When a company launches an Initial Public Offer (IPO), it invites people to subscribe to its shares. Each IPO has certain requirements in terms of the price range, lot size, etc. that investors need to keep in mind while applying. On many occasions, investors don’t receive an IPO allotment.
Today, we will talk about the possible reasons why investors don’t receive an IPO allotment and offer tips to help maximize the chances.
We have explained what is meant by lot size and how is an IPO price range decided towards the end of the blog.
There are three possible reasons why investors don’t receive an IPO allotment as explained below:
When a company launches an IPO, it specifies the price range and the number of shares it plans to issue via the offer. For example, a company wants to raise a share capital of Rs.10 crores and launches an IPO for the issue of 10 lakh shares with the price range of Rs.100-101. Hence, in an ideal scenario, the company receives applications for all 10 lakh shares and allots them to investors. However, the real-world scenario is different.
For our example, if the company receives 1 crore applications, it can be said that the company’s IPO was subscribed 10 times the original issue size of 10 lakh shares.
Now, the company cannot allot shares to each applicant.
If the company received more applications than offered, it holds a computerized lottery where each applicant gets an equal opportunity to receive an allotment. In the example above, since the company has received 10 times the offered shares, not all investors will be allotted shares.
This is one of the most common reasons investors do not receive an IPO allotment, especially in IPOs of companies that are in demand.
[IPO application and allotment is done in lots. You do not apply for one or two shares, you apply for one lot or more. A lot is generally a number of shares. However, we have explained the oversubscription concept using shares for easier understanding.]
Every IPO application is scanned by the Registrar of the IPO for completeness and correctness of the information. There are many technical reasons for rejection that investors are not informed about too. Some common reasons are:
If the Registrar of the IPO deems an application invalid, then it is rejected and the investor does not receive any allotment.
In a Book Building IPO, when you submit the application, you need to choose the price at which you want to apply from within the given price range. Hence, in the above example, you can apply at any price between Rs.100 and Rs.101.
When the company receives all applications, it determines the final issue price based on the BID price offered by investors. If the Issue Price is higher than your Bid Price, then you do not receive an allotment. In the example above, if you submit the application with a Bid Price of Rs.100.5 and the company declares the Issue Price as Rs.100.8, then your application will not qualify for allotment.
Now that we have spoken about the common reasons why investors might not receive an IPO allotment, let’s look at some tips that can help you maximize your chances:
One of the most common reasons for the rejection of an IPO application is entering invalid or incorrect information on the application form. While this is usually a typing error or simple oversight, it can cost you an opportunity to receive an allotment. Hence, fill the application form carefully.
Many investors think that making big applications or applying for more number of lots are favoured by companies.
This is completely untrue. In fact, SEBI has laid down a process that mandates companies to treat all retail individual investor applications of less than Rs.2 lakh, equally and allot a maximum of one lot per investor if selected in the lottery. Hence, you cannot maximize your chances of allotment by making a big application.
However, if the IPO is undersubscribed, then a big application can ensure higher share allotment.
As explained above, if an IPO is oversubscribed, then the company uses a lottery system to allot shares. Therefore, if you have multiple applications from different PAN numbers, then your chances in the lottery increase. Hence, if the IPO is expected to be oversubscribed, then submitting multiple applications from different Demat accounts can be an effective strategy to maximize your chances. Typically, investors use the Demat accounts of family and friends to submit multiple applications in an IPO.
We have explained the Bid Price and Issue Price above. If the price range of a share in the IPO is Rs.100-101, then to avoid rejection, the most logical approach is to apply at the maximum price (Rs.101). The best way to do this is to apply at the Cut-Off Price.
Cut-Off Price means that you are willing to pay whatever Issue Price is declared by the company at the end of the book-building process. Since the Issue Price is determined only after the IPO applications are processed, you are required to pay the maximum price in the price band. If the Issue Price is lower, then the difference amount is released to your account.
In the example above, if you choose to apply at the Cut-Off Price, then you need to pay Rs.101 per share. If the Issue Price is Rs.100.8, then the difference amount of Rs.0.20 per share is released to your account.
This helps ensure that you don’t miss out on receiving an allotment due to a low Bid Price.
Waiting until the last moment can be counterproductive if your bank’s internet banking is unavailable or your internet services are down. Also, rushing to fill the application form at the last moment can result in errors on the form. If there is no application, there will be no allotment!
Hence, it is prudent to submit your application at least one day before the last date.
If the parent company of company launching its IPO is also listed on the stock exchange, you can buy the shares of the listed company to increase your chances. This is because, once you are a shareholder of the parent company, you can apply in the ‘shareholder’ category rather than the ‘retail’ category. However, this just diversifies your chances as you will be applying across categories.
None of the reasons mentioned above can give a 100% guarantee for getting an IPO subscription. These can just increase your chances as in the end, receiving an IPO allotment is on the basis of pure luck and a lottery system.
In an IPO application form, you are required to apply for shares in lots. When a company launches an IPO, it declares the minimum number of shares one investor can apply for. This is a ‘Lot’. Continuing our example from above, the company launches the IPO to raise Rs.10 crore by issuing 10 lakh shares in the price range of Rs.100-101. It also declares the minimum lot size as 148 shares.
Therefore, one lot is 148 shares. When you apply for this IPO, you will apply for one or more lots and not the number of shares.
Some IPOs offer special allotments to existing shareholders (this is in the case of companies that are already listed). Hence, it is important to go through the Red Herring Prospectus (RHP) of the IPO carefully before investing. We hope that this article helped you understand the possible reasons for not receiving an IPO allotment. Follow the tips mentioned above and boost your chances of receiving the shares. Good Luck!