Oversubscription

Sometimes, the number of applied debentures is more than the debentures offered to the general public. Experts refer to this problem as oversubscription. Nevertheless, an organisation shall not allot more debentures than those whose invitation has been taken for a subscription. Due to oversubscription, excess money may be received. This excess money may be retained for adjustment. This is towards allotment, and it can be shown with the accounting analysis of oversubscription.

Keep on reading to understand oversubscription and its various methods. Below you will also find a demonstration of accounting analysis of oversubscription for a better understanding.

Accounting Analysis of Oversubscription

Below is a demonstration of the accounting analysis of oversubscription.

Accounting treatment:

If there is returning of excess application money:

Stock application A/c        Dr.

To Bank A/c

(Refunding due to rejection of applications)

If there is a transference of excessive application money to calls accounts and stock allotment:

Stock application a/c          Dr.

To stock allotment a/c

To stock calls a/c

(Adjustment of excessive application money)

Understanding Oversubscription

Sometimes, the issuing of a prospectus takes place for offering debentures to the public. Oversubscription will happen in a situation where applications received in respect of public prospectus are more than the debentures offered.

This excess application money is usually returned. Also, there may be allotting of a lesser number of debentures to the applicants. In such cases, adjustments will have to be made to application money towards allotment and subsequent calls. This is according to the decision of the organisation’s board of directors.

Difference Between Oversubscription and Undersubscription

Oversubscription happens when the total number of debentures applied exceeds the number of debentures offered. In contrast, under subscription happens when the number of debentures offered to the public exceeds the total number of debentures applied for. Let us study the key differences between them below:

Applications– In oversubscription, there will have to be a rejection of some applications. However, under subscription, there is acceptance of all the received applications.

Minimum Subscription– The topic of minimum subscription does not arise in oversubscription. UIn under subscription, the condition of the minimum subscription must be satisfied by the concerned organisation.

Refunding– There is refunding or adjustment of excessive application money in oversubscription. However, there is no refunding or adjustment of excessive application money in undersubscription. This is because there is no receiving of excessive application money in undersubscription.

Declining of application and refunding of Money:

It is the simplest way to deal with the situation of oversubscription. After receiving an excess number of applications for the subscription of debentures, the organisation has to decide.

In this decision, allotting of debentures should take place only to those individuals’ corporations from whom the application has come for more than a particular debentures number. As for those who applied for less number from this limit, the organisation must reject their application. Afterwards, there shall be refunding of the application money to them.

Allocation of Stocks on a Pro Rata Basis

Allocation of stocks on a pro-rata basis is another method of oversubscription. Here, a particular number of debentures will be allotted against the specific number of debentures that have been applied. For example, allotting four debentures shall be against 6 numbers of debentures that the subscriber applies for.

Adjustment of this excess amount will take place with the next calls. Another method of adjusting this extra amount is to be treated as calls in advance.

The Blend of the above methods

This method is a blend of declining of application and pro-rata basis methods. Here, the allotting of the debentures is on a pro-rata basis, while some of the applications are rejected. The rejected applications are those that are below a particular limit set by the organisation. This can be understood better with an accounting analysis of oversubscription.

Conclusion

Sometimes, a situation may happen where the number of applied debentures is more than the debentures offered to the public. This situation is called oversubscription. A demonstration of accounting analysis of oversubscription would help better understand the topic. There are various differences between over subscription and under subscription. An organisation may undertake three methods of oversubscription: Declining of application, Pro-rata basis allotment, and a mixture of both.