BouncyCoconut

Finance folks, help me understand the IPO allocation probability

When the IPO for the retail category is over-subscribe let's say by 2x time, everyone seems to say that the probability of allocation is 1:2 i.e 50%, but is that the correct way of calculating probability?

Different retail investors apply for different numbers of lots, maximum allottees = (shares offered / total shares in 1 lot), it is possible that number of applicants are less than maximum allottees if maximum applicants are applying for more than 1 lot, in such cases if IPO is 2x times subscribed by total applicants less than max allottees then everyone is 100% going to get at least 1 lot, so probability becomes 100% and not 50%.

Is this calculation correct? What i'm missing or misunderstood?

I have watched many videos and read many articles but i'm still not clear on how probability calculation should be done correctly.

12mo ago

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FluffyCupcake

Amazon12mo

If any IPO is oversubscribed (especially in Retail), they converge all applications as single lot applications.
Another allocation method is called as “Proportionate” allocation, this is happening in shareholders category of TaTa Tech IPO

BouncyCoconut

Stealth12mo

That doesn't answer my question at all bro

FluffyCupcake

Amazon12mo

I read your calculation but the fundamental problem here is (over)subscription is reported in number of shares applied for/value associated.

Lemme give an example, if everyone applies for 2 lots and (maximum allottees = = applicants). Probability of getting IPO lot will remain 100%. Subscription won’t matter.

But

In real time scenarios, everyone has different lots in their applications, so probability calculation becomes too complex.

GigglyBanana

Stealth12mo

The simplest way to look at this is the average number of lots applied per person.If you look at the "Basis of allotment" of past IPOs, you will see that the average number of lots people are applying for is 1.1 only. That means more or less if an IPO is oversubscribed 2x in value, then the applicant oversubscription is 2/1.1~1.8x ie it will automatically become a lottery with a probability of allocation of 1/1.8~55%

SqueakyNugget

Stealth12mo

There are 3 ways for allotting: a) FIFO & b) LIFO (hardly in case of over subscription), c) Lottery (Almost used for all the IPO applications).

TwirlyLlama

Stealth12mo

Yes, that’s the correct way If it is oversubscribed the number of lots one applied for does not matter . It is just considered as one application and based on lottery the allocation is done
This is for retail quota.

For HNI quota - number of lot matters . ( Many years ago , number of lots mattered even for retail quota)