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So the allotment price would be Rs. 465 and A, B, C will be allotted the shares they applied for, D will be allotted 30 shares (100-70) and E won't get any share.

Though there hasn't been a clear-cut proof but a Dutch auction method is supposed to have following benefits over traditional method of IPO allocation: -

1. Minimization in "Spike" or "Pop"
The increase between the offer price and the opening price is termed as "spike". In the traditional IPO allocation process, investment banks handling the IPO process determine the appropriate price by taking the IPO through "roadshows" to possible investors (large mutual funds, or clients of investment banks) and gauging the demand. As a consequence, these investors often receive the initial allotment of IPO shares and benefit from the price appreciation, which happens on listing. By Dutch auction method, the spike can be reduced since the demand level has already been gauged and the price has been arrived at by market mechanisms of demand and supply.

2. Small investor participation
Enables small investors to participate in the pricing by mentioning the price that they are willing to pay and the number of shares they are interested in buying. Thus, it is supposed to democratize the process of share allocation.

3. Role of investment banks
Since the investment banks are not involved in pricing of the IPO, the price is the lowest price at which all of the shares are sold; it minimizes the influence of investment banks. The value of IPO goes to the public rather than to the favored client of investment banks.

However, there are few shortcomings in the Dutch auction process: -

1. Lack of information to small investors
Small investors, who are supposed to be primary participant in this type of IPO allocation method, may not have sufficient detailed information to price the shares based on fundamentals, as a result they tend to do it on basis of name recognition (brand of the company).

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* Contributed by: -
Vijay Singh Poonia,
PGDM 2007-09,
IIM Calcutta,
Has work experience of 3 years with Indian Oil Corp Ltd.