The initial public offering is a hot topic in stock markets recently. 2021 has been an epic for IPOs with 60 new companies raising more than Rs.1.2 lakh crore. This shows the kind of demand and interest retail investors showed towards IPOs recently.
But this demand has some downsides too. Since the number of available stocks is not in alignment with the demand, a lot of investors were unable to get allotments. This situation has in turn helped a lot of myths to spread regarding applying for IPOs and IPO allotments. One of the most prominent among them is the idea to apply for an IPO through multiple demat accounts. But will that work? Is it legal and does it increase the chance of IPO allotment, let’s take a look.
To answer this question, first, we need to understand how IPO shares are allotted.
The process of IPO allotment starts with the company announcing a per share price range for their IPO. They are priced by underwriters the company appointed for the IPO. They thoroughly study the company in and out, assume the possible demand the company’s shares could have and come to a price conclusion, which is usually in a range.
Once the company and the underwriters have fixed a price range, retail investors have the opportunity to bid on it through their demat accounts. Stocks are packed as lots for the ease of transactions and the bids are made for these lots. Each lot will have a fixed number of stocks of the company. If the number of bids and the number of lots is equal, every investor who had bid will get allotted lots. But what happens if the number of bids is more than the number of available lots? Then the IPO is said to be oversubscribed.
IPOs are oversubscribed when there is a higher demand. This means that the retail investors see potential in the company, and they are confident about its ability to make a profit for them.
Usually, when a company’s IPO is oversubscribed, the shares could open at a profit. But stock markets are often unpredictable and on occasions, stocks could go down at opening even when the IPO is oversubscribed.
On the other hand, if the opposite happens – that is if the number of bids is lesser than the number of lots, the IPO is said to be undersubscribed and it reflects a lesser retail demand.
In 2021, most of the IPOs were oversubscribed, thanks to the skyrocketing demand. But is applying through two demat accounts the right way to increase the chances of allotment? Let’s see.
If both the demat accounts are in your name with a single PAN card, then the answer is no. If you do so, it might result in both your applications being rejected leaving your chances for IPO allotment to zero.
You cannot apply twice through the same demat account as well. This will also be a violation of securities and exchange board of India’s (SEBI) terms and conditions and your application could become void.
An alternative for this would be to apply using demat accounts of your family members, with their permission, to increase your chances of allocation.
According to the Securities and Exchange Board of India’s terms, when there is an oversubscription, every bidder is given at least one lot, doesn’t matter the number of lots an investor had bid for. The rest of the lots, if any, are distributed on a pro-rata basis. But this only works for minor oversubscriptions. There are multiple IPOs that were subscribed more than 10 times in the recent past. In such situations, a lottery system is adopted, and lots are allotted to random investors who happen to win a bid. In this situation too, every bid is given only one lot, doesn’t matter the money that the investor has put in. This is to give every retail investor a fair and equal chance to get their hands on the IPO.
But this doesn’t mean your chances of winning an allotment is doomed. There are certain things you can do to increase the chance of your IPO allotment, such as –
Like said above, applying multiple times or through multiple demat accounts of your own is illegal and it could result in your applications becoming void. Instead, you could use accounts of your family and friends, with their knowledge, to increase the chances of allotment. This way, if the IPO allotment goes to a lottery system, there is a higher chance for you or your family or friends to win the allotments. Here, it is important to understand that if you win an allotment through your family’s or friends’ account, they will be the sole owner of the shares and there should be an agreement to avoid any misunderstandings.
Bidding for a higher amount doesn’t make sense as if the allotment goes to a lottery system, higher bids have no extra value. But bidding for a lower amount will decrease your chances of getting allotted as well. Hence, it is always advisable to bid at the cut-off price or closer to the cut off price. That is, if an IPO’s price range is between Rs.1000 and Rs.2000, it is best to bid at Rs.2000 or close to it.
IPOs are becoming great money making opportunity for retail investors and it shows in the kind of demand IPOs have recently. But it is important to understand the workings of an allotment and stick by the rules to make sure that you have the best chance of getting an allotment. While the above tricks will increase your chance of winning the bid, IPO allotment is still a lottery-based system and a lot depends on luck.
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