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In the first six months of 2021, as many as 22 firms launched initial public offerings (IPOs) to raise a total of 27,417 crore. Retail investors flocked to share sales, but many were left disappointed as they failed to get any share allocation in heavily subscribed IPOs. Mint explains:

How are shares allocated to investors?

There are three broad categories of IPO investors—qualified institutional buyers (QIBs) or simply institutional investors, non-institutional buyers who are largely high net-worth individuals (HNIs) and retail investors. Firms that have had three straight years of profit must allot 50% of the share sale to QIBs, 35% to retail and 15% to HNIs. Companies that don’t meet this criterion must allot 75% of the shares on offer to QIBs, 15% to HNIs and only 10% to retail. Shares can only be bid for in lot sizes, which are mandatorily fixed between 10,000 and 15,000 and retail investors can bid for shares only up to 2 lakh in any IPO.

How is it decided who gets how many shares?

Let’s say there are 1 million shares on offer with a minimum lot size of 100 shares. So the maximum number of investors who can get at least one lot in this IPO is 10,000 (1 million shares/100 lot size). In the case of small oversubscription, say, 9,000 investors have bid but 7,000 have bid for one lot and remaining 2,000 have bid for two lots; so total shares bid for are 1100,00 shares (7,000 x 100 + 2,000 x 200). Here, one lot will be distributed among all bidders i.e all 9,000 investors will get one lot each and then the remaining shares will be assigned proportionally to the investors who have bid for more than one lot.

Most-subscribed IPOs of 2021
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Most-subscribed IPOs of 2021

What happens when an IPO is oversubscribed?

Assume that in the above IPO, 50,000 investors have bid for the shares. In this scenario, all investors cannot be allocated at least one lot each as per the Sebi norms. In this scenario, the allocation will be based on a lottery draw—computerized, and, thus impartial. In this scenario, some investors will manage to get one lot each, while many will not be allocated any shares.

Who are anchor investors?

Anchor investors are institutional investors or QIBs. Sebi allows firms and merchant banks to allocate 60% of the overall QIB category shares to institutional investors in an anchor allotment one day prior to the IPO and the names of these investors are disclosed to stock exchanges. Shares sold to anchor investors are locked in for 30 days after the listing of the IPO, so it also helps bring in serious investors into the IPO who will not dump the shares immediately after the listing, which can impact the firms’ post-listing performance.

How are shares allocated to them?

It is a discretionary allocation, and the firm and merchant banks can decide how many shares to allocate to which investor. Typically, the decision would be based on negotiations between the banks and the firm as each banker will bring in their own set of investors. The decision can also be based on the brand of the investor. Since anchor book allocations are used as a signal to the broader investor universe, the merchant bankers and the firm may choose, say a long only investor over a hedge fund to show a high-quality anchor book.

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