IPO: Eligibility Criteria, How To Apply and Allotment Methods

The Indian stock market is a growing market that is full of investment opportunities for individuals and institutions. Of these opportunities, Initial Public Offerings (IPOs) have been a source of enormous interest and exuberance, providing a route for companies to raise funds and for investors to garner large gains.

IPOs are an important point in the life of a company when it moves from a privately held to a publicly traded entity. Such conversion allows the company to consider new horizons for growth and development, and investors have the possibility to share in the future prosperity of the company. IPOs have been a vital catalyst in India for promoting economic growth, encouraging entrepreneurship, and unleashing value for a variety of stakeholders.

The allocation of shares in an IPO is a mechanism that defines the process of spreading the desired share of equity among the investors. This is a complicated balance between supply and demand, which includes subscription levels, type of investor, and the regulatory environment. Appreciating the subtleties of this procedure is critical for those investing to successfully navigate the IPO landscape.

This detailed article will focus on the realm of IPOs and the allotment of shares, shedding light on the importance of these offerings in the Indian stock market, the eligibility criteria for investment, allotment process complexities, and the different methods of share distribution. Also, we will give practical guidelines about the process of making an application for an IPO, both online and offline, and the major documents needed by both individual and institutional investors.

Thus, buckle up while we go through the exciting world of IPOs, where fortunes can be made and dreams can come true. Let us look at the world of investment in IPOs and the allotment of shares that can open opportunities for wealth creation and diversification of portfolios.

Significance of IPO in the Indian Stock Market

The Indian stock market has undergone impressive growth and transformation over the last few decades, with IPOs being one of the deciding factors in its pattern. These IPOs are a pillar of the country’s economic development, stimulating innovation, bringing foreign investment, and acting as an accelerator of entrepreneurial activities.

IPOs are used as a strong tool for companies to raise capital to finance their growth projects, internal research and development and strategic acquisitions. The public market provides companies with a large base of investors that helps them diversify their ownership and enhances their credibility and visibility.

Also, IPOs are an indicator of economic development and a measure of investors’ mood. IPO success is usually considered to be an indication of the potential of the company and the market’s confidence in its future prospects. Highly awaited IPOs could whip up a frenzy and usher a massive influx of interest, capturing the hopefulness and growth dreams of the country.

In a wider view, IPOs have an important impact on the progress of the Indian capital markets. They add to the width and depth of the stock markets, enabling the perfect distribution of resources and creating a dynamic investment environment. IPOs, through offering investment opportunities, enable individuals and institutions to be a part of the growth stories of promising companies, thereby making them a party to the nation’s economic progress.

Lastly, IPOs have become a driving force for innovation and enterprise in India. Successful public offerings are a major source of capital for companies, but they are also proof of good business models and strategies for the company. That, in turn, stimulates and motivates would-be entrepreneurs to follow their dreams, which defines an innovative environment and risk-taking attitude that is crucial for a successful economy.

Activity in the Indian IPO market has increased over the past few years, with various companies in areas that include technology, healthcare and consumer products going to the public markets. The large number of new listings has not only broadened the investment horizon but has also helped to improve the overall growth and maturity of the Indian stock market and make it a global investment destination.

With India's economy moving towards an upward trend and the entrepreneurial spirit expanding, IPOs will essentially be a significant determinant of the future of the country’s financial markets. Through a platform that companies use to access capital and investors acquire shares that give them the right to partake in their growth stories, IPOs will keep driving economic advancement, spurring innovation, and promoting chances for wealth generation and prosperity.

Eligibility Criteria for Investing in an IPO

To invest in an IPO as an individual, several key requirements must be met:

• Indian Citizenship or Overseas Citizen of India (OCI) Status: IPOs are open to participation only among Indian citizens and (OCIs) Overseas Citizens of India who hold valid OCI cards.
• Demat Account: An investor should have a valid Demat (Dematerialized) account with a registered depository participant (DP). This account acts as a safe electronic holding platform for shares, facilitating smooth trading and ownership transfer.
• Minimum Application Size: Every IPO has a minimum bid size, which may be expressed in terms of a lot or a number of shares. Investors should be ready to invest the minimum application amount that varies based on the individual offering.

