What is Firm Allotment: Definition & Meaning Explained

Definition of Firm Allotment

Firm Allotment is the process of allocating shares during an IPO to investors who are not considered to be retail public investors. The firm allotment is done as per SEBI guidelines, which dictate that a portion of the IPO can be allocated to the likes of Mutual Funds, regular employees (permanent), and others.

The complete list of firm allotments for investors by allocation is as follows.

Foreign Institutional Investors (FIIs): 30%
Development Financial Institutions (DFIs): 20%
Mutual Funds: 20%
Regular Employees (permanent): 10%
Employee of Promoting Company: 10%
Lead Bankers: 5%

Any leftover percentage can be allocated to promoters.

Floating Interest Rate

The rate of interest that changes across the tenure of a loan, generally every quarter, due to the government’s interest rate, market conditions, and other factors is known as a floating interest rate.

Personal loans and home loans are typical examples of borrowing that carry a floating interest rate. A point to note here: the floating interest rate is added on top of a base interest rate that is charged by lenders.

Ex-Dividend Date

The ex-dividend date is the trading day on and after which a new buyer of the stock is not entitled to any dividends. Most traders say that a stock has gone ex-dividend when this happens.

Traditionally, the ex-dividend date is set a day before the record date when a company evaluates its records for existing shareholders. If a trader buys a stock that has gone ex-dividend from a seller, the one who'll get dividends is the seller.

Forex Options

Forex options are exchange-traded derivative contracts that give the right but not the obligation to buy or sell a pair of underlying currencies at a pre-agreed price and date. Forex options are also known as currency options.

Every forex option can be split into a call or put option. A forex call option gives the holder the right to buy underlying forex pairs while a forex put option gives the holder the right to sell underlying currency pairs.

In either case, there is no obligation to exercise the contract but there is a pre-agreed price and expiration date attached. In India, forex options are only available for the USD-INR currency pair.

European Option

A European Option allows a trader to exercise the contract only on the day of expiry. For example, let’s say an options trader bought a European Call Option that expires on 01-01-2023.

The options trader can only exercise the call option, that is, buy the underlying assets on the day of expiry which is 01-01-2023. In India, traders can only engage in European options.

Cash Reserve Ratio

Cash Reserve Ratio (CRR) is the amount of liquid cash a bank has to deposit with the Reserve Bank of India (RBI), calculated as a percentage of the total deposit of the bank. The latest Cash Reserve Ratio in India is 4.5%.

There are two important uses of CRR:

It acts as a reserve or collateral because banks borrow money from the RBI
The RBI decides the interest rate for borrowing based on the CRR

These two pointers become extremely important during high inflation as the RBI can hike interest rates with the assurance of having collateral from banks.

Firm Allotment