When a company makes a public issue, the shares on offer are not thrown open as a free-for-all. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 carve the net offer into statutory buckets — qualified institutional buyers, non-institutional investors and retail individual investors — and fix the minimum or maximum slice that each may claim. The architecture of that division turns on a single upstream question: did the issuer qualify on its own financial strength under Regulation 6(1), or did it take the institution-anchored route under Regulation 6(2)? Regulation 32 answers both, and the answer reshapes the entire allotment. This chapter maps the allocation framework provision by provision, explains the anchor-investor mechanism that sits inside the QIB portion, and grounds the rules in the market abuses — the 2005 IPO demat scam chief among them — that gave them their present shape.
Why allocation is regulated at all
A public issue is, in economic terms, a moment of acute information asymmetry. The issuer and its lead managers know far more about the company than the lay subscriber, demand is uncertain, and the price is being discovered in real time. Left unregulated, the limited pool of shares would gravitate to the best-informed and best-funded bidders, crowding out the ordinary investor in whose name the ‘public’ issue is made. The allocation rules in Part VIII of the SEBI ICDR Regulations, 2018 are a deliberate response: they reserve guaranteed slices of the net offer for retail and non-institutional applicants, while channelling the price-discovery function through qualified institutional buyers.
The constitutional backdrop is SEBI's mandate under Section 11 of the SEBI Act, 1992 to protect the interests of investors and to regulate the securities market. The Supreme Court underscored the breadth of that mandate in Sahara India Real Estate Corporation Ltd. v. SEBI, (2012) 10 SCC 603, holding that the moment a security is offered to more than fifty persons it is a deemed public issue attracting the full discipline of the listing and disclosure framework. Once an offer is a public issue, the allocation grid in Regulation 32 is not optional — it is the price of accessing the public's money. For the conceptual foundations of why this regime exists, see our chapter on the introduction and object of the Regulations.
The three investor categories
Allocation presupposes a taxonomy of investors, and Regulation 2(1) supplies it. A qualified institutional buyer (QIB) is, broadly, an institutional investor of demonstrated sophistication — mutual funds, foreign portfolio investors, scheduled commercial banks, insurance companies, pension and provident funds, the National Investment Fund, alternative investment funds and similar entities — presumed capable of pricing the issue without paternalistic protection.
A retail individual investor (RII) is an individual applicant who applies for specified securities for a value of not more than two lakh rupees (the cap was raised from one lakh in 2010 and continues at two lakh). A non-institutional investor (NII) is the residual category — any investor, including a body corporate or a high-net-worth individual, who is neither a QIB nor a retail individual investor, and who therefore applies for more than two lakh rupees. The precise contours of each definition, including the carve-outs for retail individual shareholders and employees, are dealt with in our chapter on definitions and scope. These three labels are the building blocks of every allocation calculation that follows.
The net offer and the minimum offer to the public
Allocation operates not on the entire issue but on the net offer to the public — the issue size less any reservations made on a competitive basis and less the promoters' contribution. Regulation 31 ties the floor of that net offer to external company-law machinery: the minimum offer to the public “shall be subject to the provisions of clause (b) of sub-rule (2) of rule 19 of the Securities Contracts (Regulations) Rules, 1957.” In practice this is the familiar twenty-five per cent minimum public shareholding requirement (with a graded relaxation, and a longer glide path, for very large issuers), which works in tandem with the post-listing continuous-listing obligation.
The distinction matters because the percentages in Regulation 32 — thirty-five per cent, fifteen per cent, fifty per cent — are computed on the net offer category, not on the gross issue. Reservations under Regulation 33 (for employees, and for shareholders of listed promoter or subsidiary companies) are sliced off first; what remains is the net offer over which the QIB/NII/RII grid is laid. Where the issuer's accounts cannot independently satisfy the profitability tests, the upstream route it must take is governed by the eligibility for IPO rules, and that choice — as the next section shows — flips the allocation proportions on their head.
