By Anisha Deosaria
What is an initial public offering (IPO)?
The process of offering shares of a private firm/unlisted company (a company that is not listed on the stock market) to the public in the stock market is known as an initial public offering (IPO). An IPO allows a firm to raise capital from the general public, i.e., when the company decides to raise funds for the first time by selling securities or shares to the general public. The people who are given shares become the company’s initial shareholders. When a private corporation decides to go public, this is what happens.
Prior to being listed on the market, the company had tiny owners such as family members, angel investors, friends, and founders, but during an IPO, the company offers its shares to the public.
Why should we invest in an initial public offering (IPO)?
The media normally pays close attention to IPOs because the company is becoming public. IPOs are popular with investors because they produce a volatile price movement on the day of the IPO and for a short time afterwards. For new IPOs, there is frequently greater demand than supply. As a result, there is no certainty that all interested investors will be able to purchase shares in an IPO. Those interested in an IPO may be able to do so through their broker, albeit access to an IPO may be limited to a firm’s larger clients in some cases. Another option is to invest in mutual funds or any other investment vehicle that allows you to diversify your portfolio.
Procedure for allotment of shares in an initial public offering (IPO) and Reasons for Non-allotment
We’ve observed several situations where a person applies for shares in an IPO and receives no shares, but his friend applies for the same amount in the same IPO and receives shares. This is frequently due to IPO share over-subscription. The reasons for non-allocation will be revealed soon.
Lot size: A company’s entire equity shares on offer are divided into several smaller lots, and each retail investor’s application is in lots. With the help of an example, it can be described. Company A, for example, plans to sell 1.5 lakh shares in an initial public offering (IPO) with a lot size of 150 shares per lot. As a result, the total number of lots in this situation is now 10000, or (1500,000/150). One cannot bid for shares that are fewer than the lot size, according to SEBI rules. When a retail individual investor bids for shares in an IPO, he or she will do so in terms of lots, such as 1 lot, 2 lots, 3 lots, and so on. He’ll do it.
After all of the bids have been submitted, a computer method is used to reject any bids that have been entered incorrectly. In this scenario, there are two possibilities for calculating the total number of successful lot bids:
• When the total number of bid lots is less than the entire number of lots provided by all applicants combined, all individuals who applied for shares are given full allocation.
• When the total number of bids exceeds the entire number of lots submitted by all applicants combined, the assignment of shares process becomes a little more complicated. In such a circumstance, we must keep in mind that when allocating shares, we must take in mind that as per SEBI laws, no individual can be allotted less than 1 lot.
There are two sub-cases in this, i.e.
• Small oversubscription: In this event, each successful applicant would receive one lot of shares first, with the remaining shares distributed proportionally.
• Large oversubscription: If there is such a large oversubscription that each successful applicant cannot be given even one lot of shares, SEBI states that the lots would be allotted by a random drawing. There will be no favoritism in the lucky draw because it will be computerized. When we allot shares based on a fortunate draw, it’s possible that a large number of people will be denied shares because their names did not appear in the lucky draw. This is the primary reason why many retail individual investors choose to invest in the stock market.
Non-allotment of shares in an IPO can occur for two reasons:
1. Your bid was deemed invalid because it had an invalid PAN number or a Demat account number, or it contained several applications made under the same name.
2. Your name was not drawn in the lucky lottery for stock allocation (in case of huge over-subscription). This is the most popular explanation, which was given by 90% of the applicants.
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