IPO allocation is the method of allocating securities to the potential bidders in the primary market. Generally there are 3 channels through which this allocation is made and they are Fixed-Price issue, Book Building and Dutch auction. This article gives all the necessary details on IPO allocation.
IPO Allocation
Initial Public Offering or
IPO allocation is the process by which an issuing company allocates securities to the investors. There are many ways through which this allocation is done. Some of them are given in the following:-
Method of Fixed-Price issue
According to this process, IPOs are offered by the issuing company (on agreement with its appointed investment banker) to the investors at a pre-determined fixed price. Investors could apply for the same at that specific price only. In this process, the allocation price is known to the investors in advance.
Process of Book Building
According to this process, the IPO issuing company first specifies the price range along with the maximum number of securities that would be issued. Now, the investors are allowed to bid for the securities at different prices. These orders are recorded in an electronic book and the bidding continues for a specified time period. Bid prices below the floor price of the price band are not accepted. The issuing price of the IPO is discovered only after the book building closes. The final price is then determined by the issuing company in discussion with its appointed investment banker (known as book-runner). Price evaluation process includes earliness of the bid, quality standard of the applicant investors, aggression of price, and many more. After taking these factors into consideration, IPO allocation is finally done based on the final price.
Dutch Auction Method
IPO is also allocated to the investors through a process known as Dutch auction procedure. According to this, IPO issuing company first asks for a high price for each security offered. Then it lowers this price for matching the bid price. The price that is announced last is taken by the winning bidder. Investors place their bid prices through the security brokers and large banks via electronic media and consequently know the outcome in a very short period of time.