Reasons For Non-Allotment of Shares in An IPO

Introduction

IPOs allow the general public (retail investors) to buy shares and help companies go public and raise capital. However, you may have often heard investors not getting allotted shares in an IPO, even after applying. So, as a retail investor, should you invest in IPOs or not? The decision to invest in IPOs should come from your own financial planning and goals. However, when it comes to not being allotted shares in an IPO, knowing the common reasons investors get rejected can help you prevent those mistakes. So, what are the reasons why IPO is not allotted, and how can you improve your chances of IPO allotment? Let’s find out.

Most Common Reasons Behind Not Receiving an IPO Allotment

There are several reasons investors can not receive allotments from an IPO. Thanks to SEBI guidelines, the process is transparent and even in cases where investors have not been allotted shares, they can find out why. So, with that being said, let’s take a look at some of the most common reasons for not receiving IPO allotments.

IPO Oversubscription and Computerised Lottery

The most common reason for not receiving an IPO allotment is IPO oversubscription. Let’s understand oversubscription with an example to help you understand the concept easily.

Companies launch IPOs to raise money, but it is not done randomly. Companies have to tell exactly how much money they want to raise and the number of shares they are issuing to raise the said amount. So, for example, a company wants to raise ₹10 crore, and it’s willing to issue 10 lakh shares for this offer with a price range of ₹100 to ₹101.

When the IPO subscription phase begins, companies wait for applications to pour in from different categories of investors. After the subscription phase is complete, companies often notice that the demand for shares in certain categories surpasses the available supply. This is known as IPO oversubscription.

As per our example, this could mean the company has received applications for the purchase of more than 10 lakh shares. Now, the company has 10 lakh shares, and they can’t just issue new shares to honour the purchase requests. So, what happens then? In such cases, the registrar to the offer may use a computerised lottery to determine which investors get the IPO allotments. As you can imagine, a computerised lottery is completely random, and only the investors selected in the process are allocated shares. 

If a computerised lottery was performed to determine who gets allocations and you don’t end up getting it, there’s nothing you can do. The IPO registrar will release fund unblock instructions for investors who have not received allocations. You can also perform IPO allotment checks online to see if you’ve received your IPO allotments.

Computerised Lottery 

As explained in the previous point, a computerised lottery determines which investors will receive allotments. Oversubscription leading to a computerised lottery is one of the most common reasons for non-allotment of shares in an IPO. In a computerised lottery, every investor has an equal chance of receiving allocations if their applications are proper. What does that mean? It means there are several application mistakes an investor can make that can lead to their application becoming invalid and rejected. Let’s check out these mistakes so you can avoid them when applying for your next IPO.

Invalid Application

The IPO registrar verifies the information submitted by every investor before any IPO allocation. There are several mistakes or technical errors in a document that can cause an application to be deemed invalid and rejected by the registrar. Here are some of the most common reasons for an invalid IPO application.

- If investors have submitted multiple bids using the same PAN card details, it will lead to the application being rejected and deemed invalid.
- The application could become invalid if any incorrect details or information are mentioned in the IPO application form.
- If there are any discrepancies between the details mentioned in your PAN records and the details mentioned in your bank records, the application can become invalid.

These are some of the most common reasons an application becomes invalid. Any invalid rejection is automatically rejected by the IPO registrar, and no allotments are made for these applications.

Bid Price is Lower Than The Issue Price 

This is also a very common reason for non-allotment of shares in an IPO. Let’s use the example from before to understand what a lower bid price than an issue price means. 

The price range of the example shared was between ₹100 to ₹101. In a book-building IPO, when you place your bid as a retail investor, you have the option to choose your bid price. So, suppose you had placed your bid at ₹100.5 and after the subscription period, the issue price came out to be ₹100.8; your application gets automatically rejected. 

This is known as the rejection of an application and non-allotment of IPO caused due to the bid price being lower than the issue price.

Tips to Maximize Your Chances of Receiving an IPO Allotment

Now that you know about the reasons for non-allotment, let’s discuss the things you can do to reduce your risk of non-allotment.

1. Applying Using Multiple DEMAT Accounts: This is a technique used by experienced investors in the case of oversubscribed IPOs. You can open DEMAT accounts for your family members or friends (with their consent) and subscribe to the IPO using different accounts. This way, you can increase your chances of IPO allotment. Since the applications are not made against the same PAN card, they are not flagged or invalidated.

2. Proofreading Your Application: Even though it may seem like a very simple thing, proofreading the application to ensure you’ve not mentioned any details wrongly can help reduce the chances of non-allotment. 

3. Avoid Last Minute Application: The IPO subscription period lasts only a few days, and investors often want to wait until the last second to apply. This is counterproductive as any outages or unavailability of your Internet banking services can lead to your complete inability to apply altogether. So, as a good rule of thumb, make sure you apply at least one day before the issue closing date.

4. Apply At The Cut-off Price: As a retail investor, you have the option to bid at the cut-off price. This is extremely helpful as it reduces your risk of non-allotment due to the bid price being lower than the issue price. If you are unable to bid using multiple DEMAT accounts, this is another handy tip that can increase your allotment chances. 

5. Apply in The Shareholder Category: Before investing in any IPO, it is crucial that you research about the company and find out more about its structure and functions. If the IPO you are interested in has a listed parent company, owning shares of the parent company can help you invest in the IPO under the shareholder category. Since this category has its own reservation of allocations, your chances of IPO allotment are increased.

What is A Lot in An IPO?

When applying for an IPO, investors apply for shares in lots and not individual shares. When listing an IPO, companies define the minimum number of shares an investor needs to buy in their company to participate in the IPO. This minimum order quantity is defined as a ‘lot’.