Why Didn’t You Get Shares in an Oversubscribed IPO? Here’s How Share Allotment Works

October 26, 2024 By: Shalini Bhardwaj

IPO investments often create a buzz in the stock market, especially when a reputed company launches its initial public offering (IPO). In high-demand IPOs, it’s not uncommon for the issue to become oversubscribed, meaning more people apply for shares than are available. This scenario raises a question for many retail investors: How exactly are IPO shares allotted when demand exceeds supply? Here’s a breakdown of the process companies use to decide share allotment, especially in cases of oversubscription.

What is an IPO and Why Does It Get Oversubscribed?

An initial public offering (IPO) marks a private company’s first step in offering shares to the public, aiming to raise funds for business expansion, debt repayment, or even research. When an IPO is announced, both institutional and individual investors can subscribe by applying for shares in “lots.” If the demand is particularly high, applications may far exceed the number of shares being offered, leading to an oversubscription.

For instance, if a company issues 1 million shares but receives bids for 3 million, the IPO is considered oversubscribed by three times. In such cases, a set allotment process is used to maintain fairness and transparency.

How IPO Shares Are Allotted: A Step-by-Step Guide

1. Retail Investor Allotment: The Lottery System:

For retail investors, companies typically follow a lottery system in oversubscribed IPOs. This system is regulated by SEBI, India’s market regulator, to ensure transparency and give all applicants an equal chance. Here’s how it works:

• Computerized Lottery: When retail demand is high, the IPO registrar conducts a computerized lottery to assign shares. This automated process ensures there’s no bias, and each investor stands an equal chance of receiving at least one lot.
• Focus on Smaller Bids: SEBI mandates that priority should be given to applicants who bid for a single lot. So, if you apply for one lot instead of multiple, your chances of receiving shares increase in an oversubscribed IPO.

2. Allotment for High Net-Worth Individuals (HNIs) and Institutional Investors:

For non-retail investors, such as high net-worth individuals (HNIs) and institutional investors, allotment works differently. Instead of a lottery, companies allot shares proportionally in oversubscription cases. For example, if an IPO is oversubscribed ten times, each HNI or institutional investor may receive only one-tenth of the shares they requested.

This proportional system provides a fair distribution among large investors based on the level of demand within their category, but it’s important to remember that they rarely receive the full quantity they bid for.

3. Transparency and SEBI Regulations:

SEBI has set strict guidelines for allotting shares in oversubscribed IPOs. These regulations ensure that the allotment is fair, transparent, and computerized, giving every applicant a fair shot. For instance:

• Automated System: The allotment process is entirely computerized to prevent human error or bias.
• Single Lot Priority for Retail Investors: By prioritizing single-lot applicants, SEBI encourages wider retail participation and provides small investors with a better opportunity to secure shares in popular IPOs.

4. ASBA System for Refunds:

If you don’t receive shares in an oversubscribed IPO, your money is refunded through the ASBA (Applications Supported by Blocked Amount) system. Under ASBA, funds remain blocked in your bank account until the allotment process concludes. Once the allotment is completed, the blocked funds are either released or debited based on the number of shares allotted.

Why Some Retail Investors May Not Get IPO Shares

Despite the transparent process, not every retail investor will secure shares in an oversubscribed IPO. Here’s why you may still miss out:

• Demand Exceeds Supply: In high-demand IPOs, the limited number of shares simply can’t accommodate all applicants, even when a lottery is used.
• Single-Lot Bias: While single-lot applicants receive preference, the competition remains intense, so even with priority, some may not receive shares.
• Randomized Allotment: The lottery system is automated and randomized, meaning luck plays a part. As a result, not everyone gets shares, even with SEBI’s fair distribution policies.

Tips to Increase Your Chances of IPO Allotment

To enhance your chances of receiving IPO shares, consider these tips:

1. Apply for a Single Lot: Especially in popular IPOs, applying for a single lot can improve your chances, as SEBI gives priority to single-lot applications in oversubscriptions.
2. Multiple Demat Accounts: If possible, apply through different Demat accounts in the names of family members. This approach can improve your odds of receiving an allotment.
3. Submit Applications Early: Some IPOs see overwhelming demand in the final hours, so applying early can sometimes help avoid last-minute technical glitches.

Key Takeaways

In high-demand IPOs, oversubscription is common, leading to an allotment process regulated by SEBI. With an automated lottery system for retail investors and proportional allotment for HNIs, the goal is to ensure fair distribution. Although not every applicant will receive shares, SEBI’s regulations and the ASBA system provide an equal opportunity for all.