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Shares are distributed based on investor category, the number of valid applications, available shares, and the applicable allotment basis. Getting shares allotted in an Initial Public Offering (IPO) is not a first-come, first-served process. It follows a structured, Securities and Exchange Board of India (SEBI) regulated method that depends on investor categories and oversubscription levels.
This article covers investor quotas, allotment formulas, the T+3 listing timeline, unblocking mechanics, and applicable capital gains tax.
Key Takeaways
- IPO shares are split across Qualified Institutional Buyer (QIB) (up to 50%), Non-Institutional Investor (NII) (at least 15%), and Retail Individual Investor (RII) (at least 35%) quotas, each with its own allotment method.
- Retail oversubscription triggers a computerised lottery where each valid Permanent Account Number (PAN) gets an equal chance, meaning extra lots do not improve winning odds.
- NII and QIB categories use pro-rata allotment, scaling down larger bids subject to a minimum lot guarantee.
- The mandatory T+3 listing timeline ensures allotment finalisation by T+1, unblocking and demat credit by T+2, and trading on T+3 via the Application Supported by Blocked Amount (ASBA) and Unified Payments Interface (UPI) system.
- Listing-day and subsequent gains attract capital gains tax (20% for short-term, 12.5% above ₹1.25 lakh for long-term) subject to Securities Transaction Tax (STT) payment.
What is an IPO Allotment?
IPO allotment is the process by which a company distributes its offered shares to investors who applied during the bidding window. Once the IPO closes, the registrar to the issue validates applications, reconciles bid and payment data, and finalises the basis of allotment in coordination with stock exchanges. The distribution mechanism varies based on investor categories and subscription levels.
How IPO Shares are Classified
Before distribution, SEBI mandates dividing the total issue size into distinct investor buckets:
- Qualified Institutional Buyers (QIB): Up to 50% of the net offer. Includes mutual funds, foreign portfolio investors, and commercial banks.
- Non-Institutional Investors (NII): At least 15% of the offer, catering to high-net-worth individuals and corporate bodies bidding above ₹2 lakh.
- Retail Individual Investors (RII): At least 35% of the offer. Individual investors applying for amounts up to ₹2 lakh fall into this bracket.
How Allotment Works Across Categories
When demand exceeds available shares, the distribution method changes based on the investor category.
The Retail Lottery System
If the retail portion is oversubscribed, SEBI mandates a computerised lottery system rather than proportional reduction. Every valid application submitted for a minimum lot receives an equal mathematical chance of selection. Successful applicants receive exactly one minimum lot, while unsuccessful applicants receive zero shares. Splitting applications using the same PAN across multiple accounts violates regulations and leads to rejection.
Pro-Rata Allotment for Non-Institutional Investors
Institutional and high-net-worth buckets use a proportional allocation method during oversubscription. Investors receive a percentage of shares bid for, scaled down based on the category's overall subscription ratio, while maintaining minimum lot safeguards for smaller tiers.
Step-by-Step Calculation and Formulas
Retail Allotment Scenario
If an IPO receives 5 lakh valid retail applications for an issue that can service only 1 lakh minimum lots, a lottery selects the successful applicants.
Successful Applicants = Total Retail Shares Available ÷ Minimum Lot Size
Each valid application has an equal chance of selection, regardless of whether the applicant applies for one lot or multiple lots.
Non-Institutional Investor Pro-Rata Scenario
Suppose the NII category is oversubscribed 10 times, and an investor applies for 100 lots. Because institutional allocation scales proportionately, the allotment ratio is calculated as follows:
Allotment Ratio = Total Shares Available in Category ÷ Total Shares Applied For in Category
Shares Allotted = Shares Applied For × Allotment Ratio
Applying this ratio to a 100-lot bid yields approximately 10 lots (100 ÷ 10), subject to rounding and minimum lot requirements.
The Post-IPO Allotment and Listing Timeline
Under SEBI regulations, public issues follow a strict T+3 schedule:
- Day 0 (T): Issue closing date. Bidding stops, and the registrar aggregates data across banking channels.
- Day T+1: Technical rejections are filtered out, and the Registrar of Companies (RoC), in consultation with the stock exchange and lead managers, finalises the Basis of Allotment.
- Day T+2: Successful applicants receive shares directly in their Depository Participant (DP) Demat accounts, and funds for unallotted applications are unblocked via ASBA or UPI.
- Day T+3: The stock officially lists on the National Stock Exchange (NSE) and BSE, and regular market trading begins.
Tax Treatment of IPO Gains
Gains from selling IPO-allotted shares are categorised as capital gains under Income Tax provisions, provided STT is paid at the time of sale:
- Short-Term Capital Gains (STCG): Applicable to shares held for under 12 months, taxed at 20% under Section 111A.
- Long-Term Capital Gains (LTCG): Applicable to shares held for 12 months or more, taxed at 12.5% under Section 112A for aggregate gains exceeding ₹1.25 lakh per financial year.
Conclusion
IPO allotment mechanics balance structured quotas with transparent lottery and pro-rata distribution rules. Understanding investor categories, subscription ratios, and the T+3 timeline clarifies why valid bids may occasionally result in zero allocation. Once credited to a demat account, shares follow standard capital gains taxation upon sale, providing clarity for retail and institutional participants alike.
