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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 scenarios, the registrar will conduct a lottery to allot shares to the applicants.

Example scenario

The first table shows the list of applicants, and the second table explains how the allotment of shares can occur.

Assume 10 investors have applied for an IPO at the cut-off price, i.e., the offer price at which the shares get issued to the investors. Each of these investors has placed a bid in the range of 1 to 5 shares. The list of these investors and shares applied would look something like this:

Investor

Quantity Applied

Investor 1 1
Investor 2 2
Investor 3 3
Investor 4 3
Investor 5 4
Investor 6 4
Investor 7 4
Investor 8 5
Investor 9 2
Investor 10 1
Total number of shares applied 29

If the total number of shares to be allotted is 5 then the allotment could be made in the following manner:

Investor Quantity Applied

Quantity Allotted

Investor 1 1 0
Investor 2 2 1
Investor 3 3 1
Investor 4 3 0
Investor 5 4 1
Investor 6 4 0
Investor 7 4 0
Investor 8 5 0
Investor 9 2 1
Investor 10 1 1
Total 29 5

Investors (2), (3), (5), (9), and (10) have won the lottery conducted by the registrar and will receive shares against their IPO application. If an investor had applied at a price below the upper price band, then the bids would not have been considered for the allotment lottery.

Visit zerodha.com/varsity/chapter/the-ipo-markets-part-1/ to learn more about IPOs.