IPO investments can be thrilling. It has the potential to generate significant capital gains on listing or over the years. However, popular IPOs are frequently oversubscribed, indicating that demand for their shares vastly exceeds supply. Some applicants who submit a single application get allotments, whereas others who submit several applications do not receive the allotment. This indicates that the process is automated and is more like a lucky draw. So, is there a strategy to increase the IPO allotment chances? Well, YES, read along to know some strategies to increase your IPO allotment chances.
How to Get IPO Allotment?
Any promising IPO may excite you as an investor, but it’s not a good feeling when you don’t receive the allotment you expected. Or worse, if you don’t get the allotment at all. You should be aware of how to increase your chances of IPO allocation. Following are some tips and tricks to get IPO allotment:
1. Avoid Large Applications
The allocation procedure of SEBI treats all retail applicants (less than Rs 200,000) equally. Therefore, even if you submit a substantial application of 1 lakh, you may not be eligible for consideration in the event of oversubscription. Large applications are excellent for large IPOs where it is reasonably guaranteed that the retail segment will remain unsubscribed. For oversubscribed IPOs, minimum bids with multiple accounts should be utilised. This will facilitate the investment of excess funds in many other IPOs.
2. Multiple Applications with Multiple Demat Accounts
It is quite possible to improve your allotment prospects if you make multiple applications. You may open numerous demat accounts and submit an IPO application. Although this appears difficult, it is simple. While you can apply for an IPO through many applications, you can only use one PAN number. Thus, you must encourage family and friends to submit several applications for the same IPO on your behalf. Consequently, multiple demat accounts can boost your chances of receiving at least one allocation.
Since large applications are rejected, you can submit multiple applications from separate demat accounts with the same amount. When six applications for single lots are submitted as opposed to one application for six lots, the likelihood of a successful allocation increases by a factor of six. These demat accounts must be linked to different PAN accounts, which is essential to keep in mind.
3. Bid at Cut-Off Price
Frequently, companies use a book-building procedure to find the appropriate stock price. They establish a range, and investors must submit bids within that range. It’s a common problem that most investors mix up the bid and cut-off prices. The term ‘cut-off price’ indicates that the investor is willing to pay whatever price the company decides after the book-building process. Once you submit the application at the ‘cut-off price’, it means that you are bidding for the highest price. The extra amount is reimbursed if the price is lower than the amount paid.
Let’s say if the pricing range for an IPO is between INR 500 and INR 550, then the cut-off price is INR 550. You must bid at the cut-off price to enhance your chances of receiving an IPO allocation. If the IPO is oversubscribed, it means that all bids were submitted at the cut-off price. Therefore, if you quote a lower price, there will be no chance of IPO allocation.
4. Don’t Wait Until the Last Minute
Several investors rely on the subscription levels of High-Net-Worth Individuals (HNI) and Qualified Institutional Buyers (QIB) before placing their orders. Some investors take interest in observing how the HNI and QIB categories purchase IPOs. If you apply on the last day, there may be a few complications, such as the bank account not responding owing to strong demand from HNI and QIB investors or other technical issues. In addition, since the majority of banks do not accept applications after 4 p.m., it may be too late to file the IPO application. Therefore, do not risk it till the end, and apply sooner.
5. Avoid Mistakes with Your IPO Application
You need to be careful while filling out the IPO application form. Verify your name, demat account number, category, bid amount, DP account number, etc. IPO applications have been denied because of mistakes and incorrect information. Therefore, fill out IPO forms carefully.
6. Approve the Mandate Request
Typically, most investors who apply for the IPO through brokers believe the task is complete upon applying. Upon applying for an IPO, you will receive a mandate request. You must accept the request via the banking application or website. If the mandate is not accepted, your money will not be frozen, and you will not be considered for the IPO allocation. Thus, ensure that you accept this mandate and don’t miss out on the allocation opportunity.
7. Apply Early
Usually, an IPO is open for three days. To maximize your IPO allotment chances, apply during the first two days. Often many people apply for the IPO on the last day. This is because they want to see the response to the IPO across different categories – retail, HNI and QIB. However, you should apply for an IPO if you are confident about the company, irrespective of its IPO demand. Also, applying for it, in the end, may lead to some technological issues. Thus, if you want to increase your chances of IPO allotment, don’t wait until the last day.
8. Ensure You Hold Parent Company Shares
All the strategies mentioned above are relevant to all IPOs; however, this strategy does not apply to all IPOs. If you own at least one share of the parent company, then you are eligible to apply under the shareholder category.
However, it only applies when the parent company of the IPO firm is already trades on the stock exchange, and there is a reservation for the parent company’s shareholders. Thus, it is a possibility that allocations are significantly higher for shareholders. Additionally, you can places bids in both the retail and shareholder categories. This thereby raises the likelihood of allocation.
Purchasing at least one share of the parent or holding company in your demat account is a smart approach to increase the chances of getting the IPO allocation. This can ensure that you qualify for the shareholder category.
Frequently Asked Questions (FAQs)
The IPO allotment works based on the subscription. If an IPO is undersubscribed, all investors with valid applications will receive a full allotment. The IPO requires a minimum total subscription of 90% for success.
In case of oversubscription in one category and undersubscription in another, excess subscriptions may be adjusted with the under-subscribed portion of the different category, excluding QIB.
In the event of oversubscription, shares will be allocated through a lottery system or proportionately based on the investor category.
No. In the case of oversubscription, the focus is on ensuring each applicant receives an IPO allotment of at least one lot before considering additional allotments. There’s no particular advantage in applying for 10 lots instead of 1, so it’s advisable to submit applications in smaller lots.
Let’s say there are 10,000 lots for retail investors in an IPO, and the total applications received are 20,000 (assuming each application is for 1 lot). If you have applied for 1 lot, the probability of receiving an allotment is 1/20 or 5%.