Query: Basis of Allotment in IPO

[rashmi raghu]

Hi Friends !!!

When a company does an IPO, and the issue is over-subscribed:

- what is the basis of allotment of shares ?
- hw is it determined?? ( i.e. company can do it or as prescribed by
Stock Exchanges/ SEBI)
- are there any rules, regulations in this regard?


Regards,
Rashmi

[See Yes Vj]

Yes Rashmi...

 

In Sebi (DIP) guidelines, its "Free Pricing".

 

The Company in consultation with the Merchant Banker (MB) can determine the Price.

 

There is no prescribed formula or rules.

 

Its purely free pricing, meaning, its to the Co. & MB to decide.

 

Vj

http://yehseeyes.blogspot.com

 

--
Vj
Trezrrr every pulsss
http://yehseeyes.blogspot.com/

[Alagar M]

Dear Rashmi,

 

basis of allotment will be finalised by the Issuer Banker and Concerned Merchant Banker after consulting with Designated Stock Exchange (DSE). There is no specific set of regulations for basis of allotment. Only regulatory authority is DSE.

 

basis of allotment should be done on proportionate basis under each category.

 

say example:

 

Retail - 10 times subscription

Non- Institutional Investor - 5 times sub....

QIB - 15 times sub......

 

In each and every category the allotment will be made on propotionate basis within that category. say I have applied for 100 shares with multiple of Rs.10 each under retail category. In this case I will get allotment of 10 shares.

 

Thanks & Regards

Alagar

 

Moble: 919884731993/ 919790906827
e-mail: alagar...@karvy.com

[madhwesh acharya]

Dear rashmi and freinds,

 

with reference to Rashmi's query, please find attached a "Draft Basis of Allottment" which is an extract of a Draft Redherring Prospectus.

 

it is a company specific draft and if there is any doubt in this, please come back.

 

mr. alagar is right in saying there is no fixed basis.

 

this draft may be helpful in understanding the process, only if it is read with DIP guidelines.

 

Regards,

Madhwesh K

Company Secretary

Kurlon Limited,

Bangalore.

9945399584

9343867708

 

On 4/16/08, rashmi raghu <popco...@yahoo.com> wrote:

[alex koshy]

Hi Rashmi,

 

Before explaning your queries would like to throw some light on Book Building and price fixation in IPOs.

 

Price Discovery in Book Building IPOs

Book building is the process of price discovery. That means there is no fixed price for the share. Instead, the company issuing the shares comes up with a price band. (The price band will be decided by the company along with the merchant banker). The lowest price is referred to as the floor and the highest, the cap. Bids are then invited for the shares. Each investor states how many shares s/he wants and what s/he is willing to pay for those shares (depending on the price band). The actual price is then discovered based on these bids.

 

Three classes of investors can bid for the shares:

• Qualified Institutional Buyers: QIBs include mutual funds and Foreign Institutional Investors. At least 50% / 60% of the shares are reserved for this category.
• High Networth Buyers : Anyone who bids for shares more than Rs 1,00,000. Reservation of 15%/10% for this category.
• Retail investors: Anyone who bids for shares under Rs 1,00,000 is a retail investor. At least 35%/30% is reserved for this category.

( Above % are for 25%/less than 25%but minimum 10% dilution in the IPO)

 

The process

 

After evaluating the bid prices, the company will accept the lowest price that will allow it to dispose the entire block of shares. That is called the cut-off price.

 

Let's take an example.

Number of shares issued by the company = 100.

Price band = Rs 30 - Rs 40.

Now let's check what individuals have bid for.

Bid	Number of shares	Price per share
1	20	Rs 40
2	10	Rs 38
3	20	Rs 37
4	30	Rs 36
5	20	Rs 35
6	20	Rs 33
7	20	Rs 30

 

The shares will be sold at the Bid 5 price of 20 shares for Rs 35.

 

Reasons?

• Because Bidders 1 to 5 are willing to pay at least Rs.35 per share.
• The total bids from Bidders 1 to 5 ensure all 100 shares will be sold (20 + 10 + 20 + 30 + 20). 

The cut-off price is therefore Bid 5's price = Rs 35.

Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't get an allotment because their bids are below the cut-off price.

 

How the allotment is done

 

The bids are first allotted to the different categories and the over-subscription (more shares applied for than the shares available) in each category is determined. Retail investors and high networth individuals get allotments on a proportional basis. Assuming you are a retail investor and have applied for 200 shares in the issue, and the issue is over-subscribed five times in the retail category, you qualify to get 40 shares (200 shares/5). Sometimes, the over-subscription is huge or the issue is priced so high that you can't really bid for too many shares before the Rs 1,00,000 limit is reached. In such cases, allotments are made on the basis of a lottery/chance.

Say a retail investor has applied for 5 shares in an issue, and the retail category has been over-subscribed 10 times, the investor is entitled to half a share. Since that isn't possible, it may then be decided that every 1 in 2 retail investors will get allotment. The investors are then selected by lots and the issue allotted on a proportional basis among.

 

The basis of allotment will be finalized by the Company, Merchent banker, Registrar together with the Desigated stock exchange.

 

You may also refer to the SEBI (DIP) guidelines, 2000 and some final IPO offer documents available in the SEBI website.

 

Trust this clarifies.

 

Regards,

 

ALEX T KOSHY

Investment Banking

Religare Capital Markets Limited

+91 98404 13911

 

www.religare.in

 

----- Original Message ----
From: rashmi raghu <popco...@yahoo.com>
To: CSMysore <csmy...@googlegroups.com>
Sent: Wednesday, 16 April, 2008 5:53:46 PM
Subject: [CSMysore] Query: Basis of Allotment in IPO


Hi Friends !!!

When a company does an IPO, and the issue is over-subscribed:

- what is the basis of allotment of shares ?

 

 

- hw is it determined?? ( i.e. company can do it or as prescribed by
Stock Exchanges/ SEBI)
- are there any rules, regulations in this regard?


Regards,
Rashmi

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[sameer vyas]

 

Hi Alex

 

Thanks for the concept beautifully explained.
 

Thanks and Regards
Sameer Vyas
ACS

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[rashmi m.r.]

Hi friends !!!

 

Thanx for the clarification.

 

Regards

Rashmi