IPO Lot Size: Meaning, Calculation, and Example

An Initial Public Offering (IPO) is a significant event for a company, as it marks the transition from a private entity to a publicly traded company. As an investor, understanding the IPO cycle and its various stages is crucial for making informed decisions. 

A critical aspect of IPOs that often comes up during the investment process is the IPO lot size. In this article, we’ll walk through what is lot size in IPO, how it’s calculated, and understand the concept with examples.

What is the IPO Cycle?

The IPO cycle refers to the company’s various stages when moving from a private to a public entity through an initial public offering. Understanding the IPO cycle can help investors make more informed decisions from preparation to post-listing activities. For those seeking expert guidance, an investment advisory firm can provide valuable insights into the factors influencing an IPO’s success.

Why Understanding the IPO Process is Crucial for Investors

Understanding the IPO process can help investors evaluate potential investment opportunities. It clarifies how the price of an IPO is set, the IPO lot size, how shares are allotted, and the risks involved in investing during the early days of a company’s public life. With this knowledge, investors can better assess whether or not an IPO is a good fit for their portfolio.

How Companies Transition from Private to Public Through an IPO

A company that decides to go public offers shares for the first time. The transition involves a detailed process, including regulatory approvals, setting an IPO price, and eventually listing shares on a stock exchange. This public offering allows the company to raise capital for expansion, acquisitions, and debt repayment, among other uses.

Definition and Explanation of the IPO Cycle

The IPO cycle comprises the entire process a company goes through to list its shares on the stock market. This cycle involves several key stages: preparation, registration, pricing, allotment, and post-listing activities. Whether dealing with current IPOs or evaluating listed IPOs, each stage presents unique challenges and opportunities for the company and investors.

Why Companies Choose to Go Public

There are several reasons why a company may decide to go public. By offering shares to the public, the company can raise capital, improve its visibility, enhance its credibility, and allow early investors and employees to liquidate their holdings. Going public also gives the company access to broader capital markets for future financing needs.

Stages of the IPO Cycle

The IPO cycle can be broken down into several distinct stages. Let’s take a closer look at each of these stages to understand how the process unfolds.

1. Pre-IPO Stage: Company Preparation

Before a company can offer shares to the public, there’s a lot of internal work to be done.

Internal Planning: When a Company Decides to Go Public

The decision to go public is often made after extensive internal planning. The company must assess its financial health, market conditions, and growth potential. They also need to decide the best time for an IPO, ensuring favorable market conditions.

Selection of Investment Bankers and Underwriters

To navigate the IPO process, companies hire investment bankers and underwriters who help them determine the offering’s pricing, structure, and timing. These professionals also manage the marketing efforts of potential investors.

Drafting the Red Herring Prospectus (RHP) and SEBI Approval

A crucial document in the IPO process is the Red Herring Prospectus (RHP). This document outlines key information about the company, its financials, risks, and plans. It is submitted to the Securities and Exchange Board of India (SEBI) for approval before the IPO.

Also Read: What is an IPO and How Does it Work?

2. IPO Registration and Compliance Stage

Once the RHP is approved, the company proceeds to the registration and compliance stage.

Filing the DRHP (Draft Red Herring Prospectus) and SEBI Review

The company files a Draft Red Herring Prospectus (DRHP) with SEBI, which then reviews the document for accuracy and completeness. This step ensures that investors can access all necessary information about the company before investing.

Regulatory Approvals and Market Analysis

In addition to SEBI’s approval, the company must fulfill other regulatory requirements, such as obtaining clearance from the stock exchanges where the shares will be listed. During this process, market analysts start evaluating the company’s potential, which plays a significant role in determining the demand for the IPO, especially when compared to other IPO performers in the market.

Roadshows and Marketing the IPO to Investors

Once the regulatory approvals are in place, the company conducts roadshows to market the IPO to potential investors. During roadshows, company executives present their business plans and growth strategies, and investors can ask questions and assess the viability of investing.

3. IPO Pricing and Subscription Phase

The pricing phase is one of the most critical steps in the IPO cycle.

