Looking to make a quick buck on initial public offerings (IPOs)? Last week’s bumper listing of Polycab India and Metropolis Healthcare would have tempted many to try their luck in the primary market. But for many retail investors, the the IPO game may not be as rewarding as it sounds. Why?

The massive over-subscription in most of the IPOs often leads to retail investors getting allotted only a few shares. Hence, the mouth-watering returns on the listing mean little to an eager retail investor who would have bid for even the entire ₹2-lakh limit allowed under the retail category. We break down the basis of allotment under an IPO to explain this anomaly.

Minimum lot

Prior to 2012, allotment of shares to retail investors was done on a pro-rata basis. In a nutshell, based on the subscription of the issue within the retail category, investors were allotted on a proportional basis — say, if the retail category got oversubscribed twice, and you applied for 200 shares, you were allotted 100 shares. But this led to other issues.

Investors who could afford to put ₹2 lakh in an IPO got most shares, while others got allotted very less or no shares.

Also, if the issue is well sought-after, massive over-subscription of over 10 times or more made it even more difficult for small retail investors to lay their hands on the shares.

To address this issue, SEBI changed the basis of allotment for retail investors in IPOs in 2012.

Rather than on a pro-rata basis, retail investors to whom shares will be allotted are now chosen by lottery, and all such investors are allotted a minimum lot.

Hence, every retail applicant, irrespective of his/her application size, gets allotted a minimum bid lot, subject to the availability of shares. The minimum application size for investors is now set at ₹10,000-15,000 as against the earlier ₹5,000-7,000.

During their IPOs, companies fix the number of shares in each lot in such a way that it meets the minimum application limit mandated by SEBI.

Let’s take the case of the two recent IPOs. In Metropolis Healthcare, with a price band of ₹877-880, the company put 17 shares in one lot (₹880 x 17 = ₹14,960).

In Polycab India, where the price band was ₹533-538, the firm put 27 shares in a lot (₹538 x 27 = ₹14,526).

At the close of the offer, issuer companies ensure that each retail investor gets at least one lot of shares, as announced, provided there are enough shares to distribute among all investors.

In the case of Metropolis Healthcare and Polycab India, there was an overwhelming response in the retail category.

In Polycab India, for instance, the total number of shares available for retail subscription was 86.96 lakh.

But the total bids received under the category was 383.64 lakh. So, in place of 3.2 lakh lots (of 27 shares each), the company got bids for 14.2 lakh lots.

The company thus refused allotment for 11 lakh lots or about 293 lakh shares and picked the eligible 3.2 lakh lots through a draw of lots. Similar was the case with Metropolis Healthcare. Hence, only a few lucky retail investors got shares allotted.

But if you are a small retail investor, you are still better off now, compared with the pro-rata allotment done prior to 2012, for the simple reason that if you have been selected for allotment, you are given a minimum number of shares (minimum lot).

Still, if you have bet big on an IPO and the issue delivers spectacular returns on listing, the small number of shares allotted to you may not enthuse you much.

What should you do?

If you want to increase your chances of getting shares in an initial public offering, split it among your family members, say analysts.

In the case of offers where there is over-subscription, as the applications are chosen by a draw of lots, there is a higher probability of getting allotment if you make multiple applications.

Also, if you are dead sure about the prospects of the issue, bid at the upper band of the issue price.

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