Let’s assume that you and your friend believe in a company’s business and are thrilled to apply for its initial public offering (IPO). You apply for three lots, while your friend applies for one lot. On the day of allotment, your friend gets allotted one lot, but to your disappointment, you don’t get any.
In this article, we shall take a look at the number of lots that you should apply for, and the steps that you can take to increase your chances of getting maximum allocation in the retail category of an initial public offering (IPO). Keep reading to find out!
What is a lot in an IPO?
IPO application forms require investors to apply in lots. When companies launch their IPOs, they declare the minimum number of shares that investors can apply for. This minimum number is called a lot.
For example, investors can apply for 20 shares (1 lot) of the shares of ABC Company, or in multiples of 20. Two lots would be equal to 40 shares, three lots would be equal to 60 shares and so on.
How to get an IPO allotment?
A promising IPO is sure to excite you as an investor. But, not receiving an allotment can be disheartening. Here are a few ways to increase your chances of getting an IPO allotment:
- Bid at the cut-off price
Let’s say, the price band for an IPO is ₹754 to ₹759. If you bid at ₹756, and the discovered price is ₹757, then your application is rejected outright.
Cut-off price indicates that the investor is willing to pay whatever price the company decides after the book-building process. Once you submit the application at the cut-off price, it means that you are bidding for the highest price. The extra amount paid is reimbursed if the issue price is lower than the amount paid.
If an IPO is oversubscribed, a majority of the bids are made at the cut-off price. Therefore, if you quote a lower price, there is hardly any chance of IPO allocation.
- Make multiple applications
There is a high chance that you will get the IPO allotment if you have made multiple applications. For example, you could make an application with your demat account and encourage your family members to apply through their accounts, on your behalf.
There is a higher chance of getting an allotment if there are four applications for four lots, instead of one application for four lots. If the PAN numbers are unique they are treated as valid applications.
- Do not apply using more than one demat account
While making multiple applications increases the probability of you getting the allotment, it does not help if the demat accounts are connected to the same PAN. In an IPO one can make only one application per PAN.
Making applications through multiple accounts that are linked to the same PAN are treated as invalid applications and all of them are rejected.
- Avoid Large Applications
The allotment procedure of the Securities and Exchange Board of India (SEBI) treats all retail applicants (those who invest less than ₹ 2,00,000) equally. Even if you submit applications for multiple lots that sum up to, let’s say ₹1,00,000, you may not receive the allotment.
Normally, the retail portion of an IPO is about 35%. In some cases, SEBI permits companies to reserve just 10% of the quota for retail investors and the rest for larger investors.
In the case of oversubscription, the minimum lot size must be allotted to as many shareholders as possible. For example, if there are 50 lakh shares on offer, and the lot size is 25 shares, the maximum allotment possible is for 2 lakh lots, i.e., 50 lakh/25. If there are 3 lakh applicants, then a maximum of 2 lakh investors are selected by a draw of lots.
- See if you can buy the shares of the parent company
If the parent company of the company launching its IPO is listed on the bourses, you can buy the shares of the listed company to increase your chances of allotment. Once you are a shareholder of the parent company, you can apply in the shareholder category rather than the retail category.
For example, Tata Technologies announced that eligible shareholders of Tata Motors, its parent company, will get a reservation of up to 10 per cent of the post-offer paid-up equity share capital of the company.
- Avoid rushing at the last minute
Waiting until the last moment to fill up your IPO application can lead to errors. This may be a typographical error or simple oversight, but this might lead to a loss of opportunity.
To add to it, your bank’s internet banking may be unavailable temporarily. Therefore you may not be able to apply for the IPO at all.
None of the points mentioned above guarantee that you will get the allotment of the lots that you have applied for. However, they increase the chances of getting the allotment.
In a nutshell, you could apply from multiple accounts connected to unique PAN numbers, like those of family members; apply at the cut-off price, fill up the details on the IPO form correctly, and see if you can buy the shares of the parent company to increase the chances of getting IPO allotment.