Understanding IPO Allotment: Can Minors Participate in IPO Applications?

 

Initial Public Offerings (IPOs) offer a popular way for companies to raise capital by selling shares to the public for the first time. For investors, participating in IPOs can present opportunities to gain equity in companies with growth potential. However, the allotment process can be intricate, and many prospective investors often have queries like, "how is IPO allotment done?" and "can minors apply for IPO?" This article aims to delve into these questions and provide clarity on the subject.

How Is IPO Allotment Done?

The IPO allotment process is managed to ensure a fair and transparent allocation of shares to applicants. It usually involves several steps, which can be summarized as follows:

1. Application Submission: 

Investors apply for IPO shares through their broker or online trading platforms. Each investor specifies the number of lots they wish to purchase and the price they are willing to pay within the predetermined price band.

2. Application Categorization: 

The applications are categorized into different investor categories such as Qualified Institutional Buyers (QIBs), Non-Institutional Investors (NIIs), and Retail Individual Investors (RIIs). Each category is allotted a specific percentage of the total IPO shares.

3. Bid Evaluation: 

The bids are evaluated based on their parameters like the bid price and number of shares. The applications within each category are considered for allocation following regulatory guidelines.

4. Share Allocation: 

The allocation method differs based on the investor category. Here is a simplified understanding:

- *Retail Individual Investors (RIIs)* applying for shares worth up to INR 2 Lakhs: All valid applications are considered, and shares are allotted using a lottery system if the issue is oversubscribed.

- *Qualified Institutional Buyers (QIBs)*: Shares are allotted on a proportionate basis as per their bids.

- *Non-Institutional Investors (NIIs)* applying for shares above INR 2 Lakhs: Shares are also allotted on a proportionate basis in case of oversubscription.

5. Funds Blocking and Refunds: 

The funds equivalent to the value of the bid are blocked in the investor's account via the Application Supported by Blocked Amount (ASBA) system. Post allocation, unsuccessful applicants receive refunds while the allotted applicants' funds are transferred for share purchase.

Mathematical Example for IPO Allotment

Consider an IPO where a company issues 10 million shares at an issue price of INR 100. Assume the categories are allotted as follows: 50% for QIBs, 35% for RIIs, and 15% for NIIs. If the IPO receives bids for 50 million shares, the subscription status would be:

- QIBs: Bids for 25 million shares (2.5x subscription)

- RIIs: Bids for 15 million shares (1.5x subscription)

- NIIs: Bids for 10 million shares (6.67x subscription)

Given the oversubscription:

- For QIBs: Shares are distributed proportionately.

- For RIIs: A lottery system draws lots to allocate shares.

- For NIIs: Shares are distributed proportionately based on their bid amount.

Now imagine you submit a bid as an RII for 1 lot (100 shares) and the total RII bids are 1.5 times over the shares allotted (3.5 million shares available). A lottery system will be used, giving approximately a 66.67% chance of receiving the allocation.

Can Minors Apply for IPO?

A common query is “can minor apply for ipo?” Legally, minors in India can invest in the stock market, including IPOs, but through a custodial or guardian account. Here are the key steps:

1. Open a Demat and Trading Account: 

The guardian (either parent or court-appointed) needs to open a Demat account and a trading account in the minor's name with depository participants (DPs) like banks or financial institutions. The guardian's PAN and details are used primarily, though the minor’s details will also be required.

2. Submission of Documents: 

Necessary documents such as the minor’s birth certificate, proof of the guardian’s identity, and proof of relationship are mandatory for the account opening.

3. IPO Application Process: 

Once the Demat and trading accounts are active, the guardian can apply for IPO shares on behalf of the minor. The process follows the same ASBA system for funds blocking.

Example Calculation for Minor Applying for an IPO

Suppose a minor, through their guardian, applies for 2 lots of shares in an IPO at INR 200 per share with a total application valued at INR 40,000. The sum is blocked from the guardian's linked bank account. Post-allotment, if the IPO is oversubscribed and the minor gets an allocation of 1 lot (100 shares), INR 20,000 remains blocked for share purchase while INR 20,000 gets unblocked and refunded to the linked account.

Conclusion

Understanding "how is IPO allotment done" and “can minor apply for IPO” helps investors navigate the IPO landscape more effectively. The allotment process is systematic and regulated, ensuring fairness among different investor categories. Minors can also participate in IPOs through custodial accounts managed by guardians, enabling early exposure to equity markets.

Disclaimer: Investing in IPOs and the stock market involves significant risks. Investors must evaluate the pros and cons thoroughly and consider seeking advice from financial advisors. The information provided here is for educational purposes and not to be construed as financial advice.