Monday, April 12, 2010

Different Categories of Investors for an IPO

We already know what an IPO is and the Various Intermediaries in an IPO Process. Let us now take a look at the different category of investors who can invest in IPO’s

As far as an IPO is concerned, the total shares issued to the public are divided into 3 major parts for 3 different category of investors. They are:

1. Qualified Institutional Buyers
2. Non Institutional Investors
3. Retail Investors

Qualified Institutional Buyers (QIB)

Under this quota, financial institutions such as banks, mutual funds, insurance companies, Foreign Institutional Investors (FIIs) etc are permitted to bid for shares. A maximum of 50% of the issue can be reserved for investors falling under the QIB category. Out of this 50% a 5% can be reserved for Mutual Funds

Non Institutional Investors

Under this Quota, resident Indian Individuals, Hindu Undivided Families (HUF), companies, NRIs, Societies and trusts whose shares application bid is more than Rs. 1 lakh are allowed. At least 15% of the total issue can be reserved for this group. This is also called as the High Net worth Individual (HNI) quota

Retail Investors

Under this quota, only individuals both residents and NRIs along with HUFs are allowed to bid. The application size here should be less than Rs. 1 lakh. A minimum of 35% of the issue has to be reserved for such people.

When shares are issued in an IPO – we usually hear the term oversubscribed. This term is applicable for each of these categories separately. The Retail bucket could be oversubscribed 5 times whereas the HNI bucket could be oversubscribed 10 times and QIBs 4 times.

What is meant by oversubscribed?

An IPO is considered to be oversubscribed when there are more people willing to buy shares than the total number of shares that are available.

Let us say a company comes up with an IPO that offers 10 lakh shares to Retail Investors and 50,000 investors apply for 100 shares each - the total requirement here is 50 lakh shares whereas there are only 10 lakh shares available. Hence the issue is said to be oversubscribed by 5 times in the Retail Investor segment.

4 comments:

  1. What happens when an issue is oversubscribed? Does everyone gets shares?

    ReplyDelete
  2. Dear Anand,

    Can u write a detailed article on HUF creation and other relevant important things..? lyk u wrote on PPF.

    ReplyDelete
  3. Thanks for Valuable Information !!!

    ReplyDelete

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