This month will see quite a few IPOs hitting the market. CARE Ltd (7-11 Dec), PC Jeweller Ltd(10-12 Dec), Bharti Infratel Ltd(11-14 Dec). IPOs are very popular among retail investors, a majority of them investing for quick gains. Recently, the SEBI has brought about some changes in the allotment process in order to boost retail participation. Let us see what are its pros and cons.

How it works

In the earlier method, allotment was made first on proportionate basis and then by the lottery system. It meant that those who applied for more shares got allotted more number of shares too. Also, in the case of over subscription, those with the highest bid got preferential allotment and those bidding for a lesser amount were not allotted anything.

The new allotment process aims to ensure that each retail applicant gets allotted the minimum one lot, subject to availability of shares, irrespective of their application amount. For eg.- Both the  investor with an application size of Rs 2 Lakhs  and the one with the minimum application amount of say Rs. 20,000 would get allotted one lot first. The balance shares are allotted on a proportionate basis and the lottery system is used only in case of a huge oversubscription. This would mean that a greater number of applicants would get allotment in oversubscribed issues.

The likely impact

• Most small investors will bid for a single lot and this would reduce the average application size.
• Instead of applying a huge amount through a single application, investors will apply through smaller multiple applications for greater allotment. For eg- An investor A who wants to invest Rs. 1 lakh will now make  5 applications of Rs. 20,000/- each in the name of different family members.
• The IPO financing companies will lose out, since there will be lesser investors requiring funding due to reduction in the individual application amount.
• The sure shot allotment guarantee will encourage more retail participation.