SEBI has tweaked the rules for the allotment of shares for HNIs (applicants in the NII category) from April 1st, 2022.
In an IPO, allotment of shares is made category-wise. Each category of investors is entitled to a reservation in the allotment process. The usual category-wise reservation is listed below:
Category
Reservation
Retail Investors
35%
NII
15%
QIB
50%
SEBI has revised the category-wise reservation by sub-dividing the NII (Non-Institutional Investor) category into two parts - a. Applications between Rs. 2 to 10 lacs and b. Applications above Rs. 10 lacs. Investors in the NII category will get a reservation of 1/3rd of the total NII reservation. The new reservation schedule will look like this:
Category
Reservation
Retail Investors
35%
NII - Rs. 2 to 10 lacs
5%
NII - above Rs. 10 lacs
10%
QIB
50%
In the NII (2 to 10 lacs) category, the allotment will be done on a draw of lots basis (lottery basis like the retail category). In the NII (above 10 lacs) category, the allotment process will remain pro-rata.
For example, an IPO is subscribed 10 times in both the NII categories and you are applying for an IPO in the NII category:
For 5 lacs - There is a 10% probability of you getting an allotment of Rs. 2 lacs. [Before the change in regulation, you would have received a firm allotment of shares worth Rs. 50 thousand]
For 50 lacs - You will get an allotment of shares worth 5 lacs.
You can check the amendment (2022) of the SEBI ICDR (Issue of Capital & Disclosure Requirements) Regulations to learn more.
Note
In case a company that isn’t profitable for the last three financial years is launching an IPO, the minimum subscription required from the QIB category increases to 75% and Retail reduces to 10%. The NII category, in such cases, stays unchanged at 15%. Read more.
Someone having 2 lacs and felt good to be categorized as an HNI investor with preferential VIP like pro rata allotment. doesn’t feel the same any more when applying for the IPO again.
The social gauge of being categorized as rich is getting farther and farther away.
The NII category bifurcation is not applicable for SME IPOs.
Deeper-dive into SME IPO reservation
The ICDR regulations are the gospel for all things related to IPOs. Unlike, mainboard IPOs which are covered under Chapter ii of the ICDR, SME IPOs are governed by a slightly different set of rules listed under Chapter ix of the regulations. The issuing company has to stick to the following guidelines:
In simple words, the reservation can be structured between RII & NII such that the RII category has a minimum 35% reservation & NIIs have a minimum 15% reservation. In case the company is also issuing to QIBs, the maximum limit is 50% of the issue.
Also, the issuer needs to appoint a market maker and allocate at least 5% of the allotment to them:
In short, SME IPOs can have any reservation structure where the minimum allotment to the Market maker is 5%, NII is 15%, and RII is 35%. The maximum allotment to QIBs will be 50% (with a proviso requiring at least 5% of this QIB allotment to be done to mutual funds).
The amendment on Page 45 says “NOTE: For category 3(b), calculation methodology shall be similar to above.” It seems to mean that if no. of applicants * minimum application size > category quota, then allotment will eventually be based on lottery. If bHNI is highly oversubscribed then this might be the case more often than not.
For 50 lacs - You will get an allotment of shares worth 5 lacs.
This seems to be wrong, as minimum application size is 10 lac in bHNI.
Hi @ashishs , the minimum application size for bHNI is 10 lakhs for the bifurcation of reservation but during the allotment, the minimum application size is 2 lakhs for both aHNI & bHNI. The 6th point in the example from the ICDR regulations amendment indicates this:
oh ok. Thanks for clarifying. But in the example you stated, let’s say all but two bHNI applicants have bid for the bHNI category minimum (~ ₹10L) and the remaining two have bid for ₹50L. In such a case, the total no. of bHNI applicants would be ~ 10*(category quota/₹10L). The no. of investors who shall receive lots (~category quota/₹2L) will be around half of this. So, each bHNI applicant will have around 50% chance of allocation, even the ones having bid ₹50L.
I understand that this might be a rare case where most of the bids are at the minimum value of the bHNI category, but the chances of allocation must get quite low when over-subscription in aHNI is much higher, say more than 50.
