Equity shares offered in Initial Public Offer (IPO) sometimes give lucrative returns in a short span of time. Yes, I'm talking about the shares you can get in oversubscribed IPOs that can give you listing gains in secondary stock markets.
Usually, IPO is oversubscribed when the valuation of stock of the issuing company is cheaper than compared to its peer group companies. Or there is huge potential growth in the company in terms of high revenue and profit growth or various other favourable aspects making the shares of the company attractive for the investors.
What happens if IPO is oversubscribed?
If such growing companies' shares are available at cheaper rates in primary markets (IPOs), every investor tries to put his money into the company with expectations to get good returns compared to other shares, resulting in the IPO being oversubscribed.
While issuing the equity shares, the company allocate the proportion of equity shares to different types of investors like QIB, HNI, FIIs, DIIs and Retail Investors. And shares are allotted as per the subscription status into a different category of investors.
How Shares are allotted in Oversubscribed IPO?
As I've already told you in the previous section, IPO oversubscription allocation is done differently for the different categories of investors.
IPO Oversubscription Allotment Process:
Qualified Institutional Buyer (QIB): If the IPO is oversubscribed in the QIB category, shares are allocated proportionally. For example, if the issue is subscribed by 10 times, then a QIB applicant who has applied for 20 lakh shares will be allotted 2 lakh shares only.
High Net worth Investors (HNI): HNI also receives allotment on a proportionate basis.
How IPO Shares are allocated to Retail Investors?
Though, as per the regularity authority SEBI's guidelines, if an IPO is oversubscribed in the retail category, the shares are to be allotted in a manner that ensures that every retail bidder gets at least one minimum lot. The remaining shares, if any, are then allotted on a pro rata basis. But companies follow the different criteria as disused below.
Case2: If RII Applications are Greater than Offered Lots: In this case, the allotment is done through a computerized draw to pick applicants for IPO allotment.
Usually, IPOs offered by companies having good prospects and potential to grow in future are very often oversubscribed. Demand for such companies is also high in the secondary markets. And getting shares allotted in an oversubscribed IPO very much depends on your luck. If you get allotments you can enjoy the listing gains on the first day.