0.5 IPOs · M00 On-ramp

Motivation

Initial public offerings are the most advertised event in Indian markets, and the retail process (bid in lots, money blocked by UPI, allotment by lottery, listing three days later) is easy to follow without understanding the odds. This section covers the process and the arithmetic of allotment. M06A · 6A.8 covers the evidence on IPO returns.

0.5.1How a book-built issue works#

The company files a draft offer document (DRHP) with SEBI, then a red herring prospectus (RHP) with a price band (for example ₹480–500) and a lot size (the minimum bid and its multiples). For main-board issues the minimum application is set so that its value is about ₹10,000–15,000.
Anchor investors (large institutions) are allotted shares the working day before the issue opens, at a price within the band, with lock-ins (M06A · 6A.8).
The issue stays open for at least three working days. Investors bid a quantity (in lots) and a price within the band; retail investors may bid at "cut-off", agreeing to pay whatever final price is set.
After the close, the issue price is fixed (usually at the top of the band when demand is strong) and the basis of allotment is finalised with the exchange and the registrar.
Allotted shares are credited to demat accounts, blocked money is released for unsuccessful bids, and the shares list. Since 1 Dec 2023 the whole process must finish by T+3, three working days after the issue closes (SEBI circular of 9 Aug 2023, voluntary from 1 Sep 2023 and mandatory for issues opening on or after 1 Dec 2023; verify).

Investor categories (SEBI ICDR Regulations 2018, for an issuer meeting the profitability test; M06A · 6A.8 gives the alternative):

Category	Who	Share of the issue	Allotment when oversubscribed
QIB (qualified institutional buyers)	Mutual funds, insurers, foreign portfolio investors, banks	At most 50% (up to 60% of it to anchors)	Proportionate
NII (non-institutional investors, "HNI")	Individuals and others bidding more than ₹2 lakh	At least 15%: one-third for bids of ₹2–10 lakh (small NII), two-thirds above ₹10 lakh (big NII)	Small and big NII: draw of lots for the minimum NII application, then proportionate (ICDR amendment of Jan 2022, from April 2022; not re-verified here)
RII (retail individual investors)	Individuals bidding up to ₹2 lakh	At least 35%	Draw of lots for one minimum lot each (0.5.3)

0.5.2Applying: ASBA and the UPI mandate#

You apply through ASBA (application supported by blocked amount): the bid amount is blocked in your bank account, not debited, and is debited only for the shares allotted. You can apply through your bank's net banking, or through your broker's app with a UPI mandate, which you must approve in your UPI app before the issue closes. UPI can be used for applications up to ₹5 lakh (SEBI circular of 5 Apr 2022, from 1 May 2022; verify). One application per PAN: multiple applications under one PAN are rejected. The blocked money earns savings interest but cannot be used for anything else until it is released.

0.5.3Allotment by lottery#

Setup

The retail portion holds $R$ shares and the lot size is $L$ , so it contains $K = \lfloor R/L \rfloor$ minimum lots. There are $N$ valid retail applications; application $j$ is for $a_j \ge 1$ lots. The subscription of the retail portion is $x = L\sum_j a_j / R$ , the multiple published by the exchanges during the issue.

The ICDR basis of allotment for retail investors is: if $N \le K$ , every applicant receives one lot and the remaining $K - N$ lots are allotted in proportion to the unmet demand; if $N > K$ , $K$ applicants are chosen by a draw of lots and each receives one lot, whatever they applied for.

Proposition 0.3retail allotment probability

If $N > K$ and the draw selects a uniformly random $K$ -subset of the $N$ applications, every application is allotted with probability

p = \frac{K}{N}, \tag{0.4}

independent of the number of lots it applied for, and its expected allotment is $K/N$ lots.

Proof

There are $\binom{N}{K}$ equally likely subsets, of which $\binom{N-1}{K-1}$ contain a given application. The ratio is $\binom{N-1}{K-1}/\binom{N}{K} = K/N$ . The allotment is one lot on success and zero otherwise, so its expectation is $p$ .∎

Corollary 0.4odds from the subscription figure

Let $\bar a = \sum_j a_j / N$ be the average number of lots per application. Then $N = xR/(L\bar a) \approx xK/\bar a$ , and

p \approx \frac{\bar a}{x}. \tag{0.5}

The headline subscription $x$ understates your odds by the factor $\bar a$ : if the average retail applicant bids for 4 lots, an issue "subscribed 40 times in the retail category" gives each applicant a 10% chance, not 2.5%. Since applications are counted after the issue, $\bar a$ is known only from the registrar's basis-of-allotment document, which is published and worth reading.

