Learn about IPO allotment and listing gains — Stock-Market notes

WHAT is happening?

WHY does allotment exist? (Steel-man the confusion)

If a company wants to sell 1,00,000 shares and investors apply for 10,00,000 shares, there simply aren't enough shares. The company must ration. In markets like India (SEBI rules), retail investors are treated fairly — everyone in the retail category is guaranteed at least one lot if possible, decided by a computerised lottery when demand is high.

HOW is allotment computed? (Derive from first principles)

Define:

$N$ = number of shares offered to a category
$D$ = number of shares demanded (applied for) in that category
Subscription ratio $\;R = \dfrac{D}{N}$

Case 1 — Undersubscribed or exactly full ( $R \le 1$ ): everyone gets what they applied for. No rationing needed.

Case 2 — Oversubscribed ( $R > 1$ ): there are more applicants than lots.

For the retail portion, allotment is done in whole lots. Let:

$A$ = total number of applicants (each applied for ≥ 1 lot)
$L$ = total lots available to retail

Derivation of the number of lots per applicant (large applicants / proportionate): Total shares to give out = $N$ . Total demanded = $D$ . Fair share for someone who applied for $q$ shares: $\text{allotted} = q \times \frac{N}{D} = \frac{q}{R}.$ Why? Each rupee of demand should receive the same fraction $N/D$ of what it asked for — that's the meaning of "proportionate."

HOW is listing gain computed? (Derive)

Suppose you were allotted shares at issue price $P_0$ and the stock opens at $P_1$ on listing day.

Profit per share $= P_1 - P_0$ . Expressed as a percentage of what you paid: $\boxed{\text{Listing gain \%} = \frac{P_1 - P_0}{P_0}\times 100}$ Why divide by $P_0$ ? Because gain is only meaningful relative to the money you invested. ₹20 profit is huge on a ₹100 share (20%) but tiny on a ₹10,000 share (0.2%).

Your total rupee gain if allotted $x$ shares: $\text{Gain} = x\,(P_1 - P_0).$

Figure — Learn about IPO allotment and listing gains

Worked Examples

Recall Feynman: explain to a 12-year-old

Imagine a bakery makes 10 special cupcakes but 50 kids want one. It's not fair to give them to the fastest runners, so the baker puts every kid's name in a hat and draws 10 names — that's allotment by lottery, and your chance is 10-out-of-50 = 1-in-5. Now say each cupcake cost you ₹120, and outside the shop kids are reselling them for ₹156. That extra ₹36 you'd make instantly is your listing gain. If lots of kids want cupcakes (oversubscribed), fewer people win — but each winning cupcake is often worth more!

Active Recall

What is an IPO?

The first sale of a company's shares to the public in the primary market.

What is allotment?

The process of rationing/deciding who gets how many shares when demand differs from supply.

Define oversubscription.

When shares applied for (demand D) exceed shares offered (supply N), i.e. R = D/N > 1.

Subscription ratio formula

R = D / N (demand ÷ shares offered).

Retail lottery probability of one lot

p = L / A = lots available ÷ number of applicants.

Proportionate allotment for an applicant asking for q shares

allotted = q × (N/D) = q / R.

Listing gain percentage formula

(Listing price − Issue price) / Issue price × 100.

Why divide listing gain by issue price?

Because return is meaningful only relative to the money invested; enables comparison across stocks.

Does applying for more lots help retail odds in a heavily oversubscribed IPO?

No — SEBI caps at one lot per applicant first; extra lots don't add lottery entries.

Where do listing gains occur — primary or secondary market?

Secondary market (the exchange), on listing day.

If R ≤ 1, what happens to allotment?

Everyone gets exactly what they applied for; no rationing needed.

Total rupee gain if allotted x shares

x × (Listing price − Issue price).

Connections

Primary vs Secondary Market — IPO happens in primary, listing gain realised in secondary.
Oversubscription and Subscription Ratio
SEBI Retail Investor Rules
Book Building vs Fixed Price Issue
HNI vs Retail Category Allotment
Grey Market Premium (GMP) — predicts likely listing gain.

Concept Map

Hinglish (regional understanding)

Intuition Hinglish mein samjho

Dekho, jab koi company pehli baar public ko shares bechti hai, usse IPO kehte hain. Ab hota kya hai — company ke paas maan lo 10,000 lots hain, lekin apply karne wale 50,000 log aa gaye. Yeh situation oversubscription hai. Ab sabko share dena possible nahi, isliye allotment hota hai — retail category mein SEBI ke rules ke hisaab se ek lottery chalti hai. Toh tumhari chance = lots available / total applicants = 10,000/50,000 = 20%. Isiliye zyada oversubscribed IPO mein allotment milne ki probability kam ho jaati hai.

Ek important baat: retail mein zyada lots apply karke tumhari chance nahi badhti agar IPO heavily oversubscribed hai, kyunki max one lot pehle sabko fair basis pe milta hai. Haan, HNI category mein proportionate allotment hota hai — matlab tumhe q/R shares milte hain (q = jitna apply kiya, R = subscription ratio).

Ab listing gain — jis din share exchange (secondary market) pe list hota hai, agar wo issue price se upar khulta hai toh instant profit. Formula simple hai: (Listing price − Issue price) / Issue price × 100. Jaise ₹120 ka share ₹156 pe khula toh 30% listing gain. Issue price se divide isliye karte hain kyunki return hamesha invested paise ke relative measure hota hai — tabhi alag-alag stocks compare kar sakte ho. Yeh sab samajhna zaroori hai kyunki bahut log sirf "IPO mein paisa lagao, profit pakka" soch lete hain, jabki allotment milna aur gain milna dono uncertain hote hain.

Test yourself — Primary vs Secondary Market & IPOs

Connections