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How does the allotment process work if the IPO is oversubscribed?

An IPO is said to be oversubscribed when the number of applications is higher than the shares available for allotment. In such cases. a draw of lots is made for allocating shares to investors.

Assume 10 investors have applied for an IPO at the cut-off or upper price band. Each investor has made an application in the range of 1 to 5 shares. A list of these investors and shares applied would look something like this:

InvestorQuantity
Investor 11
Investor 22
Investor 33
Investor 43
Investor 54
Investor 64
Investor 74
Investor 85
Investor 92
Investor 10
1
Total29

If the total number of shares to be allotted is 5 then the allotment could be made in the following manner:
InvestorQuantityAllotment
Investor 110
Investor 221
Investor 331
Investor 430
Investor 541
Investor 640
Investor 740
Investor 850
Investor 921
Investor 1011
Total295

There could have been more investors who applied. However, if they applied at a price below the upper price band then their bids would not have been considered. Alternatively, if this public offering saw lower public interest then the issue price could have been any price in the price band which ensures maximum subscription.

According to guidelines an issue must be subscribed by at least 90% for it to list, if the issue fails to hit that limit even after the underwriter’s assurances the IPO will be scrapped and the amount returned to the bidders