Allocation Procedure

The allocation procedure relating to an issue of a firm that wishes to follow the book building route is as follows:

Case I – Initial public offer (IPO) issue

In the case of a company going in for an IPO and availing the book building facility, the allocation to individual investors applying through the syndicate members shall be with reference to the post issue capital.. The allocation to individual investors not applying through the syndicate members shall be with reference to the issue size offered to the public through the prospectus. The allocation procedure in the case of an IPO is as follows:

1) Calculate initial promoters’ contribution:
= Initial post issue capital x 20% (Minimum)
2) Calculate the quantum of book building:
= initial post-issue capital – initial promoters’ contribution
3) Calculate allocation to individual investors applying through syndicate (fixed):
= Initial post-issue capital x 15% (minimum)
4) Calculate allocation to institutional investors (fixed):
= Initial post-issue capital – [Initial promoters’ contribution + Allocation to individual – investors applying through syndicate]
5) Calculate allocation to individual investors not applying through syndicate (fixed):
= initial post-issue capital x 8% (Minimum)
6) Calculate New Post issue size:
= initial post-issue capital + Allocation to individual investors not applying through syndicate
7) Calculate New allocation to individual investors applying through syndicate (fixed):
= New post-issue capital x 15% (Minimum)
8) Find the excess contribution to be brought in by the promoter:
= New allocation to individual investors applying through syndicate (fixed) – Old allocation to individual investors applying through syndicate.
9) Find New allocation to institutional Investors (fixed):
= Initial post-issue capital – [Initial promoters’ contribution + New allocation to individual investors applying through syndicate]
10) Find the deficiency contribution to be brought in by the promoter:
= Fixed allocation – New allocation
11) Calculate total promoters’ contribution:
= Initial contribution + Excess of individual investors + Deficiency of institutional investors
12) Calculate individual investors allocation:
= Minimum allocation to individual investors applying through syndicate + Minimum allocation to individual investors applying through syndicate
13) Calculate total issue size:
= Total promoters’ contribution + Total allocation investors + Allocation to institutional investors.

Illustration:

From the following information, set out the calculations to show the quantum of book building, the total promoters’ contribution and the total allocation to individual investors:

1) Initial post issue capital Rs 100 Crores
2) Minimum promoters’ contribution 20%
3) Minimum allocation to individual investors applying through syndicate 15%
4) Minimum allocation to individual investors not applying through syndicate 8%

Solution:

Quantum of book building promoters’ contribution & individual investor’s contribution:

1) Initial post issue size = Rs 100 Crores
2) Initial promoters’ contribution = Rs 100 crores x 20% = Rs 20 crores
3) Calculate the quantum of book building = Rs 100 crores – Rs 20 crores = Rs 80 crores
4) Fixed allocation to individual investors applying through syndicate = Rs 100 crores x 15% = Rs 15 crores.
5) Fixed allocation to institutional investors = Rs 100 crores – [Rs 20 crores + 15 crores] = Rs 65 crores.
6) Fixed allocation to individual investors applying NOT through syndicate = Rs 100 crores x 8% = Rs 8 crores
7) New post-issue size = Rs 100 crores + Rs 8 crores = Rs 108 crores
8) New (fixed) allocation to individual investors applying through syndicate = Rs 108 crores x 15% (Minimum) = Rs 16.2 crores
9) Excess contribution to be brought in by the promoter = Rs 16.2 crores – Rs 15 crores = Rs 1.2 crores.
10) New (fixed allocation to institutional investors = Rs 100 crores – [Rs 20 crores + Rs 16.2 crores] = 63.8 crores.
11) Deficiency contribution to be brought in by the promoter Rs 65 crores – Rs 63.8 crores = Rs 1.2 crores.
12) Total promoters’ contribution = Rs 20 crores + Rs 1.2 crores + Rs 1.2 crores = Rs 22.4 crores
13) Total individual investors allocation = Rs 15 crores + Rs 8 crores = Rs 23 crores
14) New total issue size = Rs 22.4 crores + Rs 23 crores + Rs 65 crores = rs 110.4 crores.

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