Offering shares to the public for the first time is a very important process, as it gives investors a possibility to buy stocks of a particular company. Precisely, that is why understanding of the IPO allotment procedure and consequences of oversubscription is essential for investors who plan to participate in it.
This article explains how IPO allotment is done, what occurs in the case of over subscription, and samples of many times oversubscribed IPOs.
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Table of Contents
How IPO Allotment Works
Application Process
The situation where a company gets to its conclusion that it will have to float shares in public is called an IPO, where the company then issues a call to all people to subscribe for its shares.
The retail and institutional investors apply for the stocks within a given time. Every application specifies the number of shares that the investor would like to acquire.
Allotment Basis
Proportionate Allotment: This is the manner in which shares are offered to the investors consistent with the percentage whereby the individual applied for certain shares out of the total number of shares issued.
Minimum Bid Lot: The bid lot is used which provides that there is a minimum number of shares that can be offered for bidding on the shares.
Investor Categories: There might be also reserved quotas for the different types of buyers (retail buyers, institutional buyers, non-institutional buyers, etc. ).
Allocation Process
Retail Investors: Commonly given shares in proportion to the amount subscribed; a amount to be paid up is guaranteed in case of the IPO issue is undersubscribed.
Institutional Investors: May be issued shares as per their bid and size of investment that they are willing to make.
Lottery System: To minimize instances where some customers can take many copies, a computerized lottery system maybe be adopted to allow equal distribution of the put options among the many customers.
What Happens When an IPO is Oversubscribed
Definition of Oversubscription
Locking of funds means that the IPO is oversubscribed, meaning that the number of shares people applied for exceed the available number of shares. This signifies demand and investors’ believe in the company’s future cash flows.
Impact on Allotment
Proportionate Reduction: From each investor’s applied shares, he or she receives a lesser amount of the total number of applied shares.
Lottery System: In case of retail investors, the allotment could be on a first-come, first-served basis but this could be based on a random basis to ensure lottery basis.
Refund Process: The shareholders who do not get their desired number of shares get back their applied amount known as application money.
Market Sentiment
This keeps the markets oversubscribed and this is usually sends a positive signal to the market.
Also Read, Who is a HNI Trader in the Stock Market?
Examples of Massively Oversubscribed Popular IPOs
Alibaba Group (2014)
Alibaba’s IPO in 2014 was one of the largest in history, raising $25 billion. The IPO was oversubscribed multiple times, reflecting immense global interest in the Chinese e-commerce giant.
Snowflake Inc. (2020)
Cloud-data warehousing company Snowflake’s IPO was heavily oversubscribed, with shares priced well above the initial range. The IPO raised $3.4 billion, marking one of the largest software IPOs ever.
Reliance Power (2008)
In India, Reliance Power’s IPO was oversubscribed by 73 times, one of the highest in the country’s history. Despite the hype, the stock performed poorly post-listing, highlighting the risks of overvaluation.
Facebook (2012)
Facebook’s highly anticipated IPO was oversubscribed, with shares initially priced at the upper end of the range. The IPO raised $16 billion, though it faced technical glitches on the listing day.
Conclusion
IPO allotment and influences of oversubscription is an area with which the investor absolutely needs to be acquainted. Moderation, on the other hand, reveals high interest in shares; if applied it can positively affect the market performance, yet, it means that applicants will not be able to get the shares they need.
The activity of oversubscribed IPOs can be described by analyzing the experience of such companies as Alibaba, Snowflake, Reliance Power, and Facebook. In this regard, investors should appreciate the actual and potential gains and losses that may arise from the IPO.
FAQs
What factors influence IPO allotment?
Several factors influence IPO allotment, including the number of shares available, the total number of applications received, investor category, and the allotment method used by the issuing company. Oversubscription and demand levels also play crucial roles.
How can retail investors improve their chances of IPO allotment?
Retail investors can improve their chances of IPO allotment by applying through multiple applications within their family members’ names, ensuring all applications are within the retail investor category limits, and applying for the maximum number of shares allowed for retail investors.
How are refunds handled in an oversubscribed IPO?
In an oversubscribed IPO, investors who do not receive the full number of shares they applied for are refunded the excess amount. The refund process is typically initiated soon after the allotment is completed and credited back to the investors’ bank accounts.
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