Retail application mechanics in a ₹600 crore mainboard IPO
Nexa Renewables Ltd's ₹600 crore mainboard IPO opens at a price band of ₹470-495, with a lot size of 30 shares. Of the offer, ₹450 crore is a fresh issue and ₹150 crore is an offer for sale by two private equity investors. Allocation is 35% retail, 15% non-institutional and 50% QIB, of which 60% of the QIB portion is reserved for anchors. Ms. Bhatt, a retail investor in the 30% tax slab, has ₹2 lakh ready and wants to apply for 400 shares at the cut-off price. Her broker also suggests her father apply for a second ₹2 lakh, paying through the same UPI account that Ms. Bhatt will use, to double the family's chance of allotment. The issue closes on a Thursday and lists on the following Friday. Retail subscription, when the books close, turns out to be about nine times the retail portion.
1. Is an application for 400 shares valid? What is the maximum she can bid in the retail category, and what happens if she bids for 14 lots instead?
Read the worked answer
Retail ceiling: ₹2 lakh per application, and bids must be in multiples of the lot size of 30 shares.
- 400 shares is not a multiple of 30 (400 / 30 = 13.33 lots), so the application would be rejected on technical grounds and the UPI mandate released. It is also not the most she can do.
- Maximum whole lots = 13, i.e. 390 shares. At the upper band, 390 × 495 = ₹1,93,050, comfortably within ₹2 lakh. Fourteen lots would be 420 × 495 = ₹2,07,900, above ₹2 lakh.
If she bids 14 lots: the application is not rejected, it is reclassified. Bids above ₹2 lakh fall in the non-institutional (NII) category, where she competes for 15% of the offer instead of 35%, and where a bid at the cut-off price is not permitted at all: NII bidders must quote a specific price. She would be taking a smaller allocation pool and a pricing obligation for no benefit.
Judgement: always compute the ceiling in lots first, not in rupees. The rupee cap and the lot size interact, and the binding constraint here is the lot size, not the ₹2 lakh.
2. Explain what happens to her ₹1.93 lakh between bidding and allotment, and how allotment will be decided given retail subscription of about nine times.
Read the worked answer
Where the money sits. The bid is made through UPI-based ASBA, so the amount is blocked in her bank account, not debited and not paid to the company. On the basis of allotment the blocked amount for allotted shares is debited and the balance is unblocked. No interest is paid for the blocked period, and the money never sits with the issuer before allotment.
Allotment with nine times retail subscription. The retail portion is oversubscribed about nine to one, so she is not assured of any shares. Allotment in the retail category is made by draw of lots for the minimum lot (30 shares) among eligible applicants, then proportionately for additional lots applied for. On average an applicant receives roughly one-ninth of the lots applied for, but the draw means many applicants receive nothing at all and the outcome is binary, not smooth.
Practical consequences: she must not commit the ₹1.93 lakh elsewhere before the basis of allotment is finalised; if she is not allotted, the unblocking takes a few working days and the money is available again. Listing gains or losses, and the 20% short-term capital gains rate on a sale within 12 months, apply only to shares actually allotted. An application is a lottery ticket, not a purchase.
3. Her father applies for ₹2 lakh using Ms. Bhatt's UPI account. Will that application be valid? Explain the rules on funding, duplicate PANs and cut-off price that apply here.
Read the worked answer
No, the application is liable to be rejected. Under UPI-based ASBA, the mandate must be raised from a bank account in which the applicant is the account holder (single or joint). Third-party funding is not permitted, so a bid by the father funded from Ms. Bhatt's UPI account fails the funding test even though the PANs differ.
What is allowed:
- Separate applications by different PANs are perfectly legitimate, and are the normal way a family diversifies allotment risk, provided each applicant uses their own bank account, UPI mandate and demat account.
- Two applications with the same PAN are duplicates and both are rejected, so she must not apply twice in her own name to improve her chances.
Cut-off price: only retail individual investors may bid at the cut-off; the allotment price is the cut-off discovered in the book build, so her effective cost is unknown until pricing. NII and QIB bidders must quote a price.
Judgement: the family can bid twice, but each bid must be self-funded and self-held. The broker's suggestion, implemented literally, would risk both being flagged, and it does nothing about the nine-times oversubscription, which is the real constraint.