The secret to getting IPOs
Finance
The recent frenzy of IPOs has coincided with a bigger disappointment of people not getting their desired allotments.
Although retail investors have the maximum share (a minimum of 50% allotment), there seems to be no way for people to get allotments through the lottery system.
Hence today we look for a way to maximize your chances, by taking a different route.
Allotment categories
We need to first understand the different categories of investors that apply for an IPO:
Retail individual investor: The most popular category for IPO applications, consisting of residents, non-residents and HUFs. The maxim sum to be invested per application is INR 2 lakh.
Non-institutional bidders (NII): Open for all retail categories by applying over INR 2 lakhs. This group receives a minimum of 15% of the bid.
The secret sauce: HNI category
The HNI category offers an opportunity for investors to grab shares worth more than INR 2 lakhs.
HNI rules
The minimum IPO application amount is INR 2 lakhs
HNI allotment is on a proportionate basis, or the lottery system based on over-subscription, if there is no oversubscription, the HNI will receive full allocation
The HNIs can’t bid below cut off-price (upper limit price for the IPO)
But what does full allocation mean?
If an IPO is subscribed over 100 times..
Retail (<2L) probability of getting a single lot is 1/100=1%
HNI (>2L) the investor will surely get 1 lot of every 100 lots applied by them
Hence you can guarantee at least 1 lot of allocation for yourself!
The NBFC route
Non-banking financial companies (NBFC) provide loans to individual investors for applying in HNIs categories, by charging an interest rate over the loaned amount. The HNIs then invest according to the subscription numbers and guarantee the number of lots for them to pay back the NBFCs and book profit
After opening the lender account with the NBFC, one can pay back the interest, and have profit if the investor believes IPO to have a good listing
Note: Your profit will be lowered, due to interest charges on the loan.
Author's opinion
The HNI category is a good way of increasing one’s chances of allotment and guaranteeing some subscriptions as well. At the end of the day, one must only invest after performing due diligence over the company’s financials and gauging market sentiment around the same. Not all IPOs outperform (looking at you Paytm), and hence one must be confident before applying large sums of money in the same.
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