Understanding Lot Size and IPO Allotment Process
You might have applied for IPOs. Have you ever wondered how allotment happens, what things happen in the background? Read to get a complete idea!
Investing in IPOs allows investors to back a company from its early stages of development. Learning the system's workings, such as share distribution and how much you can allot, is important to give yourself a good chance at getting IPO shares. Let’s get into the details of lot size, the IPO allotment process, what IPO allotment status means, and how shares are distributed among different investor categories.
What is the lot size in an IPO?
In an IPO, shares are purchased in groups called lots rather than individually. Each application must include at least one lot, and investors can apply for multiple lots if desired.
For example, an IPO with 50 shares per lot and a share price of ₹100 means that the cost of one lot is ₹5,000. When you apply for two lots, you are looking at 100 shares with a value of ₹10,000.
The lot size is chosen by the company that issues the IPO to help the application process be simpler and uniform. It helps retail investors keep their shares affordable since institutions and wealthy people have the opportunity to buy in larger numbers.
Importance of lot size in Retail Participation
The participation of retail investors is affected a lot by the size of the lot being offered. Retail investors can only put in a maximum of ₹2 lakh in an IPO under the rules set by the Securities and Exchange Board of India (SEBI). Due to the cap, the number of lots a retail investor can apply for depends on the lot size.
For example, 30 shares at ₹600 each make one lot, which costs ₹18,000. Under the limit of ₹2 lakh, a retail investor can get up to 11 lots. When the lot size is lower, more people can invest their saved money to take part in an IPO. However, fewer people may join in when a lot is large, but that might also mean each lot gets allocated due to less competition.
How are IPOs Allotted?
Knowing how shares are distributed is crucial to understanding the lot size and IPO allotment process. IPO allotment is handled through a well-defined mechanism regulated by SEBI. IPOs are typically divided into three main investor categories:
- Retail Individual Investors (RIIs)
- Non-Institutional Investors (NIIs or HNIs)
- Qualified Institutional Buyers (QIBs)
Each category is assigned a certain percentage of the total IPO shares. For most mainboard IPOs in India, 35% is reserved for retail investors, 15% for NIIs, and 50% for QIBs.
Allotment for retail category
If there are too many applications for an IPO in retail, its allocation is done randomly through a lottery. For example, if an IPO has 100,000 shares set aside for retail investors and one lot contains 100 shares, then there will be 1,000 allotments available (100,000 ÷ 100 = 1,000). Each retail investor can get one allotment.
A computer lottery carried out by the registrar chooses 1,000 lucky entrants. The purpose of this method is to make the process fair and noticeable.
So, only one lot is allotted per successful applicant, regardless of how many lots they applied for. If the IPO is undersubscribed, allotments are made as per the quantity applied.
Allotment for HNI and QIB category
For QIBs and high-net-worth individuals (HNIs), shares are given out based on the proportion of demand. For example, if the HNI section is oversubscribed five times and an investor applies for 10 lots, they will only get 2 (10 divided by 5). HNIs usually ask for large amounts but often receive only part of what they requested.
The allotment of QIB is a little different. Whereas the allocation is proportional to the number of shares, getting allotted shares depends on the timing, which is far later than other retail investors, who get confirmation of allotment earlier.
What doest it tells you?
After the IPO subscription period ends, investors wait to see their IPO allotment status, which tells them whether they got shares. Usually, 3–5 days after the IPO closes, the registrar shares this information.
You can check your IPO allotment status using the following details:
- PAN number
- Application number
- DP ID/Client ID
The allotment status will show:
- Whether shares have been allotted
- The number of shares allotted
- Refund status (if no shares are allotted)
The timeline
Let’s summarise how the entire IPO application and allotment process works with a typical timeline:
Strategies to improve Allotment chances
Although the IPO allotment process in the retail segment is largely a lottery, here are some tips to potentially improve your chances:
- Apply with multiple PANs: Families can apply separately using different demat accounts and PANs.
- Stick to one lot: In oversubscribed IPOs, applying for one lot increases your probability as allotment is done per-lot-per-applicant.
- Apply early: Although not officially proven, anecdotal evidence suggests early applications might reduce technical errors.
Why it matters
The lot size and IPO allotment process are a well-regulated and transparent mechanism designed to ensure fair distribution of shares. Understanding lot size, the IPO allotment process, and knowing when to check your status is essential to becoming a confident IPO investor.
