A series of recent initial public offerings (IPO) saw good participation by retail investors. In almost all the good issues, the quota for retail investors was oversubscribed. This is a good signal for the market as it shows significant interest from investors in equity as an asset class.
However, retail investors who had applied for some recent IPOs seem more confused as there is no logical explanation to the manner in which shares were allotted. For example, in the issues of Alkem Labs and Dr Lal Pathlabs, where retail portion was oversubscribed over three times, several retail investors have complained they did not receive even a single lot of shares despite subscribing to the full quota of Rs 2 lakh.
The method used to allot shares were changed in 2012 by the Securities and Exchange Board of India (Sebi). But the allotment process has come under investor scrutiny as there is renewed interest in some of the high-quality issues in the recent times.
In order to understand the rationale behind the allocation, we need to look at the guidelines issued by Sebi. Firstly, we need to understand that applications are segregated into three categories -- institutional or qualified institutional buyer (QIB), NII (non-institutional investors) or HNI (High-networth investor) and retail individual investor (RII).
In the case of QIB, the merchant banker has the discretion to allot shares. In the case of QIB, shared are allotted proportionately. Thus, if shares are oversubscribed by say, five times then an application for 1,000,000 shares will receive only 200,000 lakh shares.
But when it comes to retail investors, the process is a little more complex. First of all, only RII are allowed to invest in smaller lots worth between Rs 10,000-15,000 as compared to Rs 5,000-7,000 before 2012. A maximum of Rs 2 lakh per IPO can be applied by an applicant in the RII category.
The total number of applications received in the RII 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 (in case of a book-build operation), full allotment may be made to the RIIs to the extent of the valid bids.
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 RIIs who can be allotted the minimum bid lot will be computed by dividing the total number of equity shares available for allotment to RIIs by the minimum bid lot, this is known as ‘Maximum RII Allottees’.
Assuming that there are shares worth Rs 10 lakh to be allotted in retail segment and the minimum lot size is worth Rs 10,000. Thus only a maximum of 100 applicants will be receiving the minimum lot of Rs 10,000. Since Sebi says that no RII 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. In this case, the Maximum RII Allottees are 100.
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 RIIs who have bid for more than one minimum bid lot.
But in case the number of RIIs is more than Maximum RII Allottees, the RIIs (in that category) who will then be allotted minimum bid lot shall be determined on the basis of draw of lots. The draw of lots is now a computerised process and thus there is no room for partiality.