Understanding Total Issue Size in an IPO & Why It Matters - IPO Spy

When a company decides to go public and launch an Initial Public Offering (IPO), one of the key terms you’ll come across is the total issue size. This metric is crucial for both the company and investors, as it determines the scale of the IPO and the amount of capital the company aims to raise. But what exactly is the total issue size, and why does it matter? In this blog, we’ll break down everything you need to know about total issue size in an IPO, its significance, and how it impacts investors and the company.

What is the Total Issue Size in an IPO?

The total issue size refers to the total number of shares a company plans to issue during its IPO and the total capital it aims to raise from the public. It is calculated by multiplying the number of shares offered by the issue price per share.

For example, if a company plans to issue 10 million shares at an issue price of ₹100 per share, the total issue size would be:
Total Issue Size = Number of Shares × Issue Price = 10,000,000 × ₹100 = ₹1,000,000,000 (₹100 crore).

Components of Total Issue Size

The total issue size is divided into two main components:

1. Fresh Issue

This refers to new shares issued by the company to raise fresh capital.
The funds raised through a fresh issue are used for business expansion, debt repayment, or other corporate purposes.

2. Offer for Sale (OFS)

This refers to the sale of existing shares by promoters, early investors, or private equity firms.
The proceeds from an OFS go to the selling shareholders, not the company.

Why Does Total Issue Size Matter?

The total issue size is a critical metric for both the company and investors. Here’s why it matters:

For the Company

Capital Raising: The total issue size determines how much capital the company can raise to fund its growth plans, repay debt, or meet other financial needs.
Valuation: The issue size, along with the issue price, helps determine the company’s market capitalization at the time of listing.
Investor Confidence: A well-planned issue size reflects the company’s confidence in its growth prospects and ability to attract investors.

For Investors

Investment Opportunity: The issue size indicates the scale of the IPO and the number of shares available for subscription.
Liquidity: A larger issue size often means higher liquidity, making it easier for investors to buy and sell shares post-listing.
Pricing: The issue size, combined with investor demand, influences the final issue price and listing price.

Factors Influencing Total Issue Size

Several factors determine the total issue size of an IPO:

1. Company’s Financial Needs

The company assesses its funding requirements for expansion, debt repayment, or other purposes and decides the size of the fresh issue accordingly.

2. Market Conditions

In a bull market, companies may opt for a larger issue size due to high investor demand. In a bear market, they may reduce the issue size to ensure the IPO’s success.

3. Regulatory Guidelines

The Securities and Exchange Board of India (SEBI) has specific regulations regarding minimum public shareholding and issue size. Companies must comply with these guidelines.

4. Investor Demand

During the roadshow and book-building process, the company gauges investor interest and adjusts the issue size to ensure full subscription.

5. Promoter Holding

SEBI mandates that companies maintain a minimum public shareholding of 25% post-IPO. The issue size is often determined based on this requirement.

Example of Total Issue Size in an IPO

Let’s take the example of Zomato’s IPO in 2021:

Fresh Issue: ₹9,000 crore.
Offer for Sale (OFS): ₹375 crore.
Total Issue Size: ₹9,375 crore.

The funds raised through the fresh issue were used to fuel Zomato’s growth plans, while the OFS allowed early investors to partially exit their holdings.

Conclusion

The total issue size is a key metric in an IPO, reflecting the scale of the offering and the company’s capital-raising goals. It plays a significant role in determining the IPO’s success, investor interest, and post-listing performance.

For investors, understanding the total issue size helps assess the investment opportunity, liquidity, and potential returns. For companies, it ensures they raise the necessary capital while complying with regulatory requirements.

Whether you’re a retail investor or a seasoned trader, keeping an eye on the total issue size and its components can help you make informed decisions and identify promising IPO opportunities. Happy investing!