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Thursday, December 6, 2012

SEBI has come out with new allotment process for IPOs, which will incorporate a mechanism. Here's an attempt to understand the new mechanism of IPO allotment through an illustration:

For our exercise, let us assume the total number of specified securities (read equity shares) on offer to be 1 crore specified securities. Let's say these securities are on offer at Rs.600/- a share. Thus, specified securities on offer for Retail Individual Investors category would translate to 35,00,000 specified securities. Let's add that the issuer decides to fix the minimum application / bid size as 20 specified securities (falling within the range of Rs. 10,000 - Rs. 15,000). Application can therefore, be made for a minimum of 20 specified securities and in multiples thereof.

Let's further assume that the issue is over-subscribed 2.5 times whereas the Retail Individual Investors’ category is oversubscribed 4 times. Assume that a total of 100,000 Retail Individual Investors have applied in the issue, in varying number of bid lots i.e. between 1 – 16 bid lots, based on the maximum application size of upto Rs. 2,00,000 (i.e. Bid Lot 1 is for 20 shares, Bid Lot 2 for 40 shares, Bid Lot 3 for 60 shares and so on till Bid Lot 16 which will translate to 320 shares)

Out of the 100,000 Retail Individual Investors, let's say there are five retail individual investors A, B, C, D and E who have applied as follows:
  • A has applied for 320 specified securities
  • B has applied for 220 specified securities
  • C has applied for 120 specified securities
  • D has applied for 60 specified securities and 
  • E has applied for 20 specified securities
Now, as per allotment procedure, the allotment to retail individual investors shall not be less than the minimum bid lot, subject to availability of shares, and the remaining available shares, if any, shall be allotted on a proportionate basis

The actual entitlement for allotment, thus, shall be as follows:


Okay. Now, in the above example, we assumed an overall over-subscription of 2.5 times and retail over-subscription of 4 times. But what happens if subscription if higher? Let's find out:

This time around, let's keep total no. of specified securities on offer (at Rs. 600 per share) unchanged at 1 crore specified securities. Specified securities on offer for Retail Individual Investors’ category therefore would be again: 35 lakh specified securities. Issuer decides to fix the minimum application / bid size as 20 specified securities (falling within the range of Rs. 10,000 - Rs. 15,000). Application can be made for a minimum of 20 specified securities and in multiples thereof

Let's now assume the issue is over subscribed 7 times whereas the Retail Individual Investors’ category is over subscribed 9.37 times.

Assume that a total of 200,000 Retail Individual Investors have applied in the issue, in varying number of bid lots i.e. between 1 – 16 bid lots (i.e. 16th lot at Rs.192,000 since the maximum application size of upto Rs.2,00,000)

Again, as per allotment procedure, the allotment to retail individual investors shall not be less than the minimum bid lot, subject to availability of shares, and the remaining available shares, if any, shall be allotted on a proportionate basis

Now since the total number of shares on offer to retail individual investors is 35,00,000 and the minimum bid lot is 20 shares, the maximum no. of investors who can be allotted this minimum bid
lot will be 1,75,000.

In other words,
  • 1,75,000 Retail Investors will get the Minimum Bid Lot and  
  • Remaining 25,000 retail applicants will not get allotment

The allotment in this case will be as follows:



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