Categorization of Investors Influence

Educational insights
1

With respect to Indian IPOs, how does the categorization of investors influence the chances of share allocation, and are there any tactical measures retail investors can adopt to optimize their allocations?

2

Navigating through IPO allocations can often feel like threading a needle in a haystack, given the stringent regulations and intricate categorizations. Let’s dive deep to understand this dynamic.

Grasping the Investor Categories:

• Retail Individual Investors (RIIs): These are individual investors who apply for shares worth up to ₹2 lakhs. Typically, around 35% of shares in an IPO are earmarked for RIIs in India.
• Non-Institutional Investors (NIIs): Investors (like HNIs) applying for shares worth more than ₹2 lakhs. They usually have around 15% of shares reserved.
• Qualified Institutional Buyers (QIBs): Includes entities such as banks, MFs, and FIIs. Generally allocated 50% of the shares.

Allocation Dynamics:

• RIIs: In case of oversubscription, each RII gets a minimum lot, and the remaining shares are distributed on a pro-rata basis.
• NIIs: Allocation is usually on a proportionate basis. An oversubscribed NII category can mean lower chances of getting an allotment.
• QIBs: Shares are proportionately divided among QIBs. The heavy backing by QIBs can sometimes be a positive indicator for retail investors.

How to increase your chances?

  1. Leverage Multiple Applications: Using separate Demat accounts from family members can help. However, do ensure that no individual applies multiple times for the same IPO, which can lead to disqualification.
  2. Avoid Last-minute Rush: Digital traffic surges on the last day of IPO applications, increasing chances of server issues. It’s advisable to apply beforehand.
  3. Track Subscription Trends: Keeping an eye on the subscription numbers of the NII and QIB categories can provide hints on the attractiveness and potential oversubscription of the IPO.

Analyze IPO data:

• IPO Grey Market Premium (GMP): Though unofficial, GMP can provide a sense of the potential listing gains and the buzz around the IPO.
• Analyst Recommendations: Many stock research firms release recommendations for prominent IPOs. A consensus view can offer some guidance.
• Illustrative Example: The IPO of “X Tech Pvt. Ltd.” in 2022 was a classic case. RIIs who applied early, monitored the overwhelmingly positive QIB subscriptions, and leveraged multiple Demat accounts stood a better chance at allocation, as the RII category saw heavy oversubscription due to the buzz.

Note: Investing in IPOs carries risks, like all stock market investments. Comprehensive research, and possibly consultation with a financial advisor, is highly recommended before making any decisions.