Regulation 6(1): the profitability route and its 35-15-50 grid
An issuer that stands on its own financial feet uses the profitability route of Regulation 6(1). That route demands net tangible assets of at least three crore rupees in each of the preceding three full years (not more than fifty per cent in monetary assets), an average operating profit of at least fifteen crore rupees over the preceding three years with operating profit in each of those years, and a net worth of at least one crore rupees in each of the preceding three years — all on a restated and consolidated basis. An issuer that has changed its name within the last year must additionally show that at least half of its revenue in the preceding full year came from the activity suggested by the new name.
For such an issuer, Regulation 32(1) prescribes the standard grid for a book-built issue: not less than thirty-five per cent to retail individual investors, not less than fifteen per cent to non-institutional investors, and not more than fifty per cent to qualified institutional buyers, of which five per cent shall be allocated to mutual funds. The logic is protective: because the company has a track record the lay investor can evaluate, the regulator is willing to guarantee the retail and non-institutional categories a majority share — a combined fifty per cent floor — while capping institutional appetite at half the net offer. The thresholds mirror the substantive financial tests examined in our chapter on the profitability test for an IPO.
Regulation 6(2): the compensating QIB route and its inverted 10-15-75 grid
An issuer that cannot satisfy the conditions in Regulation 6(1) is not shut out. Regulation 6(2) opens a compensating door: such an issuer may still make an initial public offer provided the issue is made through the book-building process and the issuer “undertakes to allot at least seventy five per cent. of the net offer to qualified institutional buyers and to refund the full subscription money if it fails to do so.” This is the so-called QIB route, and its rationale is the mirror image of the profitability route. Where the company has no track record to vouch for it, the regulator substitutes the disciplining judgment of sophisticated institutions for statutory financial thresholds — the theory being that if QIBs are willing to take three-quarters of an issue, their due diligence is a credible proxy for quality.
The allocation grid inverts accordingly. Regulation 32(2) provides: not more than ten per cent to retail individual investors, not more than fifteen per cent to non-institutional investors, and not less than seventy-five per cent to qualified institutional buyers, again with five per cent of the QIB portion for mutual funds. Crucially, the seventy-five per cent QIB subscription is not merely a target but a condition precedent to the issue itself: failure to achieve it triggers a mandatory refund of the entire subscription money. The QIB route and its consequences are treated in greater depth in our notes on eligibility for an FPO, where a parallel structure governs further public offers.
The mutual fund reservation within the QIB portion
Both grids carve out a mini-reservation inside the institutional bucket. Five per cent of the QIB portion “shall be allocated to mutual funds.” This is not a ceiling on mutual-fund participation but a floor that protects domestic collective-investment vehicles from being elbowed aside by larger foreign and bank investors. The point is reinforced by the second proviso to both Regulation 32(1)(c) and (2)(c): “in addition to five per cent allocation available in terms of clause (c), mutual funds shall be eligible for allocation under the balance available for qualified institutional buyers.”
In other words, mutual funds enjoy a guaranteed five per cent slice and also compete on equal footing for the remaining ninety-five per cent of the QIB pool. If the dedicated five per cent mutual-fund sub-portion is undersubscribed, that shortfall is added back to the general QIB allocation. The design reflects a deliberate policy preference for channelling household savings into the market through professionally managed funds rather than leaving retail savers to bid directly into a category dominated by institutions.
Anchor investors: a window inside the QIB portion
The single most consequential refinement of the QIB allocation is the anchor investor mechanism in Regulation 32(3), read with Part A of Schedule XIII. The issuer “may allocate up to sixty per cent of the portion available for allocation to qualified institutional buyers to anchor investors.” An anchor investor is a QIB who commits early — bidding one day before the issue opens — for a large value, thereby signalling confidence and stabilising sentiment ahead of the public bidding window.