For instance, during the much-awaited IPO of Zomato in 2021, the minimum application size for retail individual investors was one lot of 51 shares, which is an investment of at least ₹3,876 (issue price of ₹76 per share).

Regulatory Requirements

In India, SEBI, the lead authority for the primary market, has a well-structured system to safeguard the operation and the credibility of the IPO process. These regulatory requirements encompass various aspects, including:

1. Issue Size: The companies have to reveal the total amount of money they are raising through the IPO and the proposed application of these funds.
2. Lock-in Period: However, some part of the offer shares assigned to certain shareholders, such as promoters or large shareholders, may be locked in for a period, usually between 6 months to 1 year. This step aims at ensuring long-term commitment and avoiding too much speculation.
3. Investor Disclosures: Companies are required to disclose their financials, business plans, risk factors, and other relevant information through an elaborate prospectus. This guarantees openness and allows the investors to know what they are investing in.

An example is the Nykaa IPO that was largely anticipated and indeed happened in 2021, where the stringent lock-in requirements were followed, 75% of the pre-issue equity was held by promoters and 50% of the post-issue equity by those that have over 25% stake. The objective of this provision was to reassure investors about the company’s future while harmonising the interests of the major stakeholders with those of the public investors.

Through compliance with such eligibility criteria and regulator requirements, the Indian IPO market promotes transparency and a well-regulated environment, ensuring the interest of all the market participants, the sustainability of growth, and the confidence of the investors.

Understanding the IPO Allotment Process

The allotment is the core of the IPO journey, which decides how these new-listed shares are shared among the Investors. This complicated procedure consists of a number of steps and is guided by a system of rules and principles aimed at promoting justice and effectiveness.

• Allotment Basics

Understanding the basic mechanics of an IPO is crucial before any discussion concerning the details of the allotment process. In the bidding part of the auction, investors bid for a specific amount of shares within the bidding zone. The company usually sets the range and its underwriters using demand estimation and company valuation methodologies.

Allocation of the shares is then determined by the size of the issue, the demand for the IPO and where in relation to the cut-off price the investor’s bid price is. Cut-off price is an important boundary between winning and losing tenders.

The allotment process can take one of two forms: block or lottery-based allotment. In block allotment, investors are awarded at amounts equal to their bid sizes, subject to the availability of shares. On the other hand, in the case of a lottery allotment, which is used, for example, in oversubscribed cases, the applicants are chosen by a computerised draw, giving equal chances for retail investors to participate.

For example, Zomato’s IPO in 2021 was oversubscribed by an incredible 187 times for the retail segment. This enthusiasm from the general public was managed through a lottery-based allotment for applicants who bid at or above ₹76 per share in the initial offering.

• Allotment Criteria in India

The Indian IPO market has procedures and guidelines for allocation, which makes the process transparent and fair. The criteria are formed by regulatory requirements and industry standards.

1. Book Building Process: In the book-building process, Qualified Institutional Buyers (QIBs) place their bids, which are consolidated at different price points. This process ultimately results in the fixing of the cut-off price, an important minimum level for a successful allotment.
2. Retail Portion: The residual shares, net of the QIB allotment, are given to retail investors. The other part is broken into quotas, with separate quotas for participants, employees, and High Net-worth Individuals (HNIs).

