Short answer

When an IPO is oversubscribed, the registrar conducts a lottery to allot shares to applicants. An IPO becomes oversubscribed when the number of applications exceeds the shares available for allotment.

Example scenario

Assume 10 investors have applied for an IPO at the cut-off price (the offer price at which shares get issued to investors). Each investor has placed a bid for 1 to 5 shares:

Quantity Applied

If only 5 shares are available for allotment, the lottery result could be:

Quantity Allotted

Investors 2, 3, 5, 9, and 10 won the lottery and will receive shares. If you had applied at a price below the upper price band, your bid would not be considered for the allotment lottery.