Schedule XIII sets the entry ticket and the headcount. On the main board, an anchor investor must apply for a value of at least ten crore rupees (two crore rupees on the SME exchange). Allocation is discretionary, but capped by number: a maximum of two anchor investors for an allocation up to ten crore rupees; a minimum of two and a maximum of fifteen for allocation above ten crore and up to two hundred and fifty crore rupees, subject to a minimum allotment of five crore rupees each; and, above two hundred and fifty crore rupees, a minimum of five and a maximum of fifteen investors for the first two-fifty crore plus ten additional investors for every further two hundred and fifty crore or part thereof. One-third of the anchor investor portion is reserved for domestic mutual funds. Because anchor allocation is carved out of the QIB pool, it does not enlarge institutional appetite at the expense of retail — it merely reshuffles who, within the QIB bucket, gets to commit first.
Anchor pricing, payment and the staggered lock-in
The anchor mechanism carries three protective features. First, on pricing: under Regulation 30(1)(b) the price offered to anchor investors cannot be lower than the price offered to other applicants, and Schedule XIII provides that if the final book-built price is higher than the anchor allocation price the anchor must pay the difference, whereas if it is lower the excess is not refunded — the anchor is simply allotted at the original price. The anchor therefore cannot be advantaged on price.
Second, on payment: anchors pay the same margin on application as other categories, with the balance payable within two days of the closure of the issue. Third, and most importantly, on lock-in: the original thirty-day lock-in was tightened with effect from issues opening on or after 1 April 2022. Under the amended Schedule XIII, fifty per cent of the shares allotted to anchor investors are locked in for thirty days from the date of allotment and the remaining fifty per cent for ninety days. The staggered lock-in directly addresses the concern that anchors, having signalled confidence, might dump their holdings on listing day — transferring the early-mover advantage into a quick exit at the expense of public subscribers who relied on the anchor's apparent endorsement.
Spill-over and the treatment of under-subscription
Markets do not always cooperate with the statutory grid, so Regulation 32 builds in flexibility for under-subscription. The first proviso to both sub-regulation (1) and sub-regulation (2) provides that “the unsubscribed portion in either of the categories specified in clauses (a) or (b) may be allocated to applicants in any other category.” That is, if the retail or non-institutional category is undersubscribed, the shortfall may spill over to another category rather than leaving the issue partly unsold. The proviso is deliberately asymmetric: it permits spill-over out of the retail and non-institutional categories (clauses (a) and (b)) but does not, by its own terms, allow the QIB portion to be enlarged at the expense of the protected categories beyond what the caps already permit. The protective floors for retail and non-institutional applicants are therefore preserved even when those investors do not turn up in force.
The spill-over discipline is reinforced elsewhere in Part VIII. Under Regulation 33(2)(e), in case of under-subscription in the net offer category, spill-over to the extent of the under-subscription is permitted from the reserved categories (employees, shareholders) into the net offer; and under Regulation 33(2)(d) any unsubscribed portion in a reserved category may first be moved inter-se among the reserved categories before being added back to the net offer. And the whole edifice is policed by the minimum-subscription rule in Regulation 45(1): the issuer must receive subscription of at least ninety per cent of the offer through the offer document, failing which, under Regulation 45(2), all application monies must be refunded within fifteen days of closure. For an issue under the Regulation 6(2) route, the seventy-five per cent QIB condition operates as a further, route-specific trigger for refund — an issue that scrapes past the ninety per cent floor on retail and non-institutional money but falls short of three-quarters QIB subscription must still be aborted. Spill-over is thus permissive within the net offer but cannot rescue an issue that fails either the absolute minimum-subscription floor or the route-specific QIB condition.
Allocation in non-book-built (fixed price) issues
The grids in Regulation 32(1) and (2) apply to issues made through the book-building process. For an issue made otherwise than through book building — a fixed-price issue — Regulation 32(4) prescribes a simpler, retail-weighted division: a minimum of fifty per cent to retail individual investors, and the remaining portion to individual applicants other than retail individual investors and to other investors including bodies corporate and institutions, irrespective of the number of securities applied for.
