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Oversubscribed IPOs: How hot offerings are made?

If the offering is oversubscribed, investors may not receive all the shares they requested. Know here what happens in case of oversubscription.

After you’ve applied for an Initial Public Offering (IPO), you naturally wait to see if you’ll be one of the lucky investors to receive shares. This decision hinges on the IPO allotment process, which determines how the company distributes its available shares among the interested applicants. Let’s understand how this process works to understand your chances of snagging shares in the IPO.

An Initial Public Offering (IPO) allotment refers to the process of assigning shares to investors who applied during the offering. The registrar, in collaboration with the stock exchange, determines this allocation. Typically, the allotment announcement is made on the registrar’s website 3-4 days after the IPO bidding period closes. Investors can then check their allotment status on the same website.

The number of shares an investor receives depends on the overall demand for the IPO. If the offering is oversubscribed (meaning there are more bids than available shares), investors may not receive all the shares they requested. Conversely, if the IPO is undersubscribed (meaning there are fewer bids than shares offered), all investors will likely receive their full allotment.

IPO Allotment Method

Fully subscribed: Everyone gets their shares (if application is valid). IPO needs at least 90% total subscription.

Oversubscribed in some categories: Extra applications from popular categories may be used to fill undersubscribed categories (except for institutional investors).

Overall oversubscription: Shares are allocated proportionally or by lottery, depending on the investor category.

IPO allotment Process

  1. Data Acquisition: The registrar receives IPO application data from the stock exchange after the offering closes.
  2. Eligibility Check: Applications are validated against eligibility criteria to ensure investor qualification.
  3. Third-Party Verification: Data is cross-checked with depositories and banks to identify applications submitted through third parties.
  4. Error Removal: Applications with technical errors are rejected to maintain data integrity.
  5. Demand Consolidation: Valid bids at or above the cut-off price are grouped by lot size to determine overall share demand per investor category.
  6. Basis Determination: The registrar, in consultation with the exchanges, finalizes the basis of allotment (BOA) for share distribution.
  7. Investor Notification: Allotment status is communicated to investors via email or SMS.
  8. Settlement Coordination: Banks and depositories are notified to debit investor accounts and credit allotted shares to their demat accounts on the settlement date.

When an IPO Gets Hot: The Lottery System for Oversubscribed Offerings

An IPO (Initial Public Offering) becomes oversubscribed when there are more investors applying for shares than the company actually has available to sell. In these situations, a random lottery is conducted to determine who gets shares.

Imagine the scenario as given below 12 investors applied for shares in an IPO, all at the set price. Each investor requested a different number of shares, ranging from 1 to 7. However, the company only has 5 shares to allocate. Here’s how the lottery could play out

Investor Quantity Applied Quantity Allotted
Investor 1 3 0
Investor 2 7 1
Investor 3 5 1
Investor 4 2 0
Investor 5 6 1
Investor 6 1 1
Investor 7 1 0
Investor 8 6 0
Investor 9 2 1
Investor 10 3 1
Investor 11 5 0
Investor 12 2 1
Total 43 7

Investors 2, 3, 5, 6, and 12 are the winners! The shares for which they sought will be given to them. It’s vital to remember that bids made for the lottery below the predetermined amount would not even be taken into account.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.
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