How to increase the chances of IPO Allotment
Created on 10 Nov 2021
Wraps up in 6 Min
Read by 4.5k people
Updated on 11 Sep 2022
It’s IPO season!! We are bombarded with some of the very popular brands, such as Paytm and Zomato as well as some not-so-popular parents to some household names, such as FSN E-commerce Ventures Limited(Nykaa) and PB Fintech(PolicyBazaar and Paisabazaar). With the number of retail investors in India increasing at an exponential rate, IPOs are definitely under the spotlight and we are interested!!
How often, though, have we personally dealt with or had a friend or family member complain, “Yaar paanch accounts se apply kiya, ek main to mil jata!” No IPO applicant is a stranger to the pains of rejection. Sometimes it’s not even the numbers, the growth prospects; sometimes, it’s just the matter of “Ye wala pasand hai”, that’s when the non-allotment hurts the most (Ab to personal ho gaya!!).
So what gives? What’s with the rejection? What’s the secret to that elusive IPO allotment? Read on. But before that, we will see why we are so crazy about the IPOs.
The Hype Behind IPO Allotments
People invest in IPOs for various reasons, while some look forward to short-term gains in case the shares in the IPO earn “listing gains”, others want to get into a company’s “ground level”, i.e. the intention is to invest in the company from the beginning and stick with it for the long haul.
So now that it is known why people invest in IPOs, we might have piqued your interest, whether as a new investor or someone who has been investing but wants to dip their toes in the “IPO waters”. Something that hassles both new and seasoned investors alike is the allotment of IPOs.
Hit a nerve, didn’t that? How often have you applied at an IPO to not make it till the allotment or even if the shares got allotted, you had no idea how or why for some IPOs you get to ride the wave while with others you’re more of a bystander? Below is a graphical representation of the fall and rise of the number of IPOs from the year 2007, as well as the increase in their ability to raise larger funds.
With the third quarter of 2021 brewing up an IPO storm, it’s definitely beneficial to learn about and earn from the IPO hype!!
IPO Allotment: Rigged or Random
One of three situations takes place whenever an IPO hits the market; the offer is, ideally subscribed at par, i.e. shares applied for = shares issued, on rare occasions undersubscribed in which shares applied for < shares issued and most commonly and our focus for today oversubscribed where the shares applied for > shares issued.
In case of oversubscription, there is a surplus of shares demanded over the shares issued to the public by the company. So what ends up happening is every applicant ends up receiving fewer lots than they applied for also some applicants end up having their applications rejected.
What separates those who get selected from those who don’t? Kya hai unme jo bakiyon main nahi hai? Do the recipients of the allotment have some super special sneaky secret? Well, no, as haphazard as it may sound, the selection process is quite simple. That’s right, it’s completely random!!
If the process has no predictability, can there ever be a sure-shot way to get an allotment? No, but an investor can definitely increase their favourable odds by following a few steps.
Here’s how you can increase your odds for your next IPO allotment
1. Go Easy or Go Home
The very root of the issue of why people do not successfully get allotments is that the offer is oversubscribed. This issue is caused by applicants bidding at multiple lots and having their applications get rejected. To avoid this problem, make applications for smaller lots, as in the case of oversubscription, because smaller bids may have a higher likelihood of being selected.
2. Make it a Family Campaign.
Since the allotment is a chance-based affair when it is oversubscribed, investors are better off improving their odds by making multiple applications through different Demat accounts. However, a thing to keep in mind is that with a single broker, a single PAN cannot be associated with multiple Demat accounts, meaning that a single person cannot open multiple Demat accounts with one broker.
A very simple solution to this problem is to employ the help of family and friends and use their accounts to make different applications by segmenting the investment amount among the various accounts. For example, instead of making an application for 5 lots from a single account, the investor can improve their odds by making single lot applications from five different accounts.
3. Flexibility is Key
The application process for IPOs is basically auctioning where interested investors bid at various prices on the shares being offered. Applications can be made at fixed prices within the price band specified by the company, so investors can bid at the cut-off price. Investors are recommended to bid at a cut-off price as it shows that they are willing to purchase the share at the price set by the issuer based on its demand.
4. Beat the Clock
We’ve all experienced the panic and scare associated with last-moment preparations, whether it’s making that summer vacation project the night before school starts, or submitting a form that you remembered about a few hours before its submission deadline.
With the monetary system being as advanced as it is, the entire application process has migrated online, yet increased traffic of like-minded last-moment applicants could cause glitches or errors in the system that could end up invalidating your application.
While it is a common practice to wait for the High Networth Individuals and Qualified Institutional Buyers to understand the market response to the IPO. However, if you are intended in getting the IPO allotment, the fastest finger(s) win. It is recommended to apply within the first two days of the three-day bidding period. As the third day is bound to be a heavy traffic day.
5. To err is Human, To forgive Divine, but we’re dealing with Machines
It is in the very nature of humans to make mistakes. There’s a reason the “human aspect” of any operation is used to point to the possibility of errors in it. Although mistakes are a very common possibility and understandable, the technological part of the IPO process is not so lenient.
It is necessary to verify all the information and its consistency through various identifying records. A single difference in documents submitted (for example, a difference in the name or spelling mentioned in the PAN Card and bank documents) can generate an error leading to disqualification of the application. This can be a difficult-to-fix mistake because of the “pay and forget” attitude that most people have when using online payment methods.
6. Curry some Favours with the Parents ;)
Remember when you wanted a friend to stay over for longer than curfew, or when you wanted to stay over at a friend's? Remember all the sweet-talking you did with your parents so that they allow you all those things. Well, with IPOs it’s a lot less buttering that’s required.
In case of IPOs, holding even a single share of the parent company of the IPO issuing company can be beneficial for the investor. Owning shares of the parent company allows the investor to apply in the shareholder category which has a greater priority when compared to the retail investor.
The investor needs to have the parent company’s shares already in their Demat accounts on the date when the issuing company’s official documents are published. Additionally, the investor can apply in the retail and shareholder categories for better odds in the allotment.
The Bottom Line
The allotment process in IPOs is definitely a bit of a doozy. That being said, hopefully, this blog has helped you acquire a sneak peek behind the curtains of the mechanics of this highly trending monetary phenomenon. Although the process is random and much is out of your hands, you can still be in control and try to boost your odds.
Are you gonna try these methods? Have you already? What were your success rates? Let us know in the comments section below and share with your friends suffering the plight of non-allotment.
Ya feelin’ lucky, investor?
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