With heavy retail participation in initial public offerings, oversubscription has become a common sighting. In fact, Paras Defence And Space Technologies Limited IPO was oversubscribed 304 times! This means there were 304 applications for one share, and only one of those subscribers got an allotment. Similarly, the Latent View Analytics IPO was oversubscribed 338 times!
The latest IPO that had the investor’s attention was the LIC IPO, which was oversubscribed three times.
With many participants in the markets, you may be wondering how the allotment actually takes place. But don’t worry. We decode it for you right below. Keep reading!
In cases of large oversubscription, IPO allotment is routed by way of a computerised lottery. In the lottery, there’s no bias, and every subscriber stands an equal chance of winning the IPO allotment. Now, a few individuals may invest in IPOs to cash listing gains, while others may view the company as a long term investment opportunity, wanting to participate in its future growth.
However, for both things to happen, you first need to get an IPO allotment which is difficult when the subscription rate is high. Investors are often found complaining about not receiving an IPO allotment despite doing everything right.
While the markets may not guarantee you an allotment, you can boost your allotment chances by following a few simple tricks. Want to know what these tips and tricks are? Let’s find out.
Applications coming from the retail segment are treated equally; now, it doesn’t matter if the application is for a single lot or multiple lots. Thus an applicant who has applied for one lot (which is, say, of Rs. 15,000) and an applicant who has applied for 10 lots (which will be Rs. 1,50,000) will be treated equally during IPO allotment.
In case of oversubscription, only one slot will be allotted to applicants selected by a lucky draw, irrespective of their application size. In a nutshell, your application size doesn’t give you an advantage in case of oversubscription. However, your entire application will be entertained in case of an under subscription.
Thus, bidding on multiple lots in IPOs where the subscription rate is high may not reap you additional shares. Rather, your capital will be blocked for the intermediate period, and you will lose on opportunity cost.
You are better off applying for a single lot when the IPO is oversubscribed.
We just understood why large applications would not boost your IPO allotment chances. But here’s the thing: if making applications for multiple lots from one Demat account doesn’t help, then you may make applications for a single lot from multiple Demat accounts! However, you need to remember only one application can be made against one PAN number. Thus you cannot make multiple applications from Demat accounts linked to your PAN. To overcome this limitation, you can use the Demat accounts of your family members.
Suppose you want to apply for 5 lots in an upcoming IPO. Instead of routing this application from a single Demat account, lodge 5 applications of one lot each from 5 different Demat accounts. This will increase the probability of you getting the allotment by 5x. In the former case, at best, you will get the allotment of one lot, while in the latter case, you stand a chance of bagging allotments in all 5 of your applications.
When IPOs are announced, companies give a tentative price band within which the IPO price will be finalised. Investors are always confused about what price to bid in order to stand maximum chances of allotment.
It is advised that you bid at the higher end of the price band or the cut-off price. By doing so, you will stand eligible for allotment no matter at which price the IPO is finalised. In case the IPO is finalised at a price lower than your bid price, the remaining money will be refunded to you. In case you bid at the lower end of the price band or a price lower than the cut-off price, you will not get the allotment if a higher price is finalised in the book-building process.
For example, an IPO is open for a subscription with a price band of Rs 1000-1100.
If you bid at Rs 1000, you will get an allotment only when the price is finalised at Rs. 1000.
If you bid for any amount less than Rs. 1100, you’ll stand eligible only when a price equal to or lower than your bid price is finalised in the book-building process.
But when you bid at Rs. 1100, you tell the registrar that you are comfortable buying the share at this price. In this case, you’ll stand eligible for allotment no matter which price is finalised.
Investors often wait until the last hour to observe how qualified institutional buyers and high-net-worth investors approach the IPO. They try to analyse the sentiment of the market and the subscription status. However, waiting till the last moment might make you lose big. Glitches or your bank’s server becoming unreachable might keep you from making your allotment.
However, there’s always the option of making a physical application by submitting a form in your bank account, which is open till 4 pm on the last day.
Thus it’s advisable to make your applications well in time.
This pointer applies only to those IPOs where the company’s parent company is already listed on the stock exchanges.
Buying shares of the parent company may make you eligible for the shareholders’ allotment quota. Since companies always secure some portion of their issue for shareholders, your chances of winning the allotment increase.
Applying for an IPO can’t get any simpler; it hardly takes a couple of minutes when you do it through your broker. Still, the excitement of IPOs is so high that many times investors forget there’s a step more after submitting their application request. SEBI has made it mandatory for retail investors to apply for IPOs using UPI (in case your bank does not extend the UPI service, you may apply using the ASBA option).
Once you apply, there comes a mandate request on your UPI service provider that needs to be approved. If someone fails to approve the mandate request within the stipulated time, the application stands incomplete. The mandate is to take your approval for blocking funds in your account. Thus, make sure you approve the mandate received from your UPI service provider. You’ll also receive an SMS reminding you to approve your mandate request.
Defective applications are rejected without even being considered for allotment. On the page where personal details like PAN and name are to be filled, make sure the name you provide matches the name on the PAN card.
Ensure to bid at the cut-off price with the desired number of lots. Also, make sure you have enough funds in your linked bank account to approve the mandate request for the selected number of lots.
The application page will ask you for your application category. Categories are defined to provide discounts and quotas to different classes of applicants. For instance, the biggest IPO in India, LIC, has different discounts for retail, shareholders, and employees. The retail category has to be selected for retail investors like me and you; otherwise, applications will not be entertained.
In 2021, companies like Zomato, Paytm, and Nyka, which are popular among the masses, drew lakhs of new investors. Moving forward, FY22-23 also eyes the listing of several well-known companies. Now, oversubscription always brings luck into the game. Though there’s nothing that can guarantee you allotment, following the above-discussed tips will no doubt strengthen your case for winning.
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