If you are an IPO investor, it is obvious that you would have come across the term “Lot size.” The IPO lot size is a pivotal element that significantly influences investor participation and the overall success of an Initial Public Offering.
So let us understand more about IPO Lot size and Minimum Order Quantity (MOQ) in this post.
What is IPO Lot Size?
The IPO lot size refers to the minimum number of shares that an individual investor must purchase when participating in an IPO.
In other words, it establishes the smallest quantity of shares available for purchase in a single order during the IPO process.
Why is IPO Lot Size Important?
Ensuring Serious Participation: By setting a minimum lot size, companies aim to attract serious investors who are willing to commit to a meaningful stake in the company. This helps in distinguishing serious investors from those looking to make smaller, speculative investments.
Facilitating Order Processing: Establishing a lot size streamlines the IPO process. It simplifies the order execution and ensures that investors are transacting in a way that aligns with the company’s issuance strategy.
Preventing Overconcentration: Lot sizes also play a role in preventing the overconcentration of shares in the hands of a few investors. It allows for a more equitable distribution of shares among a larger investor base.
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How the IPO Lot size is Calculated?
Lot size is arrived after taking lot of parameters. Let is understand better with an example.
Suppose XYZ Pharma, a leading pharmaceutical company in India, is gearing up for an IPO. Here’s how the company might determine the lot size:
1. Company Valuation: XYZ Pharma is valued at INR 5,000 crores, indicating its significant presence in the pharmaceutical sector.
2. Market Conditions: The pharmaceutical industry is performing well, and there’s considerable investor interest in healthcare stocks.
3. Desired Investor Profile: XYZ Pharma aims to attract a mix of institutional and retail investors to ensure a diverse shareholder base.
4. Industry Norms: Lot sizes in recent pharmaceutical IPOs in India have ranged from 50 to 500 shares.
5. Regulatory Guidelines: SEBI, the regulatory authority, provides guidelines to ensure fair practices and investor protection in the IPO process.
6. Liquidity and Trading Volume: XYZ Pharma considers the liquidity it wants in the stock post-IPO and sets a lot size that balances liquidity with accessibility.
7. Company’s Objectives: The company aims to raise INR 1,000 crores through the IPO to fund expansion and research initiatives.
8. Avoiding Overconcentration: To prevent concentration of shares in the hands of a few, XYZ Pharma opts for a moderate lot size.
After evaluating these factors, XYZ Pharma decides on a lot size of 100 shares. This means investors participating in the IPO must apply for a minimum of 100 shares, with the option to apply for multiples of 100.
The lot size aligns with the company’s valuation, market conditions, and objectives, providing a balance that accommodates a broad spectrum of investors in the Indian market
Minimum and Maximum Lot Sizes:
In an IPO, the minimum and maximum lot sizes play a pivotal role in shaping investor participation. Consider a hypothetical scenario with ABC Pharma’s upcoming IPO:
Minimum Lot Size:
ABC Pharma sets a minimum lot size of 50 shares. This means that investors must apply for at least 50 shares in a single order to participate in the IPO.
Purpose: The minimum lot size ensures committed investor participation, streamlines the IPO process, and discourages small, speculative investments.
Example: An investor applying for the IPO must bid for a minimum of 50 shares, and they can increase their application in multiples of 50 (e.g., 100 shares, 150 shares).
Maximum Lot Size:
ABC Pharma establishes a maximum lot size of 500 shares. Investors cannot apply for more than 500 shares in a single order.
Purpose: The maximum lot size prevents concentration of shares in the hands of a few investors, contributes to market stability, and manages liquidity.
Example: An investor can apply for up to 500 shares in a single order, preventing any one investor from monopolizing a substantial portion of the offering.
