What Is an IPO:
An initial public offering or simply an IPO is a process through which the owners of a Company decide to transform from a privately held company to a public Company by offering a part of their ownership to the public in the form of shares issued to the public for the first time. The process of IPO comprises of inviting bids for allotment of shares from the public and allotting them shares against payment of share money by following a set of laid down steps & rules. A Company intending to invite bids under an IPO has to fulfill the criteria and comply with the rules, guidelines & processes laid down by SEBI (Securities & Exchange Board of India). SEBI was constituted by an Act of the Parliament and is a Statutory as well as regulatory body.
After an IPO has been issued and shares allotted, the issuing company becomes gets transformed into a public company listed company on a recognized stock exchange.
Retail Investor:
Retail Investors are individuals who buy securities for their personal accounts. An individual investor who is subscribing to Securities for a value not exceeding
Rs.200,000 is called a Retail Investors under SEBI guidelines. With the increase in per capita income of the middle income group, the exposure of small individual investors to securities & debts has been increasing. Retail Investors have been identified as a separate category to protect their interests and to encourage such investments by allotment of shares out of a “reserved” quota; providing tax incentives and facilitating certain exclusive options of subscription to them so as to make it easier for them to get allotment of shares as compared to other category of investors.
Exclusive options & incentives to Retail Investors:
- The Retail Investors have certain exclusive privileges:
- They can be offered a discount of up to 10% while applying for shares in a public offer.
- They can withdraw or revise their submitted bids.
- New Retail Investors can avail of the tax benefits under Rajiv Gandhi Equity Saving Scheme.
- Retail Investors have the option of bidding at the “Cut Off Price”.
Cut Off Price:
The IPOs prescribe the price band within which the investor has to quote the bid. However, only a Retail Individual Investor has been given the option of either bidding for a specific price within the mentioned price band or indicate his offer as “Cut Off Price”. Exercise of Cut Off Price option simply means that the investor is flexible with any price within the price range mentioned in the prospectus for allotment of shares. Broadly, choosing this option increases the chances of allotment of shares in case the issue gets over subscribed.
Lot size:
The Companies inviting bids under a public offer divide their total number of equity shares for which bids are invited into “lots” of a specified number of shares. For example, a Company X intending to issue 10,00,000 equity shares may prescribe 50 shares as one lot. Here, the issue will comprise of 20,000 lots of 50 shares each.
An investor has to bid in terms of the number of lots and not in terms of the number of shares. An investor cannot bid for less than the lot size or in a fraction of the lot size as per SEBI regulations.
Only Retail Investors are allowed to bid for smaller lots worth between Rs 10,000-15,000 subject to a maximum amount of Rs 2 lakh.
Process of allotment of shares to Retail Investors:
The allotment of shares against a public issue is often leaves the Retail Investors wondering why they didn’t get any shares or if they did get some allotment, why the number of shares allotted to them is much less than the number for which they had submitted their bid. Therefore, it is essential to understand the basis & rationale behind the process of allotment. SEBI has laid down separate guidelines for allotment of shares to Retail Investor category of bids.
The allotment process can be briefly summarised as follows:
After completion of the bidding process, the first step is to scrutinise the bids and eliminate the incomplete or improper bids. Thus, the total demand for the shares is ascertained by the total number of applications received in the RII category. Two scenarios could emerge:
- In case the aggregate demand in this category is equal to or less than the shares offered for subscription in this category, full allotment is made for the shares applied.
- In case, the aggregate demand in this category is more than number of shares offered for this category, the shares to be allotted to each investor is computed by dividing the total number of equity shares offered for allotment to Retail Investors by the minimum bid lot.
To explain it with the help of an example, let us assume that: a Company X had decided to allocate 20,000 shares to be allotted to Retail Investors and the lot size is 200 shares. Thus only a maximum of 100 applicants (20,000/200) will be issued the minimum lot of 200 shares which @ Rs.50 will be worth Rs 10,000.
- if the issue is subscribed multiple times at the upper limit of the price band, there will be a draw of lots, with lucky investors getting a minimum of one bid.
Maximising the chances of allotment of Shares:
There are a number of factors that may influence the chances of getting allotment under an IPO. Let’s examine them from the point of view of a Retail Investor:
- Number of bids to apply:
A retail Investor can bid for up to an amount not exceeding Rs.200000 and this has to be in minimum bid lot or in multiples thereof. So, if a Company prescribes lot size as 50 shares each in one lot, a Retail investor can apply for a minimum of one bid lot of 50 shares or in more bid lots in multiples of lots of 50 shares each, subject to the value not exceeding Rs.200,000.
It is better to make multiple bid applications by different members of the family instead of making one big bid for a large number of lots. By doing so, the probability of getting minimum allotment become better when the IPO is oversubscribed many times and draw of lots has to be resorted to. Those lucky to be picked up in draw of lots have to be allotted at least one lot size as per SEBI guidelines.
2. The Bid Price:
The price bid plays an important role in allotment. The Company inviting bids in an IPO prescribes a price range within which the price has to be quoted. For example, Company X lays down a price band of Rs.500 to Rs.650 per share as the price band. Now if the actual pricing for the share is finalised at Rs.600, any bidder who would have applied for a price less than Rs.600 would not get any allotment.
In case, a bidder is of the view that the issue is likely to be oversubscribed many times and is very keen to get an allotment, he may bid for the upper end of the price band provided the valuation is reasonable as per his analysis and justifies the price at upper band.
However, Retail Investors have an additional option of choosing Cut Off Price option and merely mentioning “cut off price” they offer. In such a case, they would be allotted shares at a price which is finalised within the price band, subject to the allotment process. Cut Off Price bids stand a better chance of allotment than a specific price bid.
3. Applications within the date & time prescribed:
A large number of applications are usually received on the last day. The deadline of time limit for accepting applications on the closing day of the offer vary from case to case and are prescribed in the issue prospectus. It is always better to avoid last minute action more so when one is applying through physical forms in order to avoid rejections on account of delayed submission.
4. Rejections on technical grounds:
In case of applications made through physical forms, errors such as incorrect cheque number, name mismatch, spelling errors in name etc, will render the application to be out rightly rejected on technical grounds. Needless to say the form needs to be filled up carefully and rechecked before submission. Such possibilities are avoided in case of making the applications through net banking for the demat account.
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