What is Lot Size in IPO: Explained With Example

IPO “Lot Size” is the minimum number of shares that you must bid in a single IPO application process.

In financial terms, “Lot Size” is the total number of shares that any investor can buy in one transaction. The number of shares in an IPO application quantity should be in multiples of lot sizes.

For example, in the NetWeb Technologies IPO, the lot size was 30 shares, then you could bid for 30 shares i.e. 1 lot, 60 shares (2 lots), 90 shares(3 lots), and so on. You can’t bid for an odd number of shares like 157 or 233. 

Your IPO application would get rejected if you don’t make sure that you bid for the correct quantity. This must be a multiple of the lot size.

As small retail investors (RIIs) you can bid for a minimum of one lot and maximum shares worth Rs 2 Lakhs in the IPO.

Note – In a Mainboard IPO, the IPO lot size is applicable only for applying and allotment. After listing the trading can be done for 1 share. This means after listing you can trade in 1 share.

In SME IPO, the IPO lot size and trading lot size are the same. The SME lot size range from 100 shares to 10,000 shares.

Suppose, you apply for SME IPO with a lot size of 1600 shares, then you need to apply for 1600 shares (1 lot) or in multiples of 1600 shares. After the listing of an SME company, you need to buy-sell 1600 shares in a single trade.

Why There is Lot Size in an IPO

The concept of lot size in an IPO serves several important purposes:

#1. Manageable Allotment

By setting a lot size, the company and the underwriters can manage the allotment process more efficiently. There is a fair and uniform distribution of shares among investors.

#2. Retail Investor Participation

Lot size is often set to encourage retail investor participation in IPOs. By defining a smaller lot size, retail investors with limited funds can participate in the IPO process. Which increases the retail investor base.

#3. Price Rationalization

The lot size is determined based on the issue price of the shares and the number of shares offered. Lot size helps in rationalizing the price per share with cut-off price and ensures that the IPO price is not too high or too low for individual investors.

#4. Liquidity

Setting a lot size ensures that there is sufficient liquidity in the stock when it starts trading in the secondary market.

There will not be a large number of odd-lot trades if lot size is indicated. Without having lot size can lead to lower liquidity and higher trading costs.

#5. Simplified Allotment Process

A fixed lot size simplifies the allocation process during the IPO. When the IPO subscription period ends, the number of lots applied can be directly allocated to investors, making the allotment process more straightforward.

The concept of lot size in an IPO streamlines the entire process, ensures fairness, and encourages wide participation. 

If you are looking to invest in the IPOs then you can bookmark our report on upcoming IPOs to keep track.

SEBI Regulations Regarding Lot Size

Here are some key SEBI regulations related to lot size.

#1. Fixing Lot Size

SEBI gives the flexibility to the company to determine the lot size in an IPO and FPO. The lot size is set based on various factors, including the price of the shares, the number of shares offered, and the objective of allowing broad retail participation.

#2. Minimum Lot Size

SEBI specifies that the lot size should be that the worth of shares an investor can bid lies in the range of Rs. 10,000 to Rs. 15,000 during an IPO or FPO. 

Below is the exact regulation from SEBI 

“The issuer shall stipulate in the offer document the minimum application size in terms of number of specified securities which shall fall within the range of minimum application value of ten thousand rupees to fifteen thousand rupees.” – SEBI 

For example, if a company’s share in an IPO is priced Rs. 50 then the number of shares in a single lot can range from –

10,000 / 50 = 200 shares to 15,000 / 50 = 300 shares.

The company is free to decide the minimum number of shares for 1 lot in between 200 to 300 shares. This is also called IPO application lot size and you are free to apply in multiples of lot size.

#3. Trading Lot

But the trading lot size for IPOs and FPOs for companies listed on the Mainboard of BSE and NSE is 1 share.

Just because the company is mature in operations, big in size, fully comply with listing requirements and there is enough liquidity. 

But in the case of small companies and startups coming up with an SME IPO the application lot size becomes the trading lot size for the listed shares. 

After the successful completion of an SME IPO, the shares get listed on the stock exchange, and investors are required to trade only in lot size in the secondary market. 

For example, if in an SME IPO, the lot size is fixed at 1600 shares then the same lot size continues after IPO for normal trading also.  

The lot size will determine the number of shares that can be bought or sold in a single transaction.

Below is the exact wording about lot size that you will find in the Red Herring Prospectus (RHP) of the company.

“Market Lot and Trading Lot 

Since trading of the Equity Shares is in dematerialized form, the tradable lot is 1 Equity Share. Allotment in the Offer will be only in electronic form in multiples of [●] Equity Share subject to a minimum Allotment of [●] Equity Shares. For the method of Basis of Allotment, see ‘Offer Procedure’.

Bid Lot [●] Equity Shares and in multiples of [●] Equity Shares thereafter.

Allotment Lot A minimum of [●] Equity Shares and thereafter in multiples of 1 Equity Share”

Takeaways – 

• Bidding in an IPO will be in lot size only
• Allotment will be done in lot size + multiples of 1 share
• Trading will happen for 1 share and multiples for Mainboard IPO.

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