The Allotment of shares in an Initial Public Offering (IPO) is called the basis of allotment. The basis of allotment means the allotment of shares based on some rationale and categories established under the terms of regulation guidelines.
What is the Basis of Allotment?
After an IPO closes, the basis of allotment is prepared to allocate securities by reviewing the total investor bids and classifying the applications. Transparency and equity in the allotment procedure are ensured under SEBI’s (Securities and Exchange Board of India) ICDR (Issue of Capital and Disclosure Requirements) regulations.
Categories of Allotment:
Investor bids are classified into different categories, including:
- Firm Allotments: To authorised investors or anchor investors.
- Qualified Institutional Buyers (QIBs): Mutual funds, banks, and financial institutions.
- Non-Institutional Buyers (NIBs): HNIs and large investors.
- Retail Individual Investors (RIIs): Small investors applying for shares worth up to ₹2 lakh of shares.
How is the Basis of Allotment determined?
- Bids Classification: Once the IPO closes, all bids are classified in their respective categories.
- Oversubscription Ratio Calculation: The ratio is determined by comparing the shares applied for with the available shares for each category.
- Proportional Allocation: In the case of oversubscription, the allocations are made using a lottery system (for retail investors) or a proportionate method (for others).
- SEBI Regulations: All allotments follow SEBI’s ICDR rules to ensure fair distribution.
Conclusion:
The basis of Allotment is a significant component of IPOs to make the allotment of shares transparent and equitable. The process gives investors a chance to set the correct expectations and a smooth journey for their investments.
