Introduction

Participating in an Initial Public Offer (IPO) allows investors to become shareholders in a company before it is listed on the stock exchange by offering its shares to the public. This process marks the transition of a private company to public ownership, involving the public in the buying process. However, despite applying, many investors experience disappointment due to the non allotment of shares.

The IPO allotment process follows specific regulations, and multiple factors can contribute to an investor not receiving shares.

This blog explores the common reasons behind non allotment of shares in IPO and provides insights on how to improve your chances of getting an allotment.

Understanding IPO Allotment

What is IPO Allotment?

IPO allotment is the process by which shares are allocated to investors who have applied for an initial public offering (IPO). This crucial step is typically managed by the registrar of the IPO, who ensures that shares are distributed fairly and in accordance with the rules and regulations of the stock exchange.

The allotment process involves several key steps:

• Verifying Applications: The registrar verifies all applications received from investors to ensure they meet the necessary criteria.
• Determining Allocation: The number of shares to be allocated to each investor is determined based on the total number of shares available and the demand.
• Allocating Shares: Shares are then allocated to investors, often prioritizing retail investors.
• Informing Investors: Finally, investors are informed of their allotment details.

Typically, the allotment process operates on a first-come, first-served basis, with retail investors often given priority. However, in cases of oversubscription, where demand exceeds supply, the process may involve a lottery system or pro-rata allocation to ensure fairness.

Common Reasons for Non-Allotment of Shares in IPO

IPO Oversubscription

One of the primary reasons for non allotment is IPO oversubscription. When an IPO receives applications exceeding the available shares, the allotment is done through a lottery system for retail investors. In case of extreme oversubscription, the chances of allotment decrease significantly.

Multiple Demat Accounts and Duplicate Applications

Applying for an IPO using multiple Demat accounts linked to the same PAN is against the rules. If an investor submits multiple applications using different Demat accounts but the same PAN, all applications are likely to be rejected.

Errors in the IPO Application Form

Mistakes in filling out the IPO application form can lead to rejection. Common errors include:

• Incorrect PAN or bank details
• Mismatch in signatures
• Invalid or incomplete information

Over Subscription

Over subscription occurs when the number of applications received for an IPO exceeds the number of shares available for allocation. This scenario often leads to a more competitive allotment process, where not all applicants receive shares.

Several factors can contribute to over subscription:

• High Demand: A strong interest in the IPO can lead to a surge in applications.
• Limited Shares: A smaller number of shares available for allocation can increase competition.
• Aggressive Marketing: Effective marketing strategies by the company or its underwriters can boost investor interest.

To manage over subscription, companies may employ various strategies:

• Increasing IPO Size: Offering more shares can help meet the high demand.
• Higher Price Band: Setting a higher price band can moderate the number of applications.
• Lottery System: Implementing a lottery system ensures a fair distribution of shares among applicants.

Technical Issues

Technical issues can pose significant challenges during the IPO allotment process. Common problems include:

• System Glitches: Technical glitches or system crashes can disrupt the application process.
• Network Connectivity: Poor network connectivity can hinder the submission and processing of applications.
• Application Errors: Errors in the application process, such as incorrect data entry, can lead to rejections.

To minimize these risks, companies can adopt several strategies:

• Thorough Testing: Conducting extensive testing of the application system before the IPO launch.
• Backup Systems: Implementing backup systems and contingency plans to handle technical failures.
• Clear Instructions: Providing clear instructions and support to investors to ensure smooth application submission.

Regulatory Issues

Regulatory issues can also impact the IPO allotment process. These issues may include:

• Non-Compliance: Failing to comply with stock exchange regulations can lead to penalties and delays.
• Disclosure Failures: Not disclosing material information to investors can result in legal consequences.
• Securities Law Breaches: Violating securities laws can have severe repercussions for the company.

To mitigate these risks, companies must ensure strict adherence to all relevant regulations and laws, including:

• SEBI Regulations: Complying with the Securities and Exchange Board of India (SEBI) regulations.
• Companies Act, 2013: Following the guidelines set forth in the Companies Act, 2013.
• Securities Contracts (Regulation) Act, 1956: Adhering to the provisions of the Securities Contracts (Regulation) Act, 1956.

Additionally, companies must ensure transparency by disclosing all material information to investors and providing clear guidance throughout the IPO process. This approach not only builds investor trust but also helps in avoiding regulatory pitfalls.

Issues Related to the Share Application Form Submission

Submitting an incorrect or incomplete share application form for a stock exchange can also lead to rejection. Investors should ensure that the form is filled out correctly and submitted within the deadline.

Any missing information, such as PAN details, bank details, or the applicant’s name, can result in disqualification. Additionally, errors in signatures or discrepancies between the details provided in the form and those registered with the Depository Participant (DP) may also lead to rejection.