The allotment ratio is related to the IPO subscription level, as this is the factor that decides the amount of share allocation an investor receives. By the subscription level, we mean the number of shares that is bid for to the one offered. The allotment ratios and allocation methods vary based on the degree of oversubscription, as illustrated in the following table:

Subscription Level	Allotment Ratio (%)	Allocation Method
Undersubscribed	100	Proportional
Small Oversubscription (Up to 115%)	100 - 80	Proportional, with the remaining shares distributed proportionally
Large Oversubscription (Above 115%)	Below 80	Lottery-Based

• Quantifying the Ratios

1. Undersubscribed IPOs: Only in such rare cases does the IPO receive less than 100% subscription, and all valid bids are allotted 100% of the requested shares. Such a scenario ensures that an investor would take part, as was seen in its mega IPO of 2022, where it collected a mere 97% subscription.
2. Small Oversubscription: If an IPO gets an intermediate oversubscription of about 115%, retail investors still get a lot based on pro rata. Nevertheless, the share allocation rate may reduce slightly, hence giving a low number of shares allocated in comparison to what is demanded. For instance, in a 100% oversubscribed IPO with an allotment ratio of 90%, if an investor bids for 100 shares, they may get only 90 shares.
3. Large Oversubscription: Where the IPO becomes oversubscribed by 115% and above, the retail investors who bid at or above the cut-off price benefit from a lottery-based allotment. This method brings some stochasticity with satisfying the fact that the amount of allotment is not dependent on the size of the particular bid. On the other hand, a machine draw decides the lucky winners. In a similar way, when a public offering is 200% oversubscribed, an investor’s chances of getting shares by the lottery will be 1/2.

Note that the size and method of bid choice can be guided by an analysis of expected subscription levels. The closer the bid to the cut-off price, the higher the chances that an investor will be able to make both proportional and lottery-based allotments. Moreover, spreading out an IPO portfolio across sectors and risk profiles helps to reduce the concentration risk and improve the general returns.

Knowledge of allotment criteria in India allows investors to make informed decisions and effectively navigate the IPO environment, thereby improving their chances of success and optimising their investment results.

How to Apply for an IPO in India?

Having understood the essence and allocation process of IPOs, investors are now free to pay attention to the practical issues of participation in these interesting pieces of investment. The public offering in India is simple and convenient for investors, with the provision of online and offline modes to cater for the different investor segments.

Application Process

1. Online Brokers: In the digital era, most of the leading brokers and investment platforms provide user-friendly online interfaces for IPO applications. These solutions offer an easy and convenient user experience with all stages of the process, from registration and application making, to user transaction tracking. The efficiency of the online application, together with competitive brokerage fees and linking educational resources, have made this model very popular among tech-savvy investors.
2. Offline Applications: For people who might go in for a more classic way or might have issues with digital access, submission of application forms in physical form is also an option. The investors are to visit the office of their broker or designated centres to collect and fill out the required forms. Though this approach may require extra time and effort, it satisfies the requirements of investors who appreciate personal communication or who have little or no access to the internet variances.

Regardless of the application mode chosen, the process typically involves the following steps: 

1. Download and Fill the Application Form: The application form can be accessed by investors from their chosen online platform or broker. Precise and detailed information should be given, which may include the Demat account details, bid price, and the number of shares required. Precise attention to detail is necessary, but as errors may occur, the application may be rejected.
2. Submit the Form and Documents: Together with the fully completed application form, the investors shall provide the supporting documents. These may include:
3. KYC Documents: ID proof (e.g., PAN card, Aadhaar card, voter ID) and address proof (e.g., bank account statement, utility bills).
4. Demat Account Details: The Demat account number and investors' details should also be given because this is where the shares allotted will be credited.
5. Pay the Application Fee: IPO applications normally come with an application fee, which is usually around ₹10 to ₹100 per application. The fee can be paid using different methods like online transfers, demand drafts, or cheques, as per the broker’s or platform’s ways of receiving payments.

How To Apply for IPO on Angel One?

1.  Login to the Angel One App or website and click on ‘IPO’ on the homepage.
2. Select the IPO you are interested in.
3. Go through the IPO details like maximum quantity, maximum investment, about the company, etc.
4. Click on ‘Apply Now’ to apply and enter the number of lots and bidding price along with your UPI ID.
5. Confirm your bid and accept the payment mandate sent to your UPI App for successfully completing the IPO application.

That’s it! Your IPO order is placed. You can check the status of your IPO in the ‘Order Book’ section.

Key Documents Required for IPO Application

Investment in an IPO requires the filing of several vital documents that act as eligibility evidence and make the application process smooth. The nature of these documents would depend on whether the investor is an individual or an institutional investor.

