27 December, 2007

How to fill up your IPO application

Found this interesting artcile on rediff

December 27, 2007

By the second week of November 2007, as many as 81 initial public offerings had listed on the National Stock Exchange this year -- significantly higher than the 73 and 50 issues in 200 and 2005, respectively.

If you have never been to the great Indian IPO party but want to join in, you need to know that the way you fill up your application form could determine your chances of getting an allotment.

Here's a beginners guide to scoring high by filling your IPO application right.

1. How to apply

You need to have a trading and a demat account to bid in an IPO. You can apply offline or online.


(i) Visit the distributor of the IPO and collect the 'bid-cum-application form.'

(ii) Fill the form carefully. The information asked for will include the name of the applicant, his address, his Permanent Account Number, the category he is applying under, the name of the depository participants (DP), DP ID, beneficiary account number, the number of equity shares the applicant is bidding for, the price per equity share he is willing to pay, and the cheque/draft number. The applicant should fill up the whole form himself and ensure that the name he enters in it is identical to what appears in his demat account.

(iii) Investors have been divided into different categories and the account in favour of which the cheque/demand draft (DD) is drawn depends on the category. So, ascertain your category and mention the correct account. For instance, in the issue of Mundra Port and Special Economic Zone, cheques/DDs of resident qualified institutional buyers had to be drawn in favour of Escrow Account-MPSEZ-QIB-R and those of resident retail and non-institutional bidders in favour of Escrow Account-MPSEZ-R. Write the bid-cum-application form number the reverse of the cheque/DD.

(iv) Companies issue IPOs in different lots, each of them containing a particular number of shares. Your bid will have to be in denominations of lot sizes.

(v) Photocopy the form after filling it.

(vi) Submit the filled application form to sub-syndicate/syndicate members in case of book building and to the bankers directly in case of fixed price issue. Now, you will have to wait to see if you get shares. Take the acknowledgement slip and keep it and the photocopy of the application form with care till you get the shares of your money back.

2. Revision of bid

To revise your bid, submit the bid revision form, which comes along with the bid-cum-application form. The new form will have all the information that you gave in the earlier one and also your revised bid.

3. If things don't happen on time

In case of delay in share allotment or refund if shares are not allotted, write to the registrar of the issue or its lead managers or the compliance officer of the company. If you don't get a reply or it is unsatisfactory, you can complain to the investor grievance cell of the Securities and Exchange Board of India, giving a copy of the application form.

4. Allotment process

There are three categories of investors: qualified institutional investors (like banks, mutual funds and insurance companies), non-institutional investors (NIIs -- individuals investing more than Rs 1 lakh) and retail investors (individuals investing less than Rs 1 lakh). If the NII and retail categories get oversubscribed, a lottery is held among applicants and then shares are allotted on a proportional basis.

So, if the retail category is oversubscribed by 10 times after the lottery, an investor who has applied for 50 shares will get five shares.

5. How to optimise your chance of getting share allotment

(i) Fill the application form correctly so that it is not declared invalid.

(ii) In a book-building issue, the bid has to be made between the floor price and the ceiling price. Let's say the band is Rs 800-850 and there are 100,000 shares in the retail segment. Now, if applications for 10 lakh (1 million) shares come in at Rs 850, all the retail segment shares will be allotted on a proportional basis among applicants at this price after a lottery.

Usually, oversubscription is so overwhelming at the ceiling price itself that allotment is restricted to applicants at this price only. Therefore, you can bid at the ceiling price to increase chances of allotment.

The alternative scenario is when all shares do not get lapped up at the top of the band. Say, applications for 10,000 shares come in at Rs 850. All of them will get allotments as the number of shares applied for at the price is less than the number of shares available.

Then, the next highest bid will be taken. Say, 15,000 shares were applied for at Rs 849. Again, all these applicants will get allotments. This process will continue. Now, if 95,000 shares get allotted by the time Rs 831 is reached, and 10,000 shares are applied for at Rs 830, then Rs 830 will be the cut-off price.

Retail investors have the option of 'applying at the cut-off price.' If 15,000 shares are applied for at the cut-off price, the retail shares that remain (5,000) will be allotted to the cut-off price applicants and those who had bid at the price which turned out to be the cut-off price through the usual way -- lottery and then proportional allotment.

So, if you want to bid at a price lower than the ceiling price, you can increase your chances of getting allotment by specifying in your application that you are bidding at the cut-off price.

(iii) Chances of success if bids go to lottery improve if there are multiple applications.

(iv) The chances of shares coming to your family improve if your relatives apply too.

(v) The NII quota, in which high net-worth individuals (HNIs) bid, is 15 per cent; the retail quota is 35 per cent. So, the possibility of your family getting shares are higher with multiple retail applications by your relatives than with a single HNI application.

Says Vinay Mehta, managing director, Almondz Global Securities: "New issues are more inclined towards retail investors than non-institutional investors as the retail category has a higher allotment and lower oversubscription level."

Many post issues had this oversubscription pattern. Chances of getting allotment are higher when the oversubscription is lower.

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