Investors should double-check all details before submission and ensure that the form is submitted well before the deadline to avoid last-minute technical glitches or processing delays. Using the Application Supported by Blocked Amount (ASBA) facility correctly can also help in ensuring a smooth application process.

Insufficient Funds in the Bank Account

When a company goes through an IPO, an application is only valid if sufficient funds are in the linked bank account at the time of blocking. If the required funds are not available, the application is rejected automatically.

The ASBA process requires banks to block the necessary amount in the investor’s account until the allotment process is completed. If the balance in the account is lower than the application amount, the request will likely be declined.

Additionally, issues such as incorrect bank details, expired mandates, or delays in fund blocking by the bank can also lead to rejection. Investors should ensure that the bank account linked to the IPO application has a sufficient balance and is active to avoid any unexpected rejections.

Keeping track of account transactions and verifying the fund blocking status through bank notifications can help prevent such issues.

Non-Compliance with the Basis of Allotment Criteria

The basis of allotment varies depending on the type of investor (retail, institutional, or non-institutional). If an investor does not meet the eligibility criteria set by the issuer, their application may be rejected.

The Role of the Book Building Process in IPO Allotment

Understanding the Book Building IPO

A book building IPO is a price discovery method where investors bid within a specified price range. The final allotment price is determined based on demand. The company, along with investment bankers, decides on a price band, and investors place bids within this range.

The price at which the maximum demand is observed becomes the final issue price. This dynamic pricing mechanism helps in efficient price discovery and allows companies to gauge investor sentiment.

Investors participating in a book building IPO should carefully assess the company’s fundamentals, demand trends, and historical performance before placing their bids. Since the allotment process is demand-driven, bidding wisely within the given price band with a well-informed strategy can significantly impact the likelihood of securing an allotment.

Price Band and Cut-off Price Considerations

The price band in a book-building IPO represents the lower and upper price limits within which investors can bid. Investors who bid below the final determined price risk missing out on the allotment if their bid falls short of the actual issue price.

Conversely, bidding at the cut-off price ensures that the investor agrees to purchase shares at the final issue price, improving the chances of receiving an allotment.

Bidding at a lower price within the price band may reduce the chances of getting an allotment, especially in cases of oversubscription.

Institutional and retail investors who bid at the cut-off price demonstrate their willingness to accept the final price, which can significantly enhance their likelihood of securing shares.

Additionally, investors should carefully analyse the demand trends in different investor categories (such as Qualified Institutional Buyers, Non-Institutional Investors, and Retail Investors) to make informed bidding decisions.

By understanding the dynamics of book building and price band strategies, investors can optimise their IPO bidding approach and increase their chances of getting an allotment.

Submitting a Properly Filled IPO Application Form

Ensuring that the IPO application form is filled out accurately reduces the chances of rejection. Investors should verify all personal and financial details before submitting their applications. Any discrepancy in PAN details, bank account information, or signatures can result in rejection. Double-checking the form and ensuring it is complete with no errors can significantly increase the likelihood of successful allotment.

Applying at the Cut-off Price in a Book Building IPO

Opting for the cut-off price increases the probability of getting an allotment, as it aligns with the final price set by the issuer. Investors who bid at a lower price within the price band may miss out on the allotment if the final issue price is higher than their bid.

To maximise the chances of securing an allotment, it is advisable to always apply at the cut-off price, as it indicates a willingness to purchase at the final price determined by demand.

Ensuring Sufficient Funds in the Linked Bank Account

Maintaining adequate funds in the bank account helps avoid rejection due to insufficient balance. Investors should check their bank balance before applying to ensure that the required amount is available and remains unutilised until the allotment process is complete.

Additionally, using the ASBA facility correctly ensures that the amount is blocked rather than debited, preventing any accidental withdrawals that might lead to rejection.

Banks may also reject applications if there are transaction issues, such as expired mandates or inactive accounts. Keeping track of ASBA fund blocking notifications and resolving any banking issues promptly can improve the chances of a successful IPO application.

Avoiding Multiple Applications from the Same PAN

To prevent rejection, investors should apply only once per PAN and avoid duplicate applications. Some investors try to increase their chances of allotment by submitting multiple applications using different Demat accounts linked to the same PAN.

However, as per SEBI regulations, such duplicate applications are automatically rejected. Instead, investors can consider applying through family members’ accounts as long as each application is unique and follows the correct process.

By adhering to these best practices, investors can enhance their chances of successfully receiving shares in an IPO.

Conclusion

IPO allotment is a competitive process influenced by oversubscription, investor eligibility, and application accuracy. Understanding the basis of allotment and adhering to guidelines can help improve the chances of securing an allotment.

By following best practices, such as applying at the cut-off price, ensuring fund availability, and avoiding multiple applications, investors can maximise their chances of successfully receiving IPO shares.

At Jainam Broking, we strive to assist investors in making informed decisions and enhancing their IPO investment experience.

So, are you planning to Apply IPO? If yes, you are at the right place! 

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