New “Basis of Allotment” Explained with CARE IPO

by Shiv Kukreja on December 26, 2012

in IPO/NFO

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at skukreja@investitude.co.in

CARE IPO, which closed on December 11th, got oversubscribed by 34.11 times. After a very long time an IPO has seen such a good response from all the categories of investors. There was a huge appetite for its shares from Qualified Institutional Investors (QIBs) and Non-Institutional Investors (NII) categories, which saw oversubscription to the tune of 43.31 times and 110.24 times respectively.

Retail investors were a little cautious but some of them got interested to apply for it. This category got oversubscribed by 6.11 times. CARE has now become the third rating agency to get listed after CRISIL and ICRA.

CARE IPO – Explaining Basis of Allotment to Retail Individual Bidders

CARE IPO had total 71,99,700 equity shares on offer in the IPO, at an issue price of Rs. 750 per share. 35% of the offer was available for allocation to the retail individual bidders in accordance with the SEBI Regulations, which makes it 25,19,895 equity shares.

As many of you must be aware, when the investors apply for a company’s shares in an IPO, there is a bid ‘lot’ system. With CARE IPO, the bid lot size was in multiples of 20 shares and the retail investors had the option to apply for a maximum of 13 lots (260 shares) and a minimum of 1 lot (20 shares). So, the minimum investment in the CARE IPO was Rs. 15,000 and Rs. 1,95,000 as the maximum.

In August this year, SEBI announced certain new measures regarding “Basis of Allotment”. Some of the important measures are:

* Every retail participant gets a minimum bid lot irrespective of his application size. This is subject to availability of shares.
* The minimum application size band in an IPO has been increased from Rs. 5,000-7,000 earlier to Rs. 10,000-15,000 now.
* Issuers are now allowed to furnish the price band five working days prior to issue opening date as against the erstwhile two working days.

So, this new system of allotment, which got used in the CARE IPO also, has left many of the retail investors disappointed, including me.

Retail investors have been allotted only 20 shares irrespective of their application size i.e. whether they applied for 20 shares or 260 shares or any number of shares in between, they got only 20 shares allotted. That too, in the ratio of 101:256 i.e. only 101 applicants got these 20 shares out of 256 applicants.

Actually, a total of 3,19,350 retail individual applicants applied for it, in varying number of bid lots i.e. between 1 to 13 bid lots and only 1,25,994 applicants got the shares allotted in the ratio of 101:256.

Allocation to Retail Individual Bidders (after technical rejection)

As you can check the Basis of Allotment in the table above, there were 2,45,680 applicants who applied for 20 shares with each of their applications. Out of these 2,45,680 applicants, 96,929 applicants have been allotted 20 shares each or total of 19,38,580 shares.

2,45,680 * 101/256 = 96,929 * 20 shares = 19,38,580

Similarly,

15,853 * 101/256 = 6,255 * 20 shares = 1,25,100
9,199 * 101/256 = 3,629 * 20 shares = 72,580

and so on.

If you want to check the manual of CARE allotment, you can do so from this link.

I was disappointed as out of my family members’ 4 applications, we got allotted only 20 shares. There have been many investors like me who are disappointed. But, the disappointment in the allotment is primarily due to non-awareness of the new system.

If the new system is analysed deeply, it is not that bad after all. I think the idea is to encourage and favour the small retail investors and also to discourage HNIs to take the retail category route to apply for higher number of shares.

At the same time, it creates uncertainty in the minds of the retail investors whether to apply for an IPO or not, as you never know whether you will fall in those 1,25,994 successful applicants or not.

With the new system in place, the retail investors will have to change their strategy to get maximum number of shares allotted in some popular IPOs like CARE i.e. they should now apply for minimum bid lots in popular IPOs and increase the number of applications using demat accounts of their family members.

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{ 11 comments… read them below or add one }

Ashok December 26, 2012 at 7:54 am

Thank you. This was well-explained. And with your explanation, SEBI strategy also seems to make sense.

Reply

Shiv Kukreja December 26, 2012 at 7:13 pm

You are welcome Mr. Ashok!

Reply

Rakesh December 26, 2012 at 8:05 pm

Great work. I was lucky as I applied for 40 and got 20. Few of my friends applied for 200 and got only 20, some got none.

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Shiv Kukreja December 26, 2012 at 8:27 pm

Yes Rakesh, you were indeed lucky. ‘Uncertainty’ of allotment is the biggest drawback of this new system.

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Manshu December 26, 2012 at 9:22 pm

They need to change the rule or they will see the retail participation because this situation is equally undesirable for people who don’t care much for 15 or 20 shares and for those won’t get anything at all.

This kind of situation is only useful for the very very small investor who will see any difference in their portfolio with 15 or 20 shares of any IPO.

Reply

Shiv Kukreja December 26, 2012 at 10:56 pm

For unpopular IPOs, they have a different method of allotment, in which the investors with high investments will get higher no. of shares allotted. But definitely there is a scope for improvement in this new system. I dont have high hopes though.

Reply

Manshu December 27, 2012 at 6:10 am

I don’t get this, won’t this new type of allotment be used for every share on offer? On whose discretion is it to decide how they are going to allot shares?

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Amit Khandelia December 27, 2012 at 7:45 am

This rule will be used for all IPO. What Shiv is trying to say is for not so popular IPO where IPO is under subscribed, those who are applying full lots will get full allotment. So now number of applicant is more important unlike earlier when no of applicant in maximum lot size was important.

I applied from 3 account for minimum lot and got allotment in one account only that is 20 shares but I am happy as I applied for 45000 and got shares worth 15000.

Reply

Kaushal December 31, 2012 at 5:07 pm

On the basis of the new rule i applied for the min and in another account for 2 lots for the ipo, but i must say i am disappointed neither i got the min nor i got allotted under the 2 lots bid…Earlier with a max lot bid i was pretty sure that i would be allotted some shares > min lot, this new rule does not even assure an allotment on min bid or only a min lot allotment on max lot bid…

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Shiv Kukreja January 1, 2013 at 5:21 pm

Yes, I agree that ways it is very disappointing.

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Sanjay September 24, 2014 at 7:32 pm

Dear sir
This information help me to understand better while applying in good ipo…. Now will open dmat for all my family members…. Now any way to get my parents pan card cause both are not hv their birth certificate…. Any options for them

Reply

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