Business Desk, ETV Bharat: The initial public offering (IPO) of IT services firm Happiest Minds Technologies was a huge success. The issue, which had closed last week, was oversubscribed by a massive 151 times. Small retail investors are now eagerly waiting for share allotment, which is already underway. If you are one of the subscribers to the issue, here’s some good and bad news.
First, the good news is that in case you are allotted shares, you may reap huge listing benefits as analysts expect the stock to debut on bourses at 40-50% premium to the issue price of Rs 165-Rs 166 after seeing huge demand for the IPO. But the bad news is that you may not receive even a single share irrespective of how much you had bid for.
The Happiest Minds IPO has received bids for over 351 crore shares against the issue size of just 2.33 crore shares. This indicates that the number of shares being supplied by the issuer company is not enough to meet the demand. In such cases of oversubscription, the allotment of shares is done by predefined rules laid down by market regulator Securities and Exchange Board of India (Sebi). Let’s take a look at how the shares are allotted to small stock market investors.
Allotment process
To understand the allotment process, one first needs to understand key concepts of ‘investor categories’ and ‘lots’.
In every IPO, investor categories are distinguished – like small retail investors (individuals who bid for shares worth up to Rs 2 lakh), qualified institutional buyers or QIBs (financial Institutions, banks, mutual funds etc), high net worth individuals/non-institutional buyers (who bid for more than Rs 2 lakh worth of shares), employees etc.
A percentage of shares is allotted to every category. In case of Happiest Minds IPO, of the total shares on offer, 75% will be allocated to QIBs, 15% will be available to the non-institutional investor category and only 10% will be available for the retail category.
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Now, what are lots? A lot is the minimum number of shares an investor needs to bid for in the IPO. In case of Happiest Minds, the lot size is 90 equity shares. It means investors would have placed bid in multiples of 90 shares.
Now what happens if the retail category gets oversubscribed, which has already happened in case of Happiest Minds (retail segment was subscribed almost 71 times)? In such cases, Sebi rules make sure that maximum possible retail investors get at least one lot of shares.
So, for that, first the total number of shares available for retail investors is divided by the lot size to determine the number of lots available for the category. And then it is compared with number of retail applications.
Case 1: If the number of lots available is equal to or more than the number of retail applications, then one lot is allotted to every retail investor. Remaining shares, if any, are then allotted proportionally or by lottery.
This is to ensure that all investors have an equal chance of being allotted IPO shares, regardless of the number of lots they had bid for. In other words, an investor who had bid for just 1 lot will be treated on par with the one who had bid for say 10 lots. This way, fairness is ensured in IPO allotment.
Case 2: If the number of retail applications exceed the total number of lots available for the category, then the eligibility to get shares is determined entirely by lottery/draw. In such cases, it is not possible for any single retail investor to receive more than one lot.
The draw is a completely automated and a computerized process, leaving no room for manipulation. Only selected applications are allotted shares are rest are refunded their money back.
Considering the huge oversubscription seen by Happiest Minds IPO in the retail category, it can be concluded that a large chunk of retail investors will be left empty handed this time as shares will most likely be allocated to only a handful through the lottery system. The rest would have to wait for the stock to start trading on exchanges this week in order to invest in the company.