An Explanation to sub-regulation (4) adds a one-way ratchet in favour of retail: if the retail individual investor category is entitled to more than fifty per cent of the issue size on a proportionate basis, the retail investors shall be allocated that higher percentage. There is no QIB carve-out and no anchor mechanism in a fixed-price issue, because there is no book to anchor — price discovery does not occur, the price being fixed in advance. Fixed-price issues are therefore structurally tilted towards the small investor, consistent with their typical use by smaller issuers.
Minimum application value and the thousand-allottee floor
Allocation interacts with two further numerical guardrails. Regulation 47 fixes the application size: the issuer must stipulate a minimum application size whose value falls within the range of ten thousand to fifteen thousand rupees, and applications must be invited in multiples of that minimum. The minimum sum payable on application must be at least twenty-five per cent of the issue price (the full price in an offer for sale). The two-lakh ceiling that separates retail from non-institutional applicants is measured against this issue-price-based application value.
At the back end, Regulation 49(1) imposes a dispersal requirement: the issuer shall not make an allotment pursuant to a public issue if the number of prospective allottees is less than one thousand. This thousand-allottee floor ensures genuine public participation and prevents a nominally ‘public’ issue from being cornered by a handful of large applicants. Together with the category caps, it operationalises the dispersal principle that the Supreme Court treated as central to the very concept of a public issue in Sahara India Real Estate Corporation Ltd. v. SEBI, (2012) 10 SCC 603.
Proportionate allotment, the draw of lots and the NII sub-categories
Once category caps are fixed, the mechanics of distributing an oversubscribed category arise. Within the retail category, the basis of allotment ensures that each successful retail applicant receives at least the minimum bid lot, subject to availability, with the balance allotted proportionately; where the category is oversubscribed such that not everyone can receive the minimum lot, allotment is determined by a draw of lots. This lottery-based dispersal in the retail category is a direct legacy of the abuses described in the next section, replacing a regime in which large multiple applications could mathematically dominate a proportionate pool.
The non-institutional category was itself reformed with effect from 1 April 2022 to curb the same concentration risk. The NII portion is now split into two sub-categories: one-third reserved for applicants whose application size is more than two lakh and up to ten lakh rupees, and two-thirds for applicants applying for more than ten lakh rupees, with allotment within each sub-category determined by draw of lots rather than pure proportionate allotment. The reform responded to data showing that proportionate allotment in the NII category had allowed a few very large applications to crowd out the majority of non-institutional applicants — the same structural vulnerability that, in extreme form, the 2005 demat scam exploited.
When allocation is gamed: the IPO demat scam line of cases
The allocation rules are not abstract; they were forged in the fire of market abuse. The defining episode is the 2005 IPO demat scam, in which operators opened thousands of fictitious and benami demat accounts to flood the retail individual investor category of numerous IPOs with small applications, thereby cornering shares reserved for genuine retail investors and selling them at a listing-day premium. SEBI's investigation and orders in In re Roopalben Nareshbhai Panchal (IPO Irregularities) exposed the architecture of the fraud, finding that key operators had cornered the retail quota across more than twenty IPOs between 2003 and 2005.
The depository participant's complicity was addressed in Karvy Stock Broking Ltd. v. SEBI, where the Securities Appellate Tribunal examined SEBI's finding that Karvy, as a depository participant, had opened large numbers of fictitious demat accounts in collusion with sub-brokers in disregard of know-your-client norms and had financed benami applications. The episode is the proximate cause of two enduring features of the present allocation framework: the shift to a draw-of-lots mechanism in the retail category (so that multiple small applications confer no proportionate advantage) and the intensification of KYC and single-PAN controls that make the multiplication of benami applications far harder. The lesson the cases teach is that category caps mean nothing without identity discipline at the application stage — the percentages in Regulation 32 protect retail investors only if the applicants in the retail bucket are real.
