What is Lot Size in an IPO & How Does It Affect Investors?

When a company launches an Initial Public Offering (IPO), one of the key terms investors encounter is lot size. Understanding lot size is crucial for participating in an IPO, as it determines how many shares you can bid for and the minimum investment required. But what exactly is lot size, and how does it affect investors? In this blog, we’ll break down everything you need to know about lot size in an IPO, its significance, and its impact on investors.

What is Lot Size in an IPO?

The lot size in an IPO refers to the minimum number of shares an investor must apply for in a single bid. It is the smallest unit of shares that can be purchased during the IPO process.

For example, if the lot size for an IPO is 50 shares, investors must bid for a minimum of 50 shares. They can also bid for multiples of the lot size (e.g., 100, 150, 200 shares, etc.).

Why is Lot Size Important in an IPO?

Lot size serves several important purposes:

1. Standardization: It ensures uniformity in the bidding process, making it easier for the company and registrar to manage applications.
2. Accessibility: By setting a minimum investment threshold, lot size makes IPOs accessible to retail investors.
3. Allotment Process: Lot size plays a key role in determining how shares are allocated to investors, especially in oversubscribed IPOs.

How is Lot Size Determined?

The lot size is decided by the company in consultation with its merchant bankers and is based on factors such as:

1. Issue Price: The higher the issue price, the smaller the lot size to keep the minimum investment amount affordable.
2. Retail Investor Participation: The lot size is often set to encourage participation from retail investors.
3. Regulatory Guidelines: SEBI mandates that the minimum investment amount for retail investors should not exceed ₹15,000.

How Does Lot Size Affect Investors?

Lot size has a direct impact on investors in several ways:

1. Minimum Investment Amount

The lot size determines the minimum investment amount required to participate in an IPO. For example:

• If the lot size is 50 shares and the issue price is ₹100, the minimum investment amount is ₹5,000 (50 × ₹100).

2. Retail Investor Quota

In India, 35% of the IPO shares are reserved for retail investors. The lot size ensures that this quota is distributed fairly among small investors.

3. Allotment Process

In oversubscribed IPOs, shares are allocated on a lot basis. For example:

• If an IPO is oversubscribed 10 times, investors may receive 1 lot for every 10 lots applied for.

4. Liquidity Post-Listing

A smaller lot size encourages more retail participation, which can improve liquidity in the stock post-listing.

5. Flexibility in Bidding

Investors can bid for multiples of the lot size, giving them flexibility in deciding how much to invest. For example, if the lot size is 50 shares, investors can bid for 50, 100, 150 shares, etc.

Example of Lot Size in an IPO

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

• Issue Price Band: ₹72–₹76 per share.
• Lot Size: 195 shares.
• Minimum Investment Amount: ₹14,040 (195 × ₹72).

This lot size ensured that the minimum investment amount was within SEBI’s limit of ₹15,000 for retail investors.

Tips for Investors

1. Check the Lot Size: Always review the lot size and minimum investment amount before applying for an IPO.
2. Plan Your Investment: Ensure you have sufficient funds to bid for at least the minimum lot size.
3. Consider Oversubscription: In oversubscribed IPOs, apply for multiple lots to increase your chances of allotment.
4. Read the RHP: The Red Herring Prospectus (RHP) contains details about the lot size, issue price, and other important information.

Conclusion

Lot size is a critical aspect of an IPO that determines the minimum number of shares an investor can bid for and the minimum investment amount. It plays a key role in ensuring fair participation, especially for retail investors, and influences the allotment process in oversubscribed IPOs.

By understanding lot size and its impact, investors can make informed decisions and participate effectively in IPOs. Whether you’re a first-time investor or a seasoned trader, keeping an eye on the lot size can help you maximize your chances of securing shares in a promising IPO.

FAQs About Lot Size in an IPO