How Are Retail Investors Prioritized In IPO Allotments?

Retail investors are an important segment of the IPO process, and their allotment is subject to certain rules and priorities. Here’s how retail investors are typically prioritized in IPO allotments:

1. Retail Investor Definition:

A retail investor is an individual who applies for IPO shares in the retail category and is generally applying for an amount less than ₹2 lakh (the current limit in India). These investors are given separate allotment from institutional investors and non-institutional investors (such as high-net-worth individuals).

2. Allotment Process and Priority:

Retail investors generally fall under the first category for allotment of shares. However, their chances of receiving the full allotment depend on whether the IPO is oversubscribed or not.

• Non-Oversubscribed IPO: If the IPO is not oversubscribed, all retail investors who have applied for the shares will generally receive the full allotment of shares, based on the lot size and the number of shares they applied for.
• Oversubscribed IPO: In case of oversubscription (i.e., when demand exceeds the number of shares offered), retail investors are subject to a pro-rata allotment. The shares are allocated based on the proportion of demand versus available shares. In this case, retail investors may not receive the full number of shares they applied for, and the allotment ratio may be lower.

3. Pro-Rata Allotment:

Pro-rata basis means that the number of shares allotted is in proportion to the number of applications received. For example, if the IPO is 10 times oversubscribed, and a retail investor applies for 100 shares, they might only get 10 shares (depending on the allotment ratio). In some cases, lottery systems are used to distribute shares equally among retail investors when the demand is too high.

4. Retail Investor Quota:

In most IPOs, a certain percentage of the total issue size is reserved for retail investors, typically around 35% of the total shares offered. This ensures that a large number of retail investors have a chance to invest in the IPO, even if there is high demand.

5. Equal Priority in Allocation:

Retail investors applying for small lots (often 10, 50, or 100 shares) are treated equally, regardless of the number of shares applied for, as long as they meet the minimum lot size. The priority for allotment is not based on the amount applied for but on the number of retail applications received.

6. Institutional vs. Retail Allocation:

Retail investors are given priority only within their category. In the overall IPO allocation, institutional investors (such as mutual funds, insurance companies) typically receive a larger proportion of the available shares. This means retail investors may not receive as large a portion of the IPO if institutional demand is high, especially in oversubscribed IPOs.

Example:

Let’s assume a company is offering 1 million shares in an IPO, with 35% reserved for retail investors, i.e., 350,000 shares. If 700,000 retail investors apply for these shares, the IPO is 2 times oversubscribed in the retail category. The allotment will be on a pro-rata basis, and each retail investor may only get half the number of shares they applied for.

7. Retail Investor Lottery System:

If the oversubscription is extreme, a lottery system might be used to allocate shares. In such cases, retail investors are randomly selected to receive shares, and the chances of receiving allotment depend on the number of applications and the random draw.

Conclusion:

Retail investors are prioritized in IPO allotments, but their chances of receiving an allotment depend largely on the level of oversubscription and the allotment process (pro-rata or lottery). In oversubscribed IPOs, retail investors may only receive a portion of the shares they applied for, or they may not receive any at all if the allotment ratio is low. Ensuring that you apply early and meet the minimum lot size increases your chances of receiving shares, but in competitive IPOs, the allotment process remains highly dependent on demand and the IPO's structure.