How Shares Are Allocated in an IPO: Process Explained?

The primary focus of the audience of an IPO is generally on the listing gains. In reality, the anticipation for investors starts much earlier when shares are actually distributed among applicants. 

In 2025, over 60% of Indian IPOs were oversubscribed, reflecting the strong participation of retail and institutional investors alike. This surge makes the allotment process even more relevant, as many applicants receive only a fraction of what they apply for. The IPO allotment process is far from a free‑for‑all; it’s a tightly choreographed sequence governed by regulators, underwriters, and a bit of luck. It is a structured mechanism designed to balance fairness, regulation, and market demand.

From Price Band to Book-Building: How Demand Is Measured

Before shares are allotted, demand must be discovered. Most IPOs in India follow the book-building process, where investors bid within a price band announced by the company and its bankers.

At this stage, investors specify two things: the number of shares and the price they are willing to pay. These bids are aggregated to form a demand curve. 

For example, when Zomato launched its IPO, institutional demand exceeded expectations early in the process, pushing the issue to be subscribed several times over even before the final day.

To understand how this demand is structured, it is useful to note what the bidding process achieves:

• It reveals how much investors are willing to pay for the company’s shares.

• It helps the issuer fix the final issue price, often at the upper end of the band if demand is strong.

• It determines whether the IPO is undersubscribed, fully subscribed, or oversubscribed.
  

This stage matters because the degree of oversubscription directly influences how shares will later be divided among applicants.

Investor Categories and Reservation of Shares

Once the price is discovered, the total shares are split among investor categories as per regulations. These categories ensure balanced participation and market stability.

Typically, the allocation structure is:

This segregation ensures that retail investors are not crowded out entirely by institutions. For instance, in the Nykaa IPO, retail investors had a fixed quota, despite much higher institutional demand.

Before shares are allotted within each category, it is important to understand one rule: applications in one category do not compete with those in another. Retail investors compete only with retail applicants, and so on.

Proportionate Allotment: The Core Logic

When an IPO is oversubscribed, shares are allotted on a proportionate basis within each category. This means investors receive shares in proportion to their application size relative to total demand in that category.

To illustrate, consider a simplified retail example:

• Retail quota: 1,00,000 shares

• Total retail demand: 10,00,000 shares

• Oversubscription: 10 times
  

If an investor applied for 1,000 shares, the proportionate entitlement would be 100 shares. However, because retail allotment must be in minimum lot sizes, this calculation is adjusted to ensure practical distribution.

The proportionate system aims to achieve two outcomes:

• It prevents large applicants from absorbing the entire quota.

• It allows more investors to receive at least one lot, especially in heavily subscribed IPOs.
  

In the 2022 LIC IPO, where retail demand was modest compared to institutional demand, many retail investors received near-full allotment. In contrast, in highly popular small-cap IPOs, retail investors often receive only one lot or none at all.

Lottery Method for Small Retail Applications

When the number of retail applicants exceeds the number of available lots, a computerised draw of lots is conducted. This is commonly referred to as the lottery method, though it is governed by transparent algorithms.

This method is applied because:

• Retail applications are capped by value (currently ₹2 Lakh).

• Regulators aim to maximise the number of unique allottees.

• Fractional allotment is not permitted, so shares must be allotted in complete lots.
  
  

For example, if an IPO has 50,000 retail lots available but 2,00,000 valid applications, only 25% of applicants will receive one lot each. The selection is random but system-driven, ensuring no manual interference.

This explains why two investors applying for the same number of shares in a popular IPO may experience different outcomes.

Finalisation and Credit of Shares

After category‑wise allocation, the registrar finalises the allotment. This includes:

• Verification of valid applications and blocked funds

• Category‑wise share distribution

• Uploading allotment status on official portals

Once finalised, shares are credited to demat accounts and unallotted funds are unblocked. For investors, this marks the shift from application to ownership.

Allotment depends more on demand than on the company’s quality alone. A strong IPO can still offer low allotment odds if demand is very high.

Conclusion

IPO share allocation is a structured process built on proportionality, transparency, and regulation. It starts with price discovery through book-building, moves through category-based reservation, and ends with either proportional or lottery-based allotment. While investors fixate on listing-day gains, understanding this flow explains why outcomes vary so much across IPOs. In a market where oversubscription is now routine, informed expectations matter just as much as informed investment choices. Platforms like Bajaj Markets now help investors track IPOs and stay updated on subscription and allotment status, making it easier to navigate this competitive landscape.