KYC Documents

1. Proof of Identity: The investors are expected to provide a government-issued identity document such as a PAN card, Aadhaar card, or voter ID.
2. Address Proof: A most recent bank account statement, utility bill or any other valid document that confirms the investor’s residential address is normally requested.

Demat Account Details

1. Demat Account Number: Investors are required to provide their Demat account number, which the allotted shares will be credited upon successful application.
2. Demat Account Statement or Client Master Report: This document is evidence of the investor’s Demat account.

Accuracy and completeness of submitted documents must be checked by investors because any discrepancies or omissions can lead to rejections of applications or delays in the allotment process. In addition, it is recommended that you seek advice from finance advisers or legal practitioners.

IPO Allotment Methods

Allocation of shares in an IPO is an important process that determines the ownership distribution among the investors. Two primary methods are employed in the Indian IPO market: Lottery-based allotment and proportional allotment. Every mechanism is meant to cater to particular situations and provide equity and transparency in the distribution process.

Proportional Allotment

The proportional allotment method is used when the public offers demand is a manageable number, allowing a systematic and fair allocation of shares. This approach favours investors who bid closer to the price cut-off set during the book-building for Qualified Institutional Buyers (QIBs) and retail allocation demand assessment.

The proportional allotment operates as a continuum-like slider, with the position of an investor with respect to the cut-off price dictating the number of shares they get. Here's how it works:

1. Bidding at the Cut-off Price: Investors who bid at the cut-off price are usually allotted the full number of shares that they had applied for as long as it is not lower than the minimum application amount.
2. Bidding Above the Cut-off Price: If a bidder is willing to bid above the cut-off, the number of shares they will receive at that level will depend upon demand at that price. To illustrate, in a moderately oversubscribed IPO, bidding a mere 10% above the cut-off price would yield a 90% proportional allotment of the shares required.
3. Bidding Below the Cut-off Price: Where the IPO is undersubscribed, bids placed under the NA may be rejected. On the other hand, if the demand is good, such bids could be allotted a larger quantity, if possible.

Quantitative Example

The much-awaited IPO of Paytm in 2022 was notable for the cut-off price of ₹2,150 per share. A bidder at the cutoff price of ₹2,150 would have been given the total number of shares asked, but a bidder at ₹2,200 might have been only given 95% of what was asked because the market had higher demand there.

The proportional allotment approach is designed to ensure that investors who express their higher confidence in the company’s future by tendering higher bids are entitled to a higher share allotment, according to the total demand and availability.

Lottery-Based Allotment

But when an IPO is highly successful with overwhelming demand and goes above the 115% oversubscription threshold, the allotment process is based on a lottery. This process offers an equal chance for retail investors to participate regardless of their bid sizes.

The lottery-based allotment process works as follows: 

1. Determination of the Cut-off Price: The cut-off price is determined through the book-building process and demand analysis.
2. Eligibility Screening: All valid bids in the amount or above the cut-off price are selected and entered into the automated draw.
3. Unique Identification: Every qualifying application is given a specific number to identify it.
4. Randomised Draw: The system’s algorithm randomly picks a set of numbers from the pool of eligible applications.
5. Allotment: If the application number of the investor corresponds to any of the randomly drawn numbers, they get an allotment of shares based on their application quantity. On the other hand, if their number does not appear, they get no shares.

Quantitative Example

Consider an IPO that gets a 200% subscription for its retail leg. That is, every 100 shares are accompanied by 200 valid bids. The process of the draw is automated and 50% of the bids (100 shares) are randomly chosen by the system for allotment. If a bidder submitted a valid bid that was at the cut-off price or above, the chances of winning and receiving shares would be 50% (1 in 2).

However, it is essential to point out that a higher subscription level means a lower chance of getting an allotment through the lottery. Bidding exactly at the limit price gives the investor the maximum possibility of success in comparison to higher or lower bids. Despite the random nature of the lottery system, good research and smart bidding can make an investor much more likely to win.

