Allotment

Allotment is the process of distributing newly issued securities—like shares or bonds—to investors who have applied for them. Think of it like this: a company decides to go public through an Initial Public Offering (IPO) and has 1 million shares to sell. But what if eager investors, swept up in the excitement, apply to buy 10 million shares? The company can't magically create more shares to satisfy everyone. It must decide who gets a slice of the pie and how big that slice will be. This distribution process is called allotment. The company, along with its underwriters (the financial institutions managing the sale), sets the rules for how these shares are divvied up. The specific method is usually detailed in the investment prospectus. For investors, the allotment result determines whether they become a shareholder and, if so, with how many shares. It's the critical, and often frustrating, step that turns an application into actual ownership.

The allotment process kicks in after the application window for a new issue of securities closes. This applies to IPOs, but also to subsequent sales of new shares, known as a secondary offering. The mechanics depend heavily on one key factor: demand.

This is the most common scenario for a highly anticipated IPO. Oversubscription occurs when the demand for shares far exceeds the supply. If you've ever applied for shares in a popular company's IPO and received far fewer than you requested (or none at all), you've experienced the sharp end of allotment. Companies and their underwriters use several methods to allot shares in an oversubscribed offering:

• Pro-Rata Basis: You receive a proportion of the shares you applied for. If the offering is 10 times oversubscribed, you might get 1 share for every 10 you requested. This is a common method but can be complex.
• Lottery System: Small investors (retail investors) are often placed into a lottery. If your application is drawn, you might get a minimum number of shares. It’s purely a game of chance.
• Discretionary Allotment: Underwriters have the discretion to allocate shares as they see fit, often prioritizing large, institutional investors who promise to be stable, long-term shareholders.

For the average investor, this means getting a meaningful stake in a “hot” IPO is incredibly difficult.

Less common but equally important is undersubscription, where there are not enough applications to cover the number of shares being offered. In this case, investors who applied will almost certainly receive the full number of shares they requested. While this might seem like good news, it can be a red flag. It may signal that the market believes the company is overvalued or that its business prospects are weak. The underwriters, who may have promised to buy any unsold shares, will be left holding the bag.

For a value investor, the allotment process is more of a market spectacle than a primary concern. The focus is always on buying a great business at a reasonable price, not on winning the IPO lottery.

The level of subscription is a useful, albeit noisy, signal of market sentiment.

1. High Demand (Oversubscription): This often signals hype and speculative fever. The price has likely been pushed to its maximum during the book-building process, leaving little to no margin of safety for new investors. A value investor is instinctively wary of what is popular, as popularity often correlates with a high price and low future returns.
2. Low Demand (Undersubscription): The crowd’s lack of interest could be a warning of genuine problems with the company. However, it could also mean the market is overlooking a solid but “boring” business that doesn't have a flashy story. This is where a value investor's independent research becomes critical. Is the market right to be pessimistic, or has it missed an opportunity?

Ultimately, a value investor knows that the real opportunity often comes after the IPO circus has left town. The goal isn't to get a small allotment of a fashionable stock that might “pop” on day one. The goal is to determine a company’s intrinsic value and buy its shares for significantly less than that price. Often, the best time to buy a great company is months or years after its IPO, once the initial excitement has faded and the stock price begins to reflect the business’s actual performance rather than speculative bets. The allotment process is part of the seller's game; a value investor is focused on playing the buyer's game, which is a patient search for long-term value.