Date Published: March 8, 2024
What Is an Allotment?
The term allotment refers to the systematic distribution or assignment of resources in a business to various entities over time. Allotment generally means the distribution of equity, particularly shares granted to a participating underwriting firm during an initial public offering (IPO). There are several types of allotment that arise when new shares are issued and allocated to either new or existing shareholders.
Understanding Allotments
In business, allotment describes the systematic distribution of resources across different entities and over time. In finance, the term typically relates to the allocation of shares during a public share issuance. When a private company wants to raise capital for any reason (to fund operations, make a large purchase, or acquire a rival), it may decide to issue shares by going public. Two or more financial institutions usually underwrite a public offering. Each underwriter receives a specific number of shares to sell. The allotment process can get somewhat complicated during an IPO, even for individual investors. That's because stock markets are incredibly efficient mechanisms for matching prices and quantities, but the demand must be estimated before an IPO takes place. Investors must express interest in how many shares they would like to purchase at a specific price before the IPO. If demand is too high, the actual allotment of shares received by an investor may be lower than the amount requested. If demand is too low, which means the IPO is undersubscribed, then the investor may be able to get the desired allotment at a lower price. On the other hand, low demand often leads to the share price falling after the IPO takes place. This means that the allotment is oversubscribed. There are various limits for IPO application Retail Individual Investor (RII) Up to Rs 2 lakhs, Non-Institutional Investor (NII) Small NII: More than Rs 2 lakhs to Rs 10 lakhs Big NII: More than Rs 10 lakhs, Qualified Institutional Buyer (QIB) Anchor Investors: More than Rs 10 crores No specified limit specified for other QIB, HNI Category more than Rs 2 lakh, Anchor Investor 10 crore.