Proposition 0.5several applications

If a household submits $m$ valid applications under $m$ different PANs, the probability that at least one is allotted is

P_m = 1 - \frac{\binom{N-m}{K}}{\binom{N}{K}} = 1 - \prod_{j=0}^{m-1}\frac{N-K-j}{N-j} \;\ge\; 1 - (1-p)^m, \tag{0.6}

and the expected number of lots allotted is exactly $mK/N$ .

Proof

No application of the household is drawn if and only if the $K$ winners are all among the other $N - m$ , which happens in $\binom{N-m}{K}$ of the $\binom{N}{K}$ subsets. Writing the ratio as a product of $m$ factors gives the middle expression. Each factor satisfies $(N-K-j)/(N-j) \le (N-K)/N$ because $(N-K-j)N - (N-K)(N-j) = -jK \le 0$ ; so the product is at most $(1-p)^m$ . The expectation follows from linearity: each of the $m$ applications wins with probability $K/N$ .∎

The draws are without replacement, so the household's chances are slightly better than independent coin flips, but for $N$ in lakhs the difference is invisible.

Worked example 0.3illustrative numbers

A main-board issue of 2 crore shares at an upper band of ₹500, with 35% reserved for retail and a lot of 30 shares (₹15,000).

$R = 70{,}00{,}000$ shares, $K = \lfloor 70{,}00{,}000/30 \rfloor = 2{,}33{,}333$ lots.
Retail bids total 50 times the reserved shares, from $N = 25{,}00{,}000$ valid applications; so $\bar a = 50 \times 2{,}33{,}333 / 25{,}00{,}000 = 4.67$ lots.
Each application wins with $p = 2{,}33{,}333/25{,}00{,}000 = 9.33\%$ , consistent with (0.5): $4.67/50 = 9.33\%$ .
An applicant who blocks the maximum 13 lots (₹1,95,000, just under the ₹2 lakh retail cap) has the same 9.33% chance as one who blocks one lot.
Expected allotment: $0.0933 \times 30 = 2.8$ shares per application.
A family of four applying under four PANs: $P_4 = 32.42\%$ , against $1 - 0.9067^4 = 32.42\%$ for independent draws.

If, hypothetically, the shares listed 20% above the issue price, the expected gain per application would be $0.0933 \times 30 \times \text{₹}100 = \text{₹}280$ . The point is not the number but its shape: in heavily oversubscribed issues the expected allotment is a fraction of a lot, and the issues where you are sure to get shares are the ones nobody else wanted (Rock's winner's curse, M06A Proposition 6A.12).

Exercisem00_ipo_allotment.pyOpen in editor →

0.5.4Listing day#

On the listing day the new shares trade first in a special pre-open call auction that starts at 09:00 and discovers the opening price; normal trading begins at 10:00 (NSE circulars on the special pre-open session for IPOs, e.g. CMTR63747; verify the timings in the exchange notice for the issue). The listing price can be far from the issue price in either direction. If you were allotted shares and intend to sell on listing, decide your plan (limit price, or hold) before the auction, not in its excitement.

0.5.5The grey market#

The grey market premium (GMP) is a price quoted informally for IPO shares before listing. It has no legal standing, no settlement guarantee and no regulator; it is thin and easy to manipulate, and widely repeated in the press. Do not trade in it and do not use it as evidence.

0.5.6SME IPOs#

Small and medium enterprise issues list on NSE Emerge and BSE SME under lighter eligibility rules. After amendments notified in March 2025, an SME issuer needs an operating profit (EBITDA) of at least ₹1 crore in two of the three preceding years, offers for sale are capped at 20% of the issue, and the minimum application is two lots with a value above ₹2 lakh (SEBI (ICDR) (Amendment) Regulations, March 2025; verify). A SEBI consultation paper of 14 Oct 2026 proposes lowering the minimum application to ₹1 lakh; it was not final as of 6 Nov 2026. Risks specific to SMEs: tiny floats, wide spreads, market makers who leave after the mandatory period, promoter-controlled prices, and thin disclosure. Treat SME IPOs as speculation on a single small company with little information.