Initial Public Offers (IPOs) are popular investment events in the financial markets. In 2023, there were 60 mainboard IPOs, with the total IPO fundraising for the full year (2023) being Rs. 53,091 crore. Central to the IPO process is the concept of lot size, which represents the minimum quantity of shares an investor must purchase in a single transaction.
Let us understand the concept of IPO lot size in detail and see how it democratises market access for retail investors.
What is a lot size in IPO?
IPO lot size refers to the minimum number of shares an investor must purchase in a single transaction during the IPO process. For instance, if the IPO lot size for XYZ company is 28 shares, with a price range of ₹480 to ₹500, the minimum investment required would be ₹14,000 (28 * ₹500). All applications must be submitted in multiples of the lot size.
Usually, a lot size is predetermined by the company issuing the IPO and varies from one IPO to another. It depends on factors such as:
- Price of the shares
- Total number of shares offered, and
- Regulatory requirements.
Types of lot sizes in an IPO
1. Minimum lot size
The minimum lot size in an IPO refers to the smallest number of shares an investor can buy. Investors cannot purchase fewer shares than the specified minimum lot size. This helps issuers ensure that only committed investors take part in the IPO. For example, if a company’s IPO has a lot size of 100 shares and the minimum requirement is three lots, the investor must buy at least 300 shares to participate.
2. Maximum lot size
The maximum lot size in an IPO sets a limit on how many shares an investor can buy. This prevents any single investor from monopolising the shares. By capping the maximum lot size, companies ensure that the shares are distributed among a wide range of investors.
Why companies decide IPO lot size?
One of the primary benefits of lot sizes is that they make IPOs accessible to retail investors by setting a minimum quantity of shares that can be purchased. This accessibility democratises the IPO market and allows individual investors to participate alongside institutional investors.
Furthermore, IPO lot sizes help in:
- Efficient allocation
- Using lots, an issuer can efficiently allocate shares among investors based on their orders and demands.
- Orderly trading
- Standard lot sizes facilitate orderly trading in the secondary market once the shares are listed.
- They provide a standardised unit of trading and help in maintaining:
- Market liquidity and
- Price stability
How do companies calculate IPO lot size?
The calculation of an ideal IPO lot size is based on several factors. Let us have a look at some major ones:
- Share price
- Companies consider the price per share they intend to offer in the IPO.
- Higher share prices usually result in bigger lot sizes to maintain accessibility for retail investors.
- Total number of shares offered
- Companies determine the total number of shares they plan to offer in the IPO.
- This decision largely depends on the funding needs of the organisation.
- Regulatory requirements
- Companies are required to adhere to regulatory guidelines and requirements regarding IPO lot sizes.
- Regulatory bodies usually:
- Specify minimum lot size thresholds or
- Guide on determining lot sizes
- Market conditions
- To determine an appropriate lot size, most companies assess:
- Market conditions
- Investor demand, and
- Trading liquidity
- To determine an appropriate lot size, most companies assess:
- Investor participation
- To understand the demand or interest for their IPO, companies analyse:
- Investor interest, and
- Participation levels
- This information also helps in deciding a lot size, which can:
- Attract sufficient investor participation and
- Avoid oversupplying the market
- To understand the demand or interest for their IPO, companies analyse:
Calculation of IPO lot size
Companies calculate lot size using this formula:
For example,
- Total number of shares: 1,000,000
- Minimum lot size: 100 shares per lot
- Total lots issued = Total number of shares / Minimum lot size
- Total lots issued by the company = 1,000,000 / 100
- Total lots issued = 10,000 lots
How much value of shares can you apply in an IPO?
The value of shares you can apply depends on the lot size and the cut-off price in IPO. Furthermore, you should also consider the different limits set by The Securities Exchange Board of India (SEBI) to categorise investors into the following:
- Retail investors
- Non-institutional investors (NIIs), and
- Qualified institutional buyers (QIBs)
These limits are specified under Schedule V to the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018. Let’s study them:
| Investor type | Limit |
| Retail investors | Retail investors are those who apply for shares in an IPO for a total value of up to Rs. 2 lakh. |
| Non-institutional investors (NIIs) | Non-institutional investors (NIIs) are those who apply for shares in an IPO for a total value exceeding Rs. 2 lakh. |
| Qualified institutional buyers (QIBs) |
|
Conclusion
An IPO lot size shows the minimum investment an investor must make to participate in the IPO. These sizes are pre-determined by the issuing organisation and are based on several factors, such as investor demand, share price offered, and regulatory requirements. These promote accessibility of retail investors in the process of IPO and also ensure efficient allocation and orderly trading in the secondary market.
