Allotment

Allotment — Meaning, Definition & Full Explanation

Allotment is the process of distributing a specific number of shares to underwriters, financial institutions, or investors during an Initial Public Offering (IPO) or other share issuance. It represents the formal allocation of securities that have been subscribed for or underwritten, converting investor applications into confirmed share ownership. Allotment is the bridge between subscription (when investors apply for shares) and listing (when shares begin trading on the stock exchange).

What is Allotment?

Allotment is the official assignment of shares to applicants who have subscribed for them during a public share offering. When a company decides to raise capital by issuing new shares to the public, the process follows a structured sequence: first, the prospectus (offer document) is filed; second, the subscription period opens and investors apply for shares; third, allotment occurs where the company decides how many shares each applicant will receive.

During allotment, if the offering is oversubscribed (more shares applied for than available), the company must follow a lottery system or proportional basis to distribute shares fairly. Underwriters—financial institutions that guarantee the success of the offering—are typically allotted a bulk portion of shares to sell to their retail client base. The allotment letter or allotment advice is issued to successful applicants, confirming the number of shares allocated to them and providing instructions for payment or delivery. Allotment differs from subscription in that subscription is the application phase, while allotment is the confirmation phase. It also differs from listing, which happens after allotment when shares are registered on a stock exchange and trading begins.

How Allotment Works

The allotment process follows these key steps:

1. Subscription opens: The company's merchant banker (lead manager) opens the subscription window, typically for 3–5 days. Investors submit applications specifying how many shares they wish to purchase at the offered price.

2. Subscription closes and bids are collected: The merchant banker compiles all applications and submits them to the registrar (an independent agency like KFintech or Link Intime).

3. Allotment basis is determined: If demand equals supply, all applicants receive their requested shares. If oversubscribed, allotment occurs through a lottery draw or proportional basis. The company's board and lead manager decide the allotment method in advance.

4. Allotment is finalized: The registrar performs the lottery (if applicable) and generates the allotment list, specifying how many shares each applicant receives.

5. Allotment advice is sent: Letters or emails confirming allotment are dispatched to successful applicants within 1–2 days of the allotment date.

6. Refunds are processed: For applicants not allotted or partially allotted, refunds of excess application money are initiated.

7. Share credit: Upon payment confirmation, shares are credited to the demat account of the investor.

Underwriters receive a contractual allotment guarantee—they are promised a minimum number of shares, ensuring their underwriting commission is earned even if the offering underperforms. The underwriter's allotment typically cannot be reduced below the agreed amount.

Allotment in Indian Banking

In India, allotment during IPOs is regulated by the Securities and Exchange Board of India (SEBI) under the ICDR (Issue of Capital and Disclosure Requirements) Regulations, 2018. The RBI does not directly regulate allotment, but the process is supervised by SEBI, which mandates that allotment must be transparent, fair, and completed within prescribed timelines.

The merchant banker (typically an investment bank like Kotak Mahindra Bank, ICICI Bank Securities, or Axis Capital) oversees the entire allotment process and appoints a registrar to conduct the lottery and maintain records. As per SEBI guidelines, the allotment date must be announced in advance, and the allotment list must be publicly available on the stock exchange (BSE and NSE) and the registrar's website.

For equity shares issued to employees or promoters, the allotment is governed by the Companies Act, 2013. Public sector enterprises (like NTPC, Bank of Baroda, or Indian Oil Corporation) follow Department of Investment and Public Asset Management (DIPAM) guidelines for allotment during their share offerings.

The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) maintain records of allotment for all listed companies. JAIIB and CAIIB exam syllabi reference allotment as a key concept in equity issuance and capital market operations. In the context of non-convertible debentures and preference shares, allotment follows similar processes but may have different regulatory timelines and procedures.

Practical Example

Amit Kumar, a 35-year-old IT professional in Bangalore, applies for 100 shares of TechVision Ltd's IPO at ₹500 per share during the subscription period. The IPO receives applications for 50 lakh shares, but only 10 lakh shares are available—a 5× oversubscription.

On the allotment date (5 days after subscription closes), the registrar conducts a lottery draw. Amit's application is selected for a 20% allotment, meaning he receives 20 shares instead of the 100 he applied for. His allotment advice shows:

• Allotted shares: 20
• Amount due: ₹10,000 (20 × ₹500)
• Excess amount refunded: ₹40,000 (80 × ₹500)

Amit pays the dues and his 20 shares are credited to his demat account within 2 days. The shares are listed on NSE and BSE the following week, and he can sell them if he wishes. Meanwhile, an underwriter who was allotted 2 lakh shares as part of their underwriting guarantee now sells them to their institutional clients over the next few days.

Allotment vs Subscription

Aspect	Allotment	Subscription
Definition	Formal allocation of shares to applicants	Application by investor to purchase shares
Timing	Occurs after subscription closes	Occurs before allotment
Outcome	Investor receives confirmed share ownership	Investor expresses intent to buy
Basis	May be partial (lottery or proportional) if oversubscribed	Full amount applied if no oversubscription
Documentation	Allotment letter issued	Application form submitted

Subscription is the investor's action—applying for shares at a stated price during the offering window. Allotment is the company's action—deciding how many shares each applicant receives based on demand and supply. If an IPO receives fewer applications than shares available, allotment equals subscription. If oversubscribed, allotment is typically lower than subscription for most applicants, but underwriters receive their guaranteed allotment regardless.

Key Takeaways

• Allotment is the formal distribution of shares to investors and underwriters after the subscription period closes during an IPO or rights offering.

• SEBI regulates allotment under ICDR Regulations, 2018, ensuring transparency and fairness; the allotment list must be published on the stock exchange within the prescribed timeframe.

• If an IPO is oversubscribed, allotment occurs through a lottery draw or proportional basis, meaning applicants receive fewer shares than they applied for.

• Underwriters receive guaranteed allotment as part of their underwriting agreement, regardless of overall subscription levels, to earn their commission.

• Allotment differs from subscription: subscription is the application phase; allotment is the confirmation phase where shares are formally assigned.

• The allotment advice is the official letter confirming the number of shares assigned, payment due date, and demat account details for credit.

• Refunds of excess application money are processed simultaneously with allotment for unsuccessful or partially allotted applicants.

• Allotment is distinct from listing: allotment happens first (shares confirmed to investors), listing happens later (shares trade on the exchange).

Frequently Asked Questions

Q: How is allotment decided if an IPO is oversubscribed?

A: If more shares are applied for than available, allotment occurs through a lottery system (random draw) or a proportional basis (all applicants receive the same percentage of their applied shares). For example, in a 2× oversubscribed IPO, most applicants receive 50% of their applied shares. The specific method is disclosed in the prospectus before subscription opens.

Q: Can allotment be cancelled or reversed after the allotment letter is issued?

A: Allotment is final once the allotment letter is issued and published on the exchange. However, if the applicant does not pay the dues by the specified date or