The purpose of this article is to clear the air about the allotment process for Retail Individual Bidders (RIBs) and the strategy individuals can undertake to increase their odds in getting an IPO allotment. The year 2017, will provide investors with many opportunities to participate in IPOs, of big issue size, and we would like to make sure that our readers stand the best chance of an allotment in each. Before we lay down the strategies one should adopt it is important to understand the various nuances of the IPO process. Some may already know what follows, but even for those individuals this article will have key takeaways that can be put into action.
After reading this small write up, we believe investors will be in a better position to apply in IPOs in a more focused manner. Let me inform the readers that 2017 is your year to make the best out of opportunities provided by the Initial Public Offerings (IPOs). Just to name a few we have numerous IPOs that are yet to come:
- Bharat Matrimony
- SBI Life Insurance
- Cochin Shipyard
- Vodafone India Pvt Ltd
- National Stock Exchange (NSE)
- Eric Life Sciences
- Diamond Wafers
- Aster DM Healthcare Hospitals
- Metropolis Path Labs & Health Care
- Lodha Group Developers
- Paranjapee Builders
- Tata Sons IPO
- Tata Infotech
- Sultan Chand & Co.
3 strategies to follow to ensure a higher probability of getting allotment:
Bidding for an IPO is game of pure Mathematics. Your research about a company’s financial performance or your expectations on the listing gains that you can get, have no bearing on your chances of getting the IPO allotment. It all comes down to chance. Does that mean it is completely based on luck? We disagree. Being part of the Industry for quite a while, we have seen many individuals who regularly are successful in getting allotments. These individuals are our clients so we have had the benefit of knowing what they do right and what other bidders frequently miss out on. We have decided to inform you of the same to increase your chances of getting ipo allotment:
- The most important strategy is to have different accounts to apply for an IPO. By different accounts we mean different demat Account and DP IDs. So next time there is an IPO that you want to apply for put in bids from DEMAT Accounts of your sister, brother, friends and Parents. This may sound new to you but this is the biggest factor in determining your success. Let me explain this with an example.
“I want you to imagine that all Application Forms are put into a big jar from which there will be a draw of lots. Not think for yourself, who has the highest probability of getting an allotment. A person who has bid for 8 lots in one form in the jar, or a person who has bid for 1 lot each in 8 forms. The probability of the second bidder in this example has gone up 8 times. There are more chances that his name is drawn from the jar.”
So, believe it or not, you need your friends and family to open demat account as soon as possible before the big IPOs, listed above, hit the market. We have explained the IPO process which is part of the Red Herring Prospectus of all companies that are going to get listed.
- Always bid at the upper price ceiling. Usually book built IPOs are launched within a price band. For instance, let’s assume a company XYZ announces a price band of 100-105 for its IPO. In this example the price floor is INR 100 and the price ceiling is INR 105. The applicants must bid within this price band. Let’s say two friends two friends decided to apply for the IPO. One filled the price for 1 lot as INR 102 and the other bid at INR 105. Once all the bids were submitted it was noticed that the cut off price for the IPO was INR 104. As a result the friend who bid at 102 automatically didn’t qualify and his bid wasn’t considered.
The price band for a given IPO suggests the probable range for the CUT-OFF Price. In turn the cut off price depends on the bids that are received at their respective prices. So clearly, it is not in the hands of the applicants. To avoid your bid from not qualifying it is always best to take the simplest possible route and bid at the price ceiling. The cut-off price will never be higher than this. Had both the friends, in the example mentioned above, bid at INR 105, then both bids would have been taken into consideration. To not qualify due to bidding at the wrong price is a mistake that all applicants can and should avoid.
- Lastly, the applicants must make sure that the ASBA forms are submitted within the stipulated time frame and that all the information filled by the applicant is factually correct. One should not take this step lightly and should double check the information filled in each application. You wouldn’t believe the number of applications that get rejected due to incorrect information.
Understanding the Process of Allotment:
It’s very important that readers understand the process mentioned below. This justifies the 3 point strategy and provides the logic behind the strategy that we are suggesting.
Bids received from the RIBs (Retail Individual Bidders) at or above the Offer Price will be grouped together to determine the total demand under this category. This is referred to as aggregate demand.
- If the aggregate demand in this category is less than or equal to the Retail Category (the % allotted to the RIBs will be mentioned in the Red Herring Prospectus; usually it’s not less than 35% of the total issue) at or above the Offer Price, full Allotment may be made to the RIBs to the extent of the valid Bids.
- If the aggregate demand in this category is greater than the allocation to in the Retail Category at or above the Offer Price, then the maximum number of RIBs who can be Allotted the minimum Bid Lot will be computed by dividing the total number of Equity Shares available for Allotment to RIBs by the minimum Bid Lot (“Maximum RIB Allottees”).
MAXIMUM RIB ALLOTTEES = (Total Number of Shares available for RIBs)/ Minimum Bid Lot
- The Allotment to the RIBs will then be made in the following manner:
(a) In the event the number of RIBs who have submitted valid Bids in the Offer is equal to or less than Maximum RIB Allottees, then :
(i) all such RIBs shall be Allotted the minimum Bid Lot; and
(ii) the balance available Equity Shares, if any, remaining in the Retail Category shall be Allotted on a proportionate basis to the RIBs who have received Allotment as per (i) above for the balance demand of the Equity Shares Bid by them (i.e. who have Bid for more than the minimum Bid Lot).
(b) In the event the number of RIBs who have submitted valid Bids in the Offer is more than Maximum RIB Allottees, the RIBs (in that category) who will then be Allotted minimum Bid Lot shall be determined on the basis of draw of lots.
Must Know Facts:
All investors should know the following before bidding for an IPO
- The minimum bid can be of 1 lot for the Retail Individual Bidders. You cannot apply for less than 1 lot. If you, your application will be rejected. The maximum money Bid in an IPO cannot be over INR 2,00,000.
- Application can be applied through the ASBA (Amount Supported by Blocked Amount) mode only. This ensures that the payment does not leave your Bank account till the time the shares have been allotted to you. Until that time the amount will be blocked in your bank account. Therefore one should make sure that there is a credit in the Bank account at least equal to the bid submitted in the form. For instance if an individual applied for 50 shares (1 lot) of DMART then he should have made sure that his Bank account should have INR 14950 (at price INR 299) or else his bid will get rejected.
- The PANCARD number DP ID and your Bank account number filled in by the applicant should be the same as the one provided to the CDSL or NSDL. It should match the records with the Depository.
- If the application has been sent for 3 lots and the bidder only receives 1, in that case the amount of money required for 1 Lot will be debited from the account and the amount for 2 lots will get unblocked after the allotment date.
- All the information about the upcoming IPO, the details of the company, the Financial Performance of the company, Issue related information as well as the IPO allotment status is available here on Mysharebazaar.com (Under Market Updates).