There is a lot of confusion among general investors regarding how Initial Public Offering (IPO- First ever public issues) gets allotted. Due to lack of simple knowledge about allotment guidelines, most of the general investors are suffering. We can take example of HIDCL (hydroelectricity Investment & Development Company Limited ) IPO issue, where investors applying for Rs 50,000 got 56 units, whereas investors applying for Rs 51,000 were allotted only 13 units of share. Here more than 7000 investors applied for Rs 51,000 due to lack of adequate knowledge about IPO allotment guidelines.
HIDCL is just a one example, there are many public issues like NIB FPO, Shikhar Insurance FPO and many more where investors who applied for fewer shares got more shares than investors who applied for more number of shares.
ShareSansar tried to find out why such difference is created. Is the issue manager or company who intentionally tries to create such differences or is it based on certain set rules and regulations for IPO/FPO allotment?
Actually Security Board of Nepal (SEBON) has prepared separate guidelines of allotment of IPO/FPOs. All the public issues, including IPO/FPO’s are allotted based on the rules and regulations set by Securities Allotment Guidelines, 2068.
What exactly Securities Allotment Guidelines, 2068 says?
- Shares are distributed on pro-rata system (uniformly).
- Securities Board of Nepal (SEBON) recognizes two types of investor groups; Retail Investors or Small Investors Group (Who invest up to NPR. 50,000) and Other Investors or Big Investors (who invest more than NPR. 50,000).
- 40 percent of total share to be allotted are set aside for small investors (Investors applying up to Rupees Fifty Thousand are regarded as small investors).
- Remaining 60 percent is set aside for other investor group (big investors) applying of more than Fifty thousand rupees.
- Out of the total public issue, 5% of shares is allotted to mutual funds and 2-5% is allotted to the employees of the issuing companies depends upon their number.
- If the demand for share from small investors exceeds more than 40 percent, then both the group is regarded as one and all the shares are allotted on pro-rata basis to all the investors representing both groups.
- Minimum 10 units need to be allotted to investors.
Securities Allotment Guidelines, 2068 set two models of allotment depending upon shares demand
Model 1 – Equal Distribution to All Investors
After deducting the mutual fund and employee’s portion; a minimum of 40 percent shares has to be allotted to the retail investors. In case retail investors have contributed more than 40 percent of the amount collected then both types of investors (Retail Investors Group and Others Investors Group) will be considered as one or single group and the shares will be distributed equally in the same ratio to all investors.
Lets us take one example
Assume XYZ companies is issuing a 1,00,00,000 units or Rs 1 Arba worth share to general public after deducting the shares to mutual funds and employees.
| IPO Share (Units) |
10,000,000.00 |
| IPO Amount (Rs.) |
1,000,000,000.00 |
| Issue Oversubscribed by 25 times |
25 times |
| Total Demand |
25,000,000,000.00 |
Suppose, the Retail investors had applied for 150,000,000 shares (NPR.15,000,000,000). In this case the amount collected from the retail investors is above 40% of the total amount collected then both groups of investors are treated as one and the shares will be allotted uniformly to each group.
| IPO Amount (Rs.) |
1,000,000,000.00 |
| Total Amount Collected (Oversubscribed by 25 times) |
25,000,000,000.00 |
| Retail Investors Contribution or Demand(60% of total Amount Collected) |
15,000,000,000.00 |
| Other Investors Contribution or Demand (40% of total Amount Collected) |
10,000,000,000.00 |
In this case the retail investors are demanded for more than 40% of total share; therefore the shares will be distributed equally.
Each Investors allotted Percentage =
Total Issue Amount/ Total Investors Demand Amount
= 1,000,000,000/25,000,000,000
= 4.00%
Hence all the investors will get 4% of the total applied shares.
As per the SEBON rule, each investor must get minimum 10 units or more. In above case, investors who applied for Rs 24,000 or 240 units will be allotted 9.6 units which is not possible as per SEBON rule. So there will be lottery allotment system till Rs 24,000 investment. For each group there will be separate lottery till an applicant gets 10 units as per allotment percentage of the issue.
Model 2 – Variable Distribution to two groups
After deducting the employees and mutual funds portion; a minimum of 40 percent has to be allotted to the retail investors. In case retail investors have contributed or demanded less than 40 percent of the amount collected, then each group of investors will be considered as separate and the shares will be distributed in the following manner; 40% to the retail investors and 60% to the other investors group.
Let’s see example:
| A |
IPO Share(Units) |
10,000,000.00 |
| B |
IPO Amount (Rs.) |
1,000,000,000.00 |
| C |
Mutual Fund (5%) |
50,000,000.00 |
| D |
Staff (2%) |
20,000,000.00 |
| E |
Public Portion (Amt) (E=B-C-D) |
980,000,000.00 |
| F |
Retails Investors (40% of E) |
392,000,000.00 |
| G |
Others Investors (60% of E) |
588,000,000.00 |
| H |
Total Demand (Amount) |
25,000,000,000.00 |
| I |
Demand of Retail Investors(Amount) (20% of total Contribution) |
5,000,000,000.00 |
| J |
Demand of Other Investors (Amount) (40% of total Contribution |
20,000,000,000.00 |
Here the Retail investors had applied for 50,000,000 shares (NPR.5,000,000,000). In this case the amount collected from the retail investors is 20% of the total amount collected. Hence, both groups of investors will be treated differently.
Retail Investors (Applying up to Rs 50,000):
| A |
Available Amount for Retails Investors (Rs) |
392,000,000.00 |
| B |
Demand of Retail Investors (Rs) |
5,000,000,000.00 |
| C |
Oversubscribed by |
12.76 |
| D |
% Allotment ( D=A/B*100) |
7.84% |
Other Investors (Applying above Rs 50,000):
| A |
Available Amount for Other Investors |
588,000,000.00 |
| B |
Demand of Other Investors |
20,000,000,000.00 |
| C |
Oversubscribed by |
34.01 |
| D |
% Allotment ( D=A/B*100) |
2.94% |
Here the two investor groups that are treated differently since there is less than 40% demand from small investors group.
Seeing the above two allotment model we came to conclude that either small investor will get more percentage of share then other investors group or small investors will get same percentage of shares that of other investor group.