The scam also drove a deeper structural shift to ASBA (Applications Supported by Blocked Amounts), now mandatory under Regulation 35, under which the application money remains blocked in the applicant's own bank account until allotment instead of leaving the investor's control. By tethering every application to a verified bank account and a single PAN, ASBA removes much of the financing mechanism on which the benami-application model depended: an operator can no longer cheaply fund thousands of fictitious applications when each must be backed by genuine, traceable, blocked funds. The allocation framework and its anti-abuse plumbing are therefore best read together — the category caps in Regulation 32 set the entitlements, while the identity-and-payment controls in Regulations 35 and 49 ensure those entitlements reach the investors the caps were designed to protect.
Disclosure of the allocation basis in the offer document
Allocation is not merely an internal allotment exercise; it must be transparently disclosed. The draft red herring prospectus and the red herring prospectus are required to set out the issue structure — the QIB, NII and retail portions, any anchor allocation, the mutual-fund reservation and any competitive-basis reservations under Regulation 33 — so that an investor knows, before bidding, the bucket into which the application falls and the rules that will govern allotment within it. The number of shares allocated to anchor investors and the price at which that allocation is made must be disclosed on the stock exchange websites before the issue opens, precisely so that public bidders can factor the anchor's commitment into their own decision.
The disclosure obligations sit within the broader prospectus regime examined in our chapter on disclosure in the draft red herring prospectus. Read together, the allocation grid and the disclosure regime express a single regulatory idea: the public is entitled both to a guaranteed share of the offer and to advance, accurate information about how that share will be divided. For the full set of related topics, return to the SEBI ICDR notes hub.
Frequently asked questions
What are the allocation proportions in a book-built IPO under the profitability route?
Under Regulation 32(1), for an issue under the Regulation 6(1) profitability route, the net offer is divided as not less than 35% to retail individual investors, not less than 15% to non-institutional investors and not more than 50% to qualified institutional buyers, with 5% of the QIB portion reserved for mutual funds.
How does allocation change if the issuer uses the Regulation 6(2) QIB route?
The grid inverts. Under Regulation 32(2), the issuer must allot not less than 75% of the net offer to QIBs, not more than 15% to non-institutional investors and not more than 10% to retail individual investors. Under Regulation 6(2) the 75% QIB allotment is a condition of the issue: if it is not achieved, the full subscription money must be refunded.
What is an anchor investor and how much can be allocated to anchors?
An anchor investor is a QIB who bids one day before the issue opens for at least ten crore rupees (two crore on the SME exchange). Under Regulation 32(3) and Schedule XIII, the issuer may allocate up to 60% of the QIB portion to anchor investors, one-third of which is reserved for domestic mutual funds.
What is the lock-in on shares allotted to anchor investors?
For issues opening on or after 1 April 2022, the lock-in is staggered: 50% of the anchor allotment is locked in for 30 days from allotment and the remaining 50% for 90 days. This replaced the earlier flat 30-day lock-in and was introduced to prevent anchors from exiting en masse on listing day.
What happens if a category in the net offer is under-subscribed?
The first proviso to Regulation 32(1) and (2) allows the unsubscribed portion of the retail or non-institutional category to be allocated to applicants in another category. Separately, under Regulation 45, if total subscription falls below 90% of the offer, all application monies must be refunded within fifteen days of closure.
How did the 2005 IPO demat scam shape the present allocation rules?
In In re Roopalben Nareshbhai Panchal and Karvy Stock Broking Ltd. v. SEBI, operators used thousands of fictitious demat accounts to flood the retail category and corner shares meant for genuine retail investors. The episode led to the draw-of-lots mechanism in the retail category and far stricter KYC controls, so that multiple benami applications confer no proportionate advantage.