How shares are allotted when an IPO is oversubscribed?

What it means when we say that an IPO is oversubscribed?

Suppose, a company named ABC issued its shares in IPO.

The total number of shares offered for retail investors in the IPO was 1.5 Crore numbers.

But after the IPO went live, the retail portion of ABC’s IPO was oversubscribed by 6 times.

What it means by IPO oversubscribed by 6 times?

Lets see an example.

  • (A) Total number of shares on offer: 1.5 Crore.
  • (B) Buy-orders received for the number of shares: 9.0 Crore.
  • (C) Oversubscription : 6 times [9/1.5].
  • (D) Excess demand : 7.5 Crore number shares (9-1.5).

But the company ABC has issued only Rs.1.5 Crore shares for retail investors, right?

So how to manage this excess demand (7.5 crore nos) for its shares?

What can be done now?

The most common action is to issue the shares proportionately.

#1. Proportionate allotment – when IPO is oversubscribed.

Recently the IPO of HDFC AMC was oversubscribed by 6.61 times (for retail investors).

The break-up of HDFC AMC’s IPO being oversubscribed is as listed below:

  • Qualified institutional buyers (QIBs) : 192.26 times.
  • Non-Institutional Investors (NIIs) : 195.15 times.
  • Retail Individual Investors (RIIs) : 6.61 times
  • Employee : 1.51 times.
  • Shareholder : 2.65 times.

On an average, it is said in financial daily’s that, the HDFC AMC’s IPO has been oversubscribed by 83.01 times.

But it must be noted that, in retail investors category (RII), the oversubscription was only 6.61 times.

So coming back to our example of company ABC.

The company has decided to manage the demand for the excess 7.5 crore number shares by issuing shares proportionately.

Lets see how this is done.

Also, lets recapitulate few key datas:

  • Lot size of IPO : 13 number shares.
  • Max Price : Rs.1,110 per share.
  • Oversubscription: 6 times.
  • Max Investment : Rs.2,00,000 (limitation for retail investors).
  • Max lots that RII’s can bid for: 13 lots (13lots x 13shares x 1100 = 1,87,590. This is less than Rs.200,000)

Suppose there are two category of people who placed their bids for ABC’s IPO as below:

  • Category #1: Big size between 1-5 Lots.
  • Category #2: Big size between 6-13 Lots.

#1.1 People with lot size above 6 nos.

As the IPO has been oversubscribed by 6 times, everybody who has placed a bid for 6 nos or more lots, will get at least 1 lot of ABC’s shares.

These people will be allotted shares as below:

  • 6-11 Lot bid size – 1 lot will be issued.
  • 12-13 lot bid size – 2 lots will be issued.

[Note: RII’s can invest a maximum of Rs.200,000 in an IPO (13 lots)].

But what happens to the extra funds blocked by the investors?

What is extra fund?

People placed the bid for 6lots, but received only 1 lot shares. So what happens to the money for balance 5 lots?

This money will be refunded back to the investor by the brokerage house.

#1.2 People with lot size below 6 nos.

What was the total number of shares allotted for RII’s in this IPO of ABC? 1.5 crore numbers.

Suppose, after allotment of shares to people in #1.1 above, all 1.5 crore numbers shares did not get consumed.

Suppose 50.0 lakh number shares are balance for disbursement.

In this case, people who had bid for smaller lot sizes (between 1 and 5) will come into consideration.

These people will also get 1 lot of ABC’s shares.

But everyone will not get 1 lot. Who will get?

  • Shares balance: 50 lakh numbers.
  • Lot size: 13 number shares.
  • Max number of applicants who will get 1 lot : 3.846 lakh people (50/13).

Suppose the number of people who applied for 1-5 lots are 5 lakh numbers.

Out of these 5 lakh people, only 3,84,600 people will get shares.

How the 3,84,600 people will be shortlisted? By lottery system.

This lottery based shares allocation is a computerise process. Hence the question of partiality or bungling will not arise.

