Allotment

Allotment — Meaning, Definition & Full Explanation

Allotment is the process of distributing a specified number of shares to underwriters, institutional investors, or applicants during an Initial Public Offering (IPO), rights issue, or bonus share distribution. It represents the formal allocation of securities by a company to eligible participants after subscription or bidding has closed.

What is Allotment?

Allotment is the mechanism by which a company distributes newly issued shares to qualified buyers. In an IPO, a company decides to raise capital by issuing shares to the public for the first time. Before these shares reach retail investors, the offering is typically underwritten by merchant banks and brokerage firms. These underwriters commit to buying a portion of the issue themselves, ensuring that all shares are sold. The company then allots a specific number of shares to each underwriter based on the underwriting agreement. For retail investors applying through the IPO process, allotment occurs after the subscription period closes and the lead manager determines how many shares each applicant will receive—often through a lottery system if the issue is oversubscribed. Allotment is not automatic; it is a formal act by the company, confirmed through an allotment letter or advice sent to the recipient. The allotment process also applies to rights issues (where existing shareholders are offered new shares proportionally) and bonus share distributions (where free shares are given to current shareholders as a reward).

How Allotment Works

The allotment process follows a structured sequence:

1. IPO announcement and underwriting: The company appoints lead managers and underwriters who commit to buying or placing shares. The underwriters are allotted a portion of the total issue upfront.

2. Subscription period: The IPO is advertised and shares are offered to retail and institutional investors. Applications are collected during this open window, typically 3–5 days.

3. Oversubscription calculation: If demand exceeds supply, the issue is oversubscribed. The lead manager and company determine the allotment basis—usually a percentage cut applied equally to all applications, or a lottery draw for smaller applicants.

4. Allotment determination: The lead manager prepares an allotment list showing how many shares each applicant receives. Institutional investors may receive full allotment; retail investors often receive partial allotment or nothing if the cut-off is high.

5. Allotment advice: The company (or registrar) sends an allotment letter or SMS/email notification to each applicant. This document confirms the number of shares allotted and provides credit details for demat accounts.

6. Share credit and trading: Allotted shares are credited to the demat accounts of successful applicants, typically 2–3 days after the allotment date. Trading commences shortly thereafter on the stock exchange.

For rights issues, eligible shareholders are allotted shares in proportion to their existing holdings. For bonus allotments, free shares are credited directly to the demat accounts of registered shareholders on the allotment date.

Allotment in Indian Banking

In the Indian securities market, allotment is governed by the Securities and Exchange Board of India (SEBI) under the ICDR Regulations (Issue of Capital and Disclosure Requirements). SEBI mandates transparent allotment criteria, fair lottery procedures for oversubscribed issues, and timely communication to applicants.

The SEBI Uniform Allotment Guidelines require that if an IPO is oversubscribed by more than 2 times, a lottery system must be used for retail investors to ensure fairness. Institutional investors (QIBs) and high net-worth individuals typically receive allotment on a discretionary basis within the price band set by the company.

The National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) publish allotment data in real-time, and the Depositories (NSDL and CDSL) credit allotted shares to demat accounts. Major Indian underwriters like Axis Bank, ICICI Securities, Goldman Sachs, and Kotak Mahindra Bank conduct allotment for listed companies.

For Indian bank IPOs—such as the IPO of Bank of Baroda or the recent insurance company listings—allotment follows the same SEBI-regulated framework. The RBI also monitors allotment practices in bank-sponsored securities offerings to ensure investor protection. Allotment knowledge is a key topic in the JAIIB examination (Capital Market and other regulatory modules) and is frequently tested in CAIIB exams for professionals handling securities operations.

Practical Example

Priya, a software engineer in Bangalore, applies for 100 shares in the IPO of TechVision Ltd at ₹500 per share. The company offers 10 lakh shares; 25 lakh applications arrive, making the IPO oversubscribed 2.5 times. The lead manager (ICICI Securities) determines an allotment ratio of 40%—meaning each retail applicant receives 40 shares instead of 100. Priya receives an allotment advice via SMS stating "40 shares of TechVision Ltd allotted to your demat account." She pays ₹20,000 (40 × ₹500) if she had not already paid at application. Within 3 days, 40 shares appear in her demat account with CDSL. TechVision Ltd shares commence trading on NSE and BSE. Priya can now sell, hold, or buy more shares. If she had applied for a rights issue announced by TechVision a year later, allotment would have been proportional to her shareholding at the record date.

Allotment vs Subscription

Aspect	Allotment	Subscription
Meaning	Formal distribution of shares after demand is assessed	Application or offer to buy shares during the open period
Timing	After subscription period closes	During the subscription window (3–5 days for IPO)
Who decides	Company and lead manager (based on demand)	Individual investors and institutions apply on their own
Outcome	Applicant receives confirmed number of shares	Applicant receives a receipt/proof of application; allotment is pending

Subscription is the investor's request to buy shares; allotment is the company's confirmation that those shares are granted. An investor may subscribe for 1,000 shares but be allotted only 400 if the issue is heavily oversubscribed. Both steps must occur for share ownership to be completed.

Key Takeaways

• Allotment is the formal allocation of shares by a company to underwriters, institutional investors, or retail applicants after the subscription period closes.
• In oversubscribed IPOs in India, SEBI rules require a lottery system for retail investors if subscription exceeds 2 times; institutional allotment is discretionary.
• Allotment advice (letter or SMS) confirms the number of shares granted; shares are credited to demat accounts 2–3 days after allotment.
• For rights issues, allotment is proportional to existing shareholding; for bonus issues, allotment is free and automatic to registered shareholders.
• The lead manager and registrar (e.g., Karvy, Link Intime) administer allotment under SEBI and stock exchange oversight.
• Allotment does not guarantee trading eligibility; shares must be credited to demat before the applicant can sell or pledge them.
• Partial allotment is common in retail IPO applications; full allotment is more likely for institutional and high-value applicants.
• Understanding allotment procedures is essential for JAIIB and CAIIB exam candidates, particularly in securities operations and regulatory modules.

Frequently Asked Questions

Q: What happens if I don't receive any allotment in an IPO?
A: If your application is not allotted, your subscription amount is refunded to your bank account or trading account within 5–7 days of the allotment date. This occurs frequently in heavily oversubscribed retail categories where the allotment ratio is very low.

Q: Can I sell shares before they are credited to my demat account?
A: No. You can only trade allotted shares once they are credited to your demat account, which typically happens 2–3 days after the allotment date. Selling before credit is not permitted by stock exchanges.

Q: Is the allotment date the same as the listing date?
A: No. Allotment date is when shares are formally allocated and advice is issued; listing date (usually 3–5 days later) is when shares begin trading on the stock exchange. There is a gap of a few days between the two.