The new measures announcement by SEBI in 2012 on the basis of allotment in the retail portion has some key clauses which favours smaller investors even among the retail investors. The idea is to broaden the equity holder base and ensure that as many people as possible get the shares they applied for. This is useful in spreading the equity cult in India.

The idea is that every retail applicant first gets a minimum bid lot irrespective of size of application. This is of course subject to availability and technical validity of the bid.

The minimum application band for retail investors has been raised in case of retail investors from Rs.5000-7000 to Rs.10,000-15,000.

Issuers are allowed to furnish the price band 5 days prior to the opening of the issue as opposed to just 2 days prior to 2012.

In case the number of applicants is more than the maximum possible allottees for the minimum lot size, then the eligible allottees will be decided through a lottery system. This point is extremely important in understanding basis of allotment of IPOs as we will see in the real life example of Narayana Hrudayalaya IPO that closed and listed a few weeks ago.

LIVE CASE STUDY: Allotment to Retail Individual Bidders (After Technical Rejections) (including ASBA Applications) for Narayana Hrudayalaya IPO

The Basis of Allotment to the Retail Individual Bidders, who have bid at cut-off or at the Offer Price of Rs 250 per Equity Share, was finalized in consultation with the BSE. This category has been subscribed to the extent of 1.82 times. The total number of Equity Shares Allotted in Retail Individual Bidders category is 8,583,154 Equity Shares to 143,052 successful applicants. The category-wise details of the Basis of Allotment are as under:

Category

No. of Applications Received

% of Total

Total No. of Equity Shares Applied

% to Total

No. of Equity Shares Allotted per Applicant

Ratio

Total No. of Equity Shares Allotted

60

172,081

90.78

10,324,860

66.06

60

643:852

7,792,140

120

6,966

3.68

835,920

5.35

60

40:53

315,420

180

2,623

1.38

472,140

3.02

60

40:53

118,800

240

1,446

0.76

347,040

2.22

60

40:53

65,460

300

977

0.52

293,100

1.88

60

40:53

44,220

360

1,154

0.61

415,440

2.66

60

40:53

52,260

420

584

0.31

245,280

1.57

60

40:53

26,460

480

287

0.15

137,760

0.88

60

40:53

13,020

540

110

0.06

59,400

0.38

60

83:110

4,980

600

419

0.22

251,400

1.61

60

40:53

18,960

660

54

0.03

35,640

0.23

60

41:54

2,460

720

168

0.09

120,960

0.77

60

40:53

7,620

780

2,679

1.41

2,089,620

13.37

60

40:53

121,320

1

34:13183

34

TOTAL

189,548

100.00

15,628,560

100.00

8,583,154

If you look at the actual IPO allotment process of Narayana Hrudayalaya, there are 6 points that you can glean from it:

Firstly, the price for the IPO was fixed at Rs.250. Thus the minimum application lot was 60 shares (Rs.15,000) and the maximum application lot for retail was 780 shares (Rs.195,000). Remember it has to be less than Rs.200,000 to qualify as Retail.

Secondly, after the technically incorrect and ineligible applications were rejected, the company received total valid applications for 85,83,154 shares in the retail category.

Thirdly, we also know that the SEBI rules require to first allot the minimum lot to as many eligible shareholders as possible. In this case we will have 143,502 successful applications (85,83,154 / 60).

Fourthly, however, a total number of 189,548 applications were received and only 143,502 successful applications can be possibly allotted. Therefore the remaining 46,046 applications get rejected. That is why many applicants may wonder why they did not get a single share allotment. That is because their application may have got rejected. How is the rejection determined? Well it is done through a computer generated random lottery system and hence there will be no scope for any favouritism in allotment in such cases.

Fifthly, if you look at the basis of allotment received, then the attempt here is to ensure that the people applying for the smallest lot size get the first preference for allotment. This will bring a lot of retail interest in the IPOs and is a good step towards building the equity cult in India.

Last, but not the least, in this case after allotment of 60 shares to the 143,502 (maximum allottees), there are no further shares left to allot to higher lot bidders. Hence you will see in the allotment column that whether you bid for 60 shares or for 780 shares, your allotment is only 60 shares.