Applying for an IPO? ‘One’ could be the most preferable lot size

The IPO (Initial Public Offer) market in India is heating up nowadays.

With almost every IPO getting oversubscribed by a huge margin, getting an allotment has become tricky. We have seen a peculiar trend—investors tend to make an application with the maximum lot size, thinking that they will get more shares of a company they are applying for.

But that may not be the most intelligent decision to make. A more minimalistic approach might help if you hope to receive shares of companies going public.

Did you know?  

As far as the retail portion of any IPO is concerned, the maximum investors applying for one lot have to be accommodated first. Only the residual shares, if any, are then allotted amongst the remaining investors applying for more than a lot on a pro-rata basis.

The indicative formula for allotment is:

Number of investors getting at least one lot = Number of shares earmarked for the retail investors / minimum bid size

Using this formula, you can arrive at the number of investors a company has to make an allotment to. Needless to say, smaller IPOs or the ones keeping lower retail quota can accommodate fewer retail investors.

Let’s take an example of Indigo Paints, which was oversubscribed 117 times recently. The retail portion got oversubscribed 15.93 times.

Under such circumstances, those who applied for just one lot of 10 shares stand the best chance of allotment.

The retail quota in this case was 35%. In other words, 35% of 78.18 lakh shares (OFS+ fresh issuance) i.e., 27.3 lakh shares, were reserved for retail investors. Against this, bids for 4.34 crore shares were received under the retail portion. The minimum lot size was 10 shares.

Based on this information, we may assume that a maximum of 2.73 lakh retail bidders would be allotted a lot each. If the number of investors bidding for one lot exceed 2.73 lakh, then those applying for more, say the maximum of 13 lots, would be out of race straight away.

Sometimes, the retail quota is even smaller. For instance, Stove Kraft Limited kept only 10% (10,71,753 shares) of the issue for retail subscription. The minimum lot size was 38 shares. This implies that a maximum of only 28,204 investors applying for one lot could be accommodated.

You see, getting an allotment at an IPO is purely a game of probability and demand and supply. And the unwritten rule here is: less becomes more, if you are lucky.

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You may also like to read: IPO watch: story vs valuation what matters the most to you?

Disclaimer:

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.