Market Lot Size vs. IPO Lot Size:
Here’s a comparison of Market Lot Size and IPO Lot Size :
| Aspect | Market Lot Size | IPO Lot Size |
|---|---|---|
| Definition | Minimum number of shares traded in a single order on the stock exchange after IPO listing. | Minimum number of shares an investor must apply for in an IPO to participate in the subscription. |
| Relevance | Applies to trading on the stock exchange in the secondary market. | Applies specifically to the IPO subscription process. |
| Timing | Relevant after the IPO is completed, during secondary market trading. | Relevant during the IPO subscription phase. |
| Example | If a stock has a market lot size of 100 shares, investors can trade in multiples of 100. | If an IPO has a lot size of 50 shares, investors must apply for at least 50 shares during the IPO. |
Minimum Order Quantity (MOQ):
The MOQ represents the minimum number of shares an investor must transact to participate in an IPO. It helps manage oversubscription and ensures fair distribution of shares.
Let us understand with an example,
- Minimum Order Quantity (MOQ): 300 shares
- Market Lot Size: 50 shares
if a corporation has an IPO with a minimum order quantity (MOQ) of 300 shares and a market lot size of 50 shares, an investor would have to purchase no fewer than 6 lots to participate in the IPO.
The calculation would be: 300 shares (MOQ) / 50 shares (Lot Size) equals 6 lots.
So, the investor, to take part in the IPO, would need to apply for a minimum of 6 lots, with each lot consisting of 50 shares. This ensures adherence to both the minimum order quantity and the market lot size stipulated by the company for the IPO.
Changing Lot Size and Oversubscription:
Adjusting the lot size in an IPO can significantly impact oversubscription. If the lot size is reduced from, for instance, 100 to 50 shares, it becomes more accessible for investors to participate, potentially leading to increased demand and higher grey market premium.
This adjustment could result in a higher oversubscription ratio, indicating heightened interest compared to the available shares.
While a smaller lot size may attract more retail investors, fulfilling applications becomes challenging in case of oversubscription
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Conclusion:
When a company goes public and sells its shares for the first time, they decide the smallest number of shares an investor can purchase, and that’s the lot size. It’s kind of like saying, “If you want to join the party, you need to buy at least this many shares.”
The lot size is important because it helps the company control who gets to join the party and how many shares they can get. If they set the lot size too big, it might be hard for small investors to join. If it’s too small, too many people might want to join, and it could get a bit messy.
So, getting the lot size right is like finding the right balance for everyone to enjoy the stock market party without any chaos.
FAQs About IPO Lot Size
Q1. What is IPO Lot Size?
Answer: The IPO Lot Size refers to the minimum number of shares an investor must apply for during an Initial Public Offering.
Q2. How is IPO Lot Size determined?
Answer: The issuing company decides the lot size before the IPO, specifying the minimum quantity of shares an investor can purchase.
Q3. What is Minimum Order Quantity (MOQ) in an IPO?
Answer: MOQ is the smallest number of shares an investor can apply for in a single order during the IPO subscription process.
Q4. Why is IPO Lot Size important?
Answer: IPO Lot Size is crucial for regulating investor participation, ensuring a systematic application process, and maintaining market order.
Q5. Can investors apply for more than the Lot Size?
Answer: Yes, investors can apply for more shares, but the application must be in multiples of the specified Lot Size.
Q6. How is oversubscription managed in IPOs?
Answer: In case of oversubscription, shares are allocated proportionally. Retail investors usually get at least one lot, and the remaining is distributed on a pro-rata basis.
Q7. Can investors change their Lot Size after application?
Answer: Generally, Lot Size cannot be changed after application. However, some revisions may be possible under specific conditions, such as withdrawal or reviewal.
Q8. What role does Lot Size play in IPO success?
Answer: IPO Lot Size influences investor interest and participation, contributing significantly to the overall success of the public offering.
Q9. How can investors calculate the number of lots to apply for?
Answer: To calculate lots, divide the desired number of shares by the IPO Lot Size. Apply for the resulting number rounded up to the nearest whole lot.
Q10. Is there a difference between Market Lot Size and IPO Lot Size?
Answer: Yes, Market Lot Size applies to trading on stock exchanges, while IPO Lot Size is specific to the initial subscription process during an IPO.
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