Allocation: What it is, how it works, methods & importance.

Key Highlights

Allocation refers to the process of distributing shares among investors during a public offering such as an IPO, FPO or Rights Issue.
Allocation methods includes proportionate, lottery-based and category-wise allocation.

What is Allocation?

Allocation refers to the process of distributing shares among investors during a public offering such as an IPO, FPO or Rights Issue. It determines how many shares each investor receives based on demand, investor category, and regulatory guidelines.

Allocation ensures fair and transparent distribution of securities, especially when the issue is oversubscribed.

How Allocation Works?

Investors place bids during the issue period.
After the issue closes, the total demand is compared with the available shares.
Shares are assigned based on rules set by regulators (like SEBI) and the issuer.
Allotment can occur through proportionate allocation, lottery systems, or category-wise quotas.

Allocation Methods

1. Proportionate Allocation: Shares are allotted in proportion to the size of each investor’s bid, commonly used in institutional and non-institutional categories.

2. Lottery-Based Allocation: Used when demand from retail investors exceeds supply. Investors receive shares through a computerized draw.

3. Category-Wise Allocation: Different investor categories such as QIBs, NIIs, and Retail - receive a defined portion of the issue as per regulatory guidelines.

Importance for Investors

Determines the actual number of shares an investor receives, which may differ from the bid quantity.
Helps investors understand fairness and transparency in the IPO process.
Impacts the investor’s final investment amount and potential returns.
Provides clarity on how oversubscription is handled.

FAQs

1. Is allocation the same as allotment?

Yes, both terms are commonly used interchangeably. Allocation refers to the process, while allotment refers to the final number of shares received.

2. Why do I sometimes receive fewer shares than I applied for?

This happens when the issue is oversubscribed. Shares are then distributed proportionately or through a lottery system.

4. Can allocation be revised after it is published?

No. Once the allotment is finalised and approved, it cannot be changed.

5. Does a higher bid increase my allocation chances?

For retail investors in book-built issues, bidding at the cut-off price improves the chances, but in heavy oversubscription, the lottery system applies.