Demand vs Shares: How Allotment Ratios Are Derived
Introduction
In an IPO, allotment outcomes are fundamentally driven by the relationship between investor demand and the number of shares available in each investor category. This relationship determines the allotment ratio and ultimately influences who receives shares.
This document explains how allotment ratios are conceptually derived from demand and supply data, as per SEBI-defined allocation principles.
What Is Demand in an IPO?
In the context of an IPO, demand refers to the total number of shares bid for by investors in a specific category at or above the cut-off price.
Demand is aggregated from all valid applications submitted through ASBA and UPI-based mechanisms during the IPO period.
What Are Shares Available for Allotment?
Shares available represent the fixed supply allocated to a particular investor category, as disclosed in the IPO prospectus.
This number is determined before the IPO opens and remains unchanged regardless of subscription levels.
Understanding the Allotment Ratio
The allotment ratio is a conceptual expression of how demand compares to available shares.
In simplified terms, it can be expressed as:
Allotment Ratio ≈ Shares Available ÷ Shares Demanded
Case 1: Undersubscription
An IPO category is undersubscribed when total demand is less than available shares.
In this case, the allotment ratio is effectively 1:1, meaning all valid applicants receive the shares they applied for.
Case 2: Exact Subscription
When demand matches available shares exactly, the category is said to be fully subscribed.
Here too, the allotment ratio remains 1:1, assuming all applications are valid.
Case 3: Oversubscription
Oversubscription occurs when demand exceeds the number of shares available.
In such cases, the allotment ratio becomes less than 1, indicating that not all demand can be satisfied.
Retail Category: Lots vs Applications
In the retail category, allotment is usually based on number of applications versus available lots, rather than raw share demand.
When applications exceed available lots, allotment is conducted via a lottery mechanism to ensure equal treatment.
NII and QIB Categories: Proportionate Allocation
For NII and QIB categories, allotment is typically done on a proportionate basis, where larger bids may receive proportionally more shares.
Here, the allotment ratio directly reflects the relationship between total demand and available shares.
Why Allotment Ratios Are Not Publicly Disclosed
- Exact valid demand is known only after bid reconciliation
- Invalid, duplicate, or rejected applications are removed post-closure
- Final rounding and spillover rules may alter exact ratios
Use in Allotment Probability Estimation
Analytical tools use allotment ratios as directional indicators to estimate allotment probability, especially in oversubscribed IPOs.
Such estimates are approximate and non-binding and do not influence actual allotment decisions.
Important Notice
Allotment ratios discussed here are based on conceptual interpretations of public data. Final allotment is carried out solely by the IPO registrar in accordance with SEBI regulations and may differ from any estimates.