares. The maximum numbers of applicants who are eligible to receive allotment are then calculated based on the total number of shares available for retail investors divided by the minimum lot size. If there is an oversubscription, shares are allotted via a computerized random draw.

Does applying for IPO guarantee investors to receive shares?

There is no guarantee that investors will get any shares at all if applying for an IPO. If an IPO is oversubscribed multiple times, this ratio shows how many applicants will receive a single lot of shares among a certain number of applicants. For example, ratio 1:7 means only one out of seven applicants shall receive one lot of shares; The ratio value 'FIRM' means all the applicants are eligible to receive the shares.

For how many days an issue is required to be kept open?

For Fixed-Price issue: 3-10 working days. 

For Book-Built public issues: 3-7 working days extendable by 3 days in case of a revision in the price band.