An IPO, or Initial Public Offering, is when a private company offers its shares to the public for the first time. Through an IPO, a company raises funds from investors, helping it grow, expand, or finance its operations. Companies typically go public when they are confident about their future performance and seek capital from a broader investor base.
The IPO Process
The journey from a private company to a publicly traded entity follows several essential steps:
- Registration with the SEC: The company must file a registration statement with the Securities and Exchange Commission (SEC), providing details about its operations, financials, and risks.
- SEC Review: The SEC reviews this registration statement, sometimes requiring changes for clarity or accuracy.
- Public Sale Approval: Once approved, the company can begin selling shares to the public, marking its entry into the public markets.
Understanding IPO Allotment
IPO allotment refers to distributing shares to investors who have applied to buy them. A third-party agent, known as the registrar, is appointed by the company and collaborates with the stock exchange to allocate shares. In India, this process follows guidelines established by the Securities and Exchange Board of India (SEBI) and typically takes place within three to four days after the IPO bidding period.
IPO Allotment Rules
The IPO allotment process considers the following factors:
- Share Offering and Investor Bids: Shares are allocated based on the shares available and the bids received from investors.
- Valid Applications Only: Invalid applications, such as those with incorrect Demat account details or duplicate entries, are rejected.
- Cut-Off Price Applications: Only bids meeting or exceeding the cut-off price are considered for allocation.
- Category Adjustments: Any under-subscription in one category (excluding the Qualified Institutional Buyers category) can be balanced by oversubscription in another category through consultations with key stakeholders.
The allotment may follow a pro-rata basis or a lottery system, depending on the investor category and the level of demand for the IPO. The registrar issues a Basis of Allotment (BOA) document that provides detailed information on the share allocation.
IPO Allotment Mechanisms
The method used to allocate shares depends on whether the IPO is undersubscribed or oversubscribed:
- Undersubscribed IPO: If demand is lower than supply across all investor categories, all valid applicants receive a full allotment, provided the IPO achieves at least 90% subscription.
- Oversubscribed IPO: When the demand exceeds the available shares, a lottery or proportionate allotment system is used to fairly distribute shares across investor categories.
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Factors Impacting Allotment
Several factors can influence IPO allotment:
- Share Availability: The number of shares a company offers impacts the likelihood of allocation.
- Investor Demand: High demand often leads to limited availability per investor.
- Bid Price: Applications at or above the cut-off price are prioritized.
- Investor Category: Allocation policies differ based on the investor type, such as retail or institutional investors.
Investor Categories in an IPO
Investors in an IPO fall into three main categories:
- Qualified Institutional Buyers (QIBs): Large entities like mutual funds and insurance companies, often receive the largest share allocation (up to 50% in India).
- Non-Institutional Investors (NIIs): Individual investors contributing above a certain threshold (₹2 lakhs in India) and allotted up to 15% of the shares.
- Retail Investors: Individual investors contributing below the NII threshold, typically allotted up to 35% of the IPO shares.
Oversubscription and Allotment
An IPO is considered oversubscribed when the number of bids exceeds the shares available. In such cases, shares are distributed using a lottery system, with random selection among applicants.
Lot Size
The lot size defines the minimum number of shares an investor can bid for in an IPO. The issuing company determines this lot size, which represents the smallest unit that can be purchased in the IPO.
An IPO is a major milestone for companies seeking to expand and fund their operations. It provides access to capital, enhanced visibility, and increased liquidity, but it also introduces regulatory scrutiny, costs, and share price volatility.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Consult with a qualified financial advisor before making any investment decisions.
