Firm Allotment

Firm allotment refers to allocating shares to specific individual and institutional investors during an Initial Public Offering (IPO), excluding retail public investors. This strategy prevents stake dilution for company promoters when inviting public subscriptions to its share capital. By ensuring that a portion of shares is reserved for select investors, firm allotment helps maintain the company’s ownership structure.

Eligibility for Firm Allotment

As per SEBI (Securities and Exchange Board of India) guidelines, several investor classes are eligible for IPO investment through firm allotment. These include:

• Foreign Institutional Investors
• Development Financial Institutions
• Indian Mutual Funds
• Permanent Regular Employees
• Lead Bankers
• Employees of the promoting companies

Purpose of Firm Allotment

Firm allotment is important in ensuring the price stability of a company’s share when moving from private to public ownership. To this end, companies can guarantee that important participants have something at stake in the company’s performance after the IPO by setting aside some shares for these particular groups. This strategy also reduces the likelihood of stock price fluctuations often experienced when shares are bought by public retail investors who may not have a long-term interest in the company.

Share Allocation Framework

In practice, firm allotment is a part of the overall framework of share allocation that distinguishes between different categories of investors. For example, allotment preference may be given to institutional investors rather than retail investors because of their capacity to invest and stability. The allocation of shares usually involves estimating the demand from various types of investors and recommending a number of shares to be offered to each category of investors based on certain criteria.

End Note

In general, firm allotment is an indispensable mechanism for the formation of the capital structure of a newly public company and the accommodation of the interests of all the parties interested in the IPO.