IPOs these days are often subscribed for more number of shares than those actually available on offer. Such a scenario is called oversubscription of an IPO. This is often observed in attractive IPOs which are expected to list at a premium to the issue price.
SEBI changed the method to allot shares in an IPO in 2012 and ever since there is a lot of curiosity amongst retail investors to understand how shares are allotted to Retail investors in case of an oversubsription in that category
So lets have a look at how allotment takes place in an IPO in case of Retail category being oversubscribed
The total number of APPLICATIONS received in the retail category is grouped together to determine the total demand in this category.
If the aggregate demand in this category is less than or equal to the retail portion at or above the offer price, full allotment is made
However, if demand in this category is greater than the allocation in the retail portion at or above the offer price, then the maximum number of INVESTORS who can be allotted the minimum bid lot will be computed by dividing the total number of equity shares available for allotment to retail investors by the minimum bid lot, this is known as Maximum Retail Individual Allottees
Let's take an example where IIB Ltd. IPO consists of shares worth Rs.1 Crore to be allotted in retail category and the minimum lot size is worth Rs.10,000.In such a case, maximum number of applicants (which by the way needs to ne mandatorily allotted shares worth Rs.10,000) would be only a maximum of 1000 applicants. This is so because SEBI says that no Investor will be allotted less than the minimum bid lot. In case of over subscription, allocation of shares lower than the minimum lot is not possible.
Hence, maximum number of retail investors eligible for allotment would be 1000. In case there is a small oversubscription then first the minimum lot is distributed among all participants and then the balance available equity shares in the retail portion shall be allotted proportionately to the Retail Investors who have bid for more than one minimum bid lot.
But in case the number of RIIs is more than Maximum Retail Individual Allottees as determined from above method, then the investors who will then be allotted minimum bid lot shall be determined on the basis of draw of lots.This draw of lots is a computerised process and computationally random
It can therefore be concluded that in case of retail oversubsription, it generally boils down to pure lottery system and also shares allotted are generally of minimum lot only
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