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There are various phases to an IPO (initial public offering). Investors can subscribe to the firm’s shares within a certain time frame when the company files for an IPO and its application is approved. A company’s initial public offering (IPO) share issue normally lasts three to ten days. Retail investors and others can subscribe to the company’s shares during this period of IPO subscription.
An IPO might be undersubscribed, fully subscribed, or oversubscribed. SEBI requires that at least 90% of the company’s shares be subscribed to the issuance for them to be listed on the exchanges. Otherwise, the IPO will be cancelled, and the funds will be refunded to the bidders within a reasonable time.
When the amount of shares on offer during the IPO subscription is less than the demand in the market, the IPO is considered oversubscribed. This signifies that investors have applied for more share lots than the corporation has available.
What is the Oversubscription of Shares?
When the demand for a new issue of the stock exceeds the number of shares available, the term “oversubscribed” is used.
Oversubscription of shares is common for companies with a strong financial history, a high market reputation, or profitable prospects. In the event of oversubscription of new issues, the financial institution or the designated underwriter managing the offering may try to increase the pricing of the issue or increase the number of shares to manage the higher demand.
An offering of stock shares that is oversubscribed means that demand outnumbers supply. The demand must eventually reconcile with the security’s underlying corporate fundamentals. Therefore, an oversubscribed offering does not automatically imply that the market will support the higher price for long.
Oversubscription can occur in any market with a limited supply of new securities. Still, it is most commonly linked with the secondary market sale of freshly issued shares through an initial public offering (IPO).
Oversubscription is expressed as a multiple. For example, “XYZ IPO has oversubscribed twice the size.” A 2:1 application indicates that there is effectively double demand for shares as they are available in the scheduled offering.
The price of a share is purposefully established at a level that will presumably sell all the shares.
As per SEBI norms, a company cannot reject an application outright. It can, however, do so if the information is missing, the signature is missing, or the application money is insufficient.
Benefits of Oversubscription of Shares
In an oversubscription situation, businesses try to make the most of it.
They can deal with this situation in a variety of ways, including increasing the number of authorised shares, rejecting applications, combining the two, and so on.
They want to match market demand while raising as much money as possible. The corporation will not be able to provide every applicant with the exact number of shares that he desires. They must properly allot the shares. The corporation has three options:
Total rejection of some applications– This is done when the number of shares issued by the corporation falls short of the number of applications received.
Accepting some applications in full– This is the situation in which some applications are fully accepted and allotted the number of shares requested in the application.
Pro-rata allotment to some applications– Pro-rata allocation refers to the distribution of shares in proportion to the number of shares requested. The corporation adjusts the surplus money received at the time of application towards the allocation and refunds the excess in the case of pro-rata allotment.
Conclusion
Oversubscription leads to a reduced number of shares allotted or no allotment at all for a few investors. For the company, it helps in building confidence and goodwill. For accounting treatment, the task becomes tedious. Entries of total refund of share application, partial refund, and pro-rata allotment get added to the books, as per the applicable condition.
