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Understanding the IPO Allotment Process and SEBI Guidelines in India

13-Jan-2025 by Admin 1030

Understanding the IPO Allotment Process and SEBI Guidelines in India

Understanding the IPO Allotment Process and SEBI Guidelines in India

Initial Public Offerings (IPOs) are a significant step for companies seeking to raise capital from the public market. Investors, in turn, are keen on participating in IPOs to gain from potential listing gains and long-term growth. However, the allotment process can be complex, and the Securities and Exchange Board of India (SEBI) has laid down comprehensive guidelines to ensure fairness and transparency. This article explores the IPO allotment process and SEBI’s regulations governing it.

Key Participants in the IPO Process

Before delving into the allotment mechanism, it’s important to understand the key players:

  • Issuing Company: The entity that offers shares to the public.

  • Lead Manager/Book Running Lead Manager (BRLM): The merchant banker responsible for managing the IPO.

  • Registrar to the Issue: The entity that processes applications and finalizes the allotment.

  • Stock Exchanges: Platforms where the shares are listed and traded post-IPO.

IPO Allotment Process

The allotment of shares in an IPO is governed by SEBI’s regulations to ensure equitable distribution among applicants. Here’s a step-by-step breakdown:

  1. Application and Bidding: Investors apply for shares within a specified bidding period using a unique application supported by ASBA (Application Supported by Blocked Amount).

  2. Categorization of Investors:

    • Retail Individual Investors (RIIs): Invest up to ₹2 lakh.

    • Non-Institutional Investors (NIIs): Invest more than ₹2 lakh.

    • Qualified Institutional Buyers (QIBs): Institutional entities such as mutual funds and banks.

  3. Allocation Based on Categories:

    • QIBs are allotted a minimum of 50% of the net offer.

    • NIIs receive 15%.

    • RIIs get at least 35%.

  4. Oversubscription Scenarios: If the IPO is oversubscribed, the allotment process differs:

    • Proportionate Allotment for QIBs and NIIs: Shares are allocated in proportion to the size of their bids.

    • Lottery for RIIs: A computerized lottery system is used if the RII category is oversubscribed. Each applicant has an equal chance based on SEBI guidelines.

  5. Basis of Allotment Finalization: The registrar finalizes the allotment according to the prospectus’ guidelines and SEBI’s rules.

  6. Credit of Shares and Refund:

    • Shares are credited to the demat accounts of successful applicants.

    • Refunds or unblocked amounts are processed for unsuccessful applicants.

SEBI Guidelines for IPO Allotment

SEBI ensures transparency and investor protection through several directives:

  1. ASBA Mechanism: SEBI mandates ASBA for all IPO applications. This mechanism blocks the bid amount in the investor’s bank account until the allotment process is completed, minimizing the risk of misuse.

  2. Minimum Allotment for Retail Investors: In case of oversubscription, at least one lot (minimum number of shares) must be allotted to each successful retail investor, ensuring wider participation.

  3. Time Frame: SEBI has reduced the time between IPO closure and listing to six days (T+6), ensuring quicker listing and improved liquidity.

  4. Transparent Allotment Process: The allotment process must be conducted via an automated and transparent mechanism overseen by SEBI-registered registrars.

  5. Fair Disclosure: Issuers must provide clear information about the allotment status on designated stock exchange websites and other channels.

Common Allotment Issues and SEBI's Measures

  • Oversubscription: In cases where demand exceeds supply, SEBI’s proportionate and lottery-based guidelines ensure fair distribution.

  • Technical Rejections: Errors in application forms, such as incorrect PAN details or multiple applications, can lead to rejection.

  • Grey Market Premiums: While SEBI does not regulate the grey market, investors should be cautious about unofficial trades before the listing.

Conclusion

The IPO allotment process, governed by SEBI’s robust framework, aims to balance the interests of retail and institutional investors. By understanding these guidelines, investors can better navigate the complexities of IPO investments and maximize their chances of allotment.

Read Also : Why Financial Education is More Important Than Academic Education and Why It’s Missing in the Indian Education System

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