Book-Building vs. Fixed Price IPOs

In a book-building IPO, the price range is set, and investors place bids within this range. The final price is then determined based on demand. In a fixed-price IPO, the price is set beforehand, and investors purchase shares at that price.

How the IPO Subscription Process Works

During the subscription phase, investors submit their applications to buy shares. The shares are allocated according to the demand in different categories, such as retail investors, institutional investors, and high-net-worth individuals.

Factors That Determine the Final Issue Price

Several factors determine the final issue price, including market conditions, company performance, share demand, and the overall economic environment.

Also Read: How to Buy IPO? All You Need to Know

4. IPO Allotment and Listing Process

Once the shares are subscribed, the company moves to the allotment and listing process.

How IPO Shares Are Allocated to Investors

Investors are allotted shares based on their applications, with specific categories receiving priority. The shares are then listed on a stock exchange, which can be freely traded.

Understanding IPO Listing Day and Market Reactions

On listing day, the stock begins trading publicly, and the market’s reaction can significantly impact the share price. Investors closely monitor the price movements, as it provides insight into how the market views the company post-IPO.

5. Post-IPO Phase: Life After Listing

After the IPO, the company enters the post-IPO phase, which involves further adjustments and market reactions.

Also Read: IPO Allotment Process: The Complete Guide

Lock-In Periods for Promoters and Institutional Investors

During the post-IPO phase, promoters and institutional investors are often subject to lock-in periods, which prevent them from selling their shares for a specific time, typically 1-3 years. This is done to stabilize the stock price in the initial months.

Stock Volatility and Market Performance After IPO

Post-IPO, stock prices can experience high volatility. Investors need to be prepared for fluctuations in stock value and keep an eye on the company’s performance and broader market conditions.

How IPOs Transition Into Publicly Traded Companies

Eventually, the company settled into its new identity as a publicly traded entity. Over time, its stock price stabilizes, and it starts engaging in regular financial disclosures to comply with public company regulations.

Real-World IPO Cycle Examples

1. Case Study: A Successful IPO Cycle

One example of a successful IPO cycle in India is Zomato’s IPO in July 2021. The food delivery giant raised ₹9,375 crore through its public offering. The IPO attracted massive investor interest, with strong demand from retail and institutional investors. Zomato’s roadshow effectively built anticipation, and the company’s stock price surged post-listing, reflecting the market’s confidence in its growth potential. This successful IPO marked a significant milestone in India’s food delivery sector.

2. Case Study: An IPO That Struggled After Listing

On the other hand, some IPOs struggle after listing, with stock prices falling below the initial offering price. An example is ACME Solar Holdings Ltd., a renewable energy company that launched its IPO in 2024. Despite the issue price being ₹289, the stock opened at ₹251, reflecting a listing discount. This example highlights how companies in emerging sectors, like renewable energy, can experience post-listing struggles due to market conditions or investor sentiment.

What These IPO Cycles Teach Us About Market Trends

By studying successful and unsuccessful IPOs, investors can learn essential lessons about market trends, timing, and the risks associated with investing in IPOs.

Common Challenges Faced During the IPO Cycle

1. Regulatory Hurdles and Compliance Delays

One of the common challenges companies face during the IPO cycle is regulatory delays, which can push back the offering date or affect the timing of the listing.

2. Market Volatility Impacting IPO Pricing

Market conditions play a crucial role in determining the success of an IPO. Volatility can result in lower-than-expected demand, leading to an underpriced IPO or a failure to meet subscription targets.

3. Oversubscription and Under-Subscription Risks

Both oversubscription and under-subscription carry risks. Oversubscription can result in a lack of shares for investors, while under-subscription can indicate weak demand and result in a failed IPO.

Conclusion

The IPO cycle is a multi-stage process that involves careful planning, regulatory approvals, market analysis, and post-listing adjustments. By understanding these stages, investors can better understand how IPOs work and what factors influence their success or failure.

Learning about the IPO cycle is crucial for investors to evaluate potential opportunities. By considering the stages of the cycle, the company’s background, and market conditions, investors can make more informed decisions when participating in an IPO.

In the case of IPO lot size, knowing the minimum number of shares you must buy in a particular IPO is essential. Understanding this and how it affects your investment can help you manage your portfolio more effectively. 

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