Reasons For The Non-Allotment of IPO Shares

Recent time has seen a steep rise in retail participation in IPO. India’s IPO frenzy lasted till the first quarter of 2022. This article is for you if you have applied for IPOs during this period and didn’t receive IPO shares. 

While investors apply for an initial public offer, it doesn’t promise an IPO allotment. But if it has happened repeatedly, you must investigate why. 

When a company releases IPO shares, it invites investors to apply for them. Each IPO has specific requirements like lot size, bid price, and more, which investors need to remember while bidding.

Why do people invest in IPOs?

An initial Public Offer is a method companies use when they need funds from the market. In simple terms, a privately held company transitions to a publicly listed company through an IPO. 

The company issuing IPOs is to raise capital to assist in their operation or expansion. Hence, it allows investors to invest in a growing company at the ground level. Several IPOs have earned investors 100 percent and more returns in the past, which explains the enthusiasm surrounding initial offers.

Reasons for non-allotment

Non-allotment of shares in an IPO can happen for the following reasons.

Issue oversubscription and lottery

When a company issues IPOs, it specifies the price range and number of shares. Companies issue IPO shares under three categories – qualified institutional buyers, non-institutional buyers, and retail. Each segment receives a specific percentage of shares. So when more investors apply under a class than the available number of scrips, it results in oversubscription. 

In case of oversubscription, the shares get allocated through a computerised lottery system. Since the company has received more applications than the number of shares available, not all investors will receive the allotment.

Invalid application 

The registrar scans each application for completeness and correctness. If you have submitted incomplete forms or put wrong information, it can lead to your application getting rejected.

Bid price is lower than the issue price

During oversubscription, the company decides the final issue price based on the bids investors offer. You will not receive an allotment if your bid price is lower than the issue price.  

How to improve your chances

Here are some tips to improve your chances.

Correctly fill out your application

Double-check your application before submitting it to ensure all details are correct. Incomplete and invalid forms are the primary reasons for not receiving IPO allocation.

Avoid big applications

Submitting a big application is no guarantee of receiving IPOs. SEBI has laid down rules to treat all applicants equally.

Apply at a cut-off price

Applying at the upper level of the price range improves your chances of getting an allotment. In a book-building IPO, the issue price is decided after receiving all applications, and applying at the cut-off improves your chances of acquiring shares.

Apply using multiple Demats

Applying using multiple Demats can improve your chances of allotment shares during a lottery. 

Avoid last-minute application

Many things can go wrong in the last minutes, so avoid rushing on the last day. 

Hold share of parent company

If you are a shareholder of the parent company, you can improve your chances by applying in the shareholder’s category.

Conclusion

It is essential to read the company’s prospectus before applying for IPO shares. It is an important document containing all crucial details related to the issue. 

We hope this article has helped you understand the reasons for the non-allotment of shares in an IPO. Open a free demat account to apply for upcoming IPOs and follow the tips to improve your chances of getting an IPO share allotment.

Disclaimer – This blog is exclusively for educational purposes. The securities quoted are exemplary and are not recommendatory.