#2. Conclusion

In recent times, the IPO’s which has seen most oversubscription are as follows:

  1. Jun’2017 – CDSL
    • Oversubscribed: 170 times.
    • Offer Price: Rs.149.
    • Current Price: Rs.263 (Jul’18).
    • Up (Current vs Offer) : 76.5%.
  2. Sep’2017 – Dixon Tech
    • Oversubscribed: 118 times.
    • Offer Price: Rs.1766.
    • Current Price: Rs.2743 (Jul’18).
    • Up (Current vs Offer) : 55.3%.
  3. Sep’2017 – Capacity Infra
    • Oversubscribed: 183 times.
    • Offer Price: Rs.250.
    • Current Price: Rs.280 (Jul’18).
    • Up (Current vs Offer) : 12.0%.
  4. Oct’2017 – MAS Financial
    • Oversubscribed: 128 times.
    • Offer Price: Rs.459.
    • Current Price: Rs.578 (Jul’18).
    • Up (Current vs Offer) : 25.9%.
  5. Jan’2018 – Ambar Enterprises
    • Oversubscribed: 165 times.
    • Offer Price: Rs.859.
    • Current Price: Rs.970 (Jul’18).
    • Up (Current vs Offer) : 12.9%.

An IPO which has been oversubscribed has a good chance of giving positive returns even in short term.

Few examples, has been listed above.

But why an IPO becomes oversubscribed? The main reason is its popularity.

And what counts for its popularity?

Making money in stock market is never guaranteed.

But a good IPO gives more chance of money-making to its investors.

Hence it is essential for individual investors to keep track of good forthcoming IPO’s.

#2. Key check points related to IPO’s:

#2.1 Ensure Technical Compliance.

Fill the IPO subscription form with utmost care, without mistake.

Otherwise there are chances of bid rejection due to technical non-compliance.

#2.2 Choose bid price carefully.

For IPO’s of good brands, better is to bid at the cut-off price (upper limit).

Because if the IPO becomes oversubscribed, shares will be allotted at cut-off price only.

Lower bids may not be considered for allotment.

#2.3 Choose number of lots thoughtfully.

One can invest in IPO’s in lots only.

The size of each lot (no of shares in one lot) is declared in the IPO prospectus.

The maximum amount that a individual investor can invest in an IPO is Rs.2.0 lakhs.

So the upper limit of investment is fixed.

Suppose an IPO has lot size of 13 shares. Each share’s cut-off price is Rs.1,110.

It means, maximum number of lots that an individual can bid for is 13 numbers.

  • 13 lots = 13 x 13shares x Rs.1110/share = Rs.1,87,590.

The minimum limit for this IPO will be:

  • 1 lot = 1 x 13shares x Rs.1110/share = Rs.14,430.

In case the IPO is expected to get oversubscribed, it is better to bid for multiple lots.

Because in case of oversubscription, bidders of 1 Lot may get nothing.

4 Comments

  1. I have applied for HDFC AMC with 13 lots. Unfortunately, not even one share is assigned to me.
    Based on my analysis, Allocation happens based on lottery only.

  2. Hi,

    I did a bid for HDFC AMC with 13 lots. However, unfortunately, I have not allocated with 1 share also..

    Thanks,
    Raviteja Sure

  3. The Process mentioned above is not correct at all.

    IPO will get oversubscribed multiple times in retail category

    In that case no matter how many lots you have applied, you will get maximum of one lot and that too in a lottery system based on how many times IPO subscribed in retail category. So you should not apply for more than one lot in a good issue which is expected to oversubscribed heavily.

    It is always advisable to subscribe in minimum lot size but the number of application should be on higher side, i.e. 5 application per bank account. Apply in the name of your family members in such a way that lot size remain minimum but application becomes five or around it. And it is also to be ensured that the total application value is within the prescribed limit of Rs.2 lac per account.There is the draw of lots for allotment to retail investors in case any issue is subscribed multiple times.And the lucky investors get a bid of minimum one lot. Hence, if you have applied for an IPO at the higher price or at cut-off price in smaller bid lots (say 5 applications per bank account) chances for you getting shares in the draw are better than that if you had applied for only one application.

    • Thanks for your comment.

      This blog is about allocation of shares in case of “oversubscription”.
      What has been written in the blog which is incorrect?

      You advised in your comment about “maximising the number of application” (5 application per bank account).
      This looks to be a good strategy to apply for a good IPO.
      This way, there is a much higher chance of shares allocation in case of oversubscription.
      Thanks for sharing your idea.

Leave a Reply

Your email address will not be published.


*