IPO Allotment Process: The allotment of shares in an Initial Public Offering (IPO) is a structured process that involves several steps to ensure that shares are distributed fairly and in accordance with regulations. The process involves setting a price, collecting bids from investors, allocating shares based on these bids, and finally listing the shares for public trading. The goal is to balance fairness and demand, ensuring that both institutional and retail investors have a chance to participate in the IPO.
Let us understand the process via a well-known example of IPO allotment of Zomato IPO in India, which took place in July 2021. Zomato, a leading food delivery and restaurant discovery platform, had a highly anticipated IPO that drew significant interest from both retail and institutional investors.
Zomato IPO Example
Date of Issue: July 14 to July 16, 2021
Issue Size: Approximately INR 9,375 crore (about USD 1.3 billion)
Price Band: INR 72 to INR 76 per share
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1. Pre-IPO Preparations
Drafting the Prospectus: The company preparing for an IPO must file a prospectus with the regulatory authorities like SEBI in India, which includes detailed information about the company, its financials and the IPO terms.
Zomato filed its Draft Red Herring Prospectus (DRHP) with the SEBI.
Underwriting Agreement: The company usually works with underwriters (investment banks) who help set the IPO price and handle the distribution of shares.
A group of investment banks acted as underwriters, assisting in pricing and share distribution for Zomato.
2. Pricing and Allocation
Price Band Determination: The company and its underwriters set a price range for the shares which is known as the price band.
The company set a price band of INR 72 to INR 76 per share.
Book Building Process: In many markets, a book-building process is used where institutional investors submit bids indicating how many shares they want and at what price within the band. This helps determine the final price for the IPO.
The IPO used the book-building process, where institutional and retail investors submitted bids within the specified price range.
3. Application Phase
Retail and Institutional Investors: Investors – both institutional and retail (individual), can apply for shares. Retail investors usually apply through brokerage firms or online platforms, while institutional investors typically apply through direct arrangements with the underwriters.
These retail investors could apply through brokerage platforms or online portals. They were allowed to apply for a minimum of 195 shares (one lot) and in multiples of 195 shares thereafter. Institutional investors also participated, submitting bids based on their investment size and preference.
4. Allocation of Shares
Final Price Determination: Once the subscription period ends, the company, with the help of underwriters, sets the final issue price based on the demand and bids received.
Allocation Criteria: Shares are allocated based on different criteria:
a. Retail Investors: Typically, shares are allocated on a pro-rata basis if there is an oversubscription. A lottery system might also be used in some cases.
b. Institutional Investors: Allocation is generally based on the size of their bids and their relationship with the company and underwriters.
c. Qualified Institutional Buyers (QIBs): Often receive a substantial portion of the shares.
d. High Net-Worth Individuals (HNWIs): May also be allocated shares based on demand and the overall allocation plan.
Allocation of Zomato Shares
Oversubscription: The Zomato IPO was oversubscribed by a significant margin. The overall subscription was around 38 times the number of shares offered. The shares were allocated based on a pre-determined allocation plan. The retail portion was heavily oversubscribed, leading to a lottery system for share allotment. Retail investors who were lucky in the lottery received shares in the ratio determined by the allotment criteria. Institutional allocations were also substantial and distributed based on the size and quality of bids. Large institutional investors often received a significant portion of the shares.
Final Allotment: After determining the final price and allocation, the company and underwriters finalize the allotment of shares. Investors receive an allotment confirmation, which details the number of shares allocated and the total payment due.
5. Final Pricing and Allotment
Determining the Final Price: Once the bids are collected, the final issue price is set, and shares are allocated accordingly.
Allotment Confirmation: Investors receive confirmation of their allotment, indicating how many shares they have been allocated and the amount payable.
6. Listing and Trading
Listing on Exchange: After the shares are allotted and payments are completed, the company’s stock is listed on the relevant stock exchange.
Zomato’s shares were listed on the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) on July 23, 2021.
Trading Begins: The shares become available for trading on the exchange, and their price may fluctuate based on market demand and other factors.
The shares began trading, and the stock experienced a strong debut with a significant premium over the issue price. On the first day of trading, Zomato’s share price surged, reflecting high demand and interest from the market.
7. Post-IPO
Lock-Up Period: There is often a lock-up period during which major shareholders (like company insiders) are restricted from selling their shares. This period typically lasts 6 to 12 months.
Summary of the Zomato IPO Allotment
The Zomato IPO was a landmark event due to the company’s high profile and the massive demand it generated. The allotment process was marked by:
- High Oversubscription: The IPO was oversubscribed by 38 times, illustrating the strong demand.
- Retail Lottery: Due to oversubscription, retail investors’ shares were allotted through a lottery system.
- Strong Debut: The shares had a successful listing and strong initial trading performance.
This IPO exemplifies how the allotment process works in a highly oversubscribed scenario and the impact it can have on market performance and investor sentiment.
Reasons for Non-Allotment of shares
Non-allotment of shares in an Initial Public Offering (IPO) can occur for various reasons, often related to the demand for shares, the application process, or regulatory issues. Here are some common reasons why an applicant might not receive shares:
1. Oversubscription
If the IPO is oversubscribed, meaning there are more applications than available shares, not all applicants will receive shares. The allocation may be on a pro-rata basis or through a lottery system, leading to partial or no allotment for some investors.
2. Application Errors
Applications with incorrect or incomplete information might be rejected. This can include errors in personal details, application amounts, or bank account information. Applications from individuals or entities that do not meet the eligibility criteria, such as minimum investment amounts or investor classifications, can be disqualified.
3. Incomplete Payment
If the payment made with the application is incomplete or fails, the application may not be considered valid. Late payments or issues with processing the payment can lead to non-allotment.
4. Regulatory Issues
If an applicant does not comply with regulatory requirements or does not meet certain criteria set by the stock exchange or regulatory body, their application might be rejected.
5. Application Size and Allocation
For large, oversubscribed IPOs, shares may be allocated on a lottery or proportional basis. Small investors or those applying for a small number of shares may receive less or no allocation if the shares are heavily oversubscribed.
6. Technical Issues
Technical problems with the application system or brokerage platforms can sometimes result in failed submissions or non-processing of applications.
7. Investor Profile
Some IPOs may have restrictions on who can apply or may reserve a certain percentage of shares for specific types of investors, such as institutional investors. If you fall into a restricted category or the reserved allocation is oversubscribed, you may not receive shares.
8. Underwriting Decisions
Underwriters have some discretion in the allocation process. They might choose to favour institutional investors or allocate shares based on their relationship with the company or their investment size.
9. Regulatory Scrutiny
During the allotment process, regulatory bodies might review applications for compliance and may disqualify those that do not meet the required standards or raise red flags.
10. Fraud or Misconduct
Applications suspected of fraudulent activity or misconduct might be rejected as part of efforts to maintain market integrity.
In Summary
The Initial Public Offering or IPO process is an important process for the launch of new shares in the stock market. When the investors subscribe to purchase IPO lots, they are eventually allotted with the help of a process called the IPO allotment process. This process adds convenience and transparency to IPO investing.
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