Subscription Level (Oversubscription %)	Odds of Allotment
100% Oversubscription	1 in 2
200% Oversubscription	1 in 3
300% Oversubscription	1 in 4

The proportional allotment and lottery-based allotment approaches are intended to accomplish an equitable and open distribution of shares, taking into account different demand patterns. Investors need to assess their investment objectives, risk dispositions, and market environment to choose the best method of allocation that is appropriate for them.

Pro Tips for Savvy Investors

IPO investment is a very dynamic and profitable activity, but it requires proper planning, control and systematic strategy. To increase your chances of success and maximise your returns, here are some pro tips for savvy investors:

Track Upcoming IPOs: Stay informed about upcoming IPOs through financial news websites, broker systems, and company announcements. Knowing of the available investment alternatives enables you to research the matter in full and make an informed choice.

Analyse the Company: Not to just follow market hypes and trends. Conduct a comprehensive review of the company, its business model, financials, management team, competitive environment and growth opportunities. Attend roadshows and prospectuses with more details, as well as professional advisors if necessary.

Diversify Your Portfolio: Do not put all your IPO eggs into an IPO basket. The concentration risk is thereby reduced, and the overall portfolio diversification is improved.

Stay Disciplined: Avoid FOMO (Fear of Missing Out) and do not act. Develop a transparent investment strategy that is consistent with your financial goals, tolerance for risk and time horizon. Adhere to the plan and avoid impulsive reactions caused by market hype or emotion.

Seek Guidance: High-risk IPOs, complex IPOs, IPOs made in a new sector, or IPOs of uncertain risk companies are good such that reputable financial advisors or professionals should be consulted. Their experience may offer good suggestions and prevent them from potential errors.

Manage Expectations: Although IPOs can be very profitable, it is crucial to be realistic in what you can achieve. Some IPOs fail because they do not do well and even underperform. Retain the side even and prepare for possible disorder at the beginning of the trading part.

Develop an Exit Strategy: Before investing money in an IPO, know what your exit will be. Determine your target price or holding period and have the guts to sell when the investments begin to manifest more than you had expected or when better options come along.

Learn from Experience: Treat every IPO as a lesson. Analyse your achievements and failures and use the knowledge you have gained to perfect your investment process, risk control system, and decision-making mechanism for the next IPOs.

With the incorporation of these pro tips into your investment method, not only will you be able to confidently navigate the fast-changing IPO landscape, but you will also reduce the risk and take advantage of the growth opportunities offered by the best companies.

Conclusion

Investment in IPOs and the process of allotment is also a journey that comes with much joy and potential away from the negatives often anticipated. In this backdrop of an Indian economy that continues to grow and an entrepreneurial spirit that is thriving, IPOs will be a significant driver of growth, innovation, and wealth generation.

IPos have been analysed in this wholesome article, with coverage of the significance of IPOs in the Indian stock market, individual and institutional investors’ eligibility criteria, and minute details of the allotment process among other topics. We discussed the allotment fundamentals, the allotment criterion in India and two basic allotment methods: proportional allotment and lottery-based allotment.

Additionally, we shared useful guidelines on the IPO application process, indicating both online and offline methods and listing necessary documents for individual and institutional investors. Moreover, we studied the details of IPO allotment techniques, providing numerical samples and probability computations to help investors make well-thought-out decisions.

Investment in IPOs should not be considered a financial transaction; it is a landscape that allows individuals and organisations to become a part of the success stories of prospective companies and link their financial objectives with the country’s economic growth. Discipline and strategy in their research, orderly approach, seeking advice when needed and diversity of their portfolios will make the investors negotiate their way into the enormous IPO arena with certainty.

The Indian stock market is undergoing a continuing evolution and maturing, and the charm of IPOs will be an absolute attraction, providing investors an opportunity to participate in the growing culture of the nation. Wealth creation will also be an excellent side benefit. Understand the excitement, but with caution, research, and a long-term perspective, you will find yourself in the realms of the benefits of the dynamic and adventurous investment path.