Oversubscribed Definition - IPOs

If you follow the chatter around companies going public, then you may have surely come across the term IPO oversubscription. An IPO or initial public offer, as most us already know, is the process of a privately owned company going public. The company's shares are made available for sale to retail investors or the general public for the first time and it gets listed on the exchanges.

In an IPO or public issue of shares, there are several stages. Once the company files for an IPO and its application gets approved, investors can subscribe to its shares within a set period. The share issue of a company in an IPO usually remains open for anywhere between 3 to 10 days. During this period of IPO subscription, retail investors and others can subscribe for the company's shares. Details of an IPO are available in the red herring prospectus and one can go through the same to get a better idea about the public offer.

Oversubscribed IPO- All you need to know

There are three possible scenarios here- an IPO can be undersubscribed, fully subscribed or oversubscribed. For shares of the company to list on the exchanges, SEBI requires at least 90% subscription to the issue. Otherwise, the IPO is scrapped and the money returned to bidders. 

An IPO is said to be oversubscribed when the number of shares on offer is less than the demand for the same during the IPO subscription process. This means that investors have applied for a greater number of share lots than what was put on offer by the company.

The first scenario, i.e., when an IPO is undersubscribed, is a reflection of the lack of demand for the issuer company's shares. In this case, most of the investors in the IPO subscription get as many lots of shares as they had applied for. However, what raises concern here is that a lower-than-expected demand for the IPO may manifest in a crash in share price on the day of listing. When an IPO is fully subscribed, each investor simply gets the number of shares applied for.

Share allotment in an oversubscribed IPO

The shares in an issue are allotted to the different categories of investors, namely, retail institutional investors (RIIs), qualified institutional buyers (QIBs) and non-institutional investors (NIIs). There is a cap of Rs 2 lakh on the value of bids made by retail investors in an IPO.

For the retail investor category, SEBI says that if this portion of an IPO is oversubscribed, then the share allotment must be done in such a way that each investor gets a minimum of one lot. Thereafter, the remaining shares are allotted proportionately. This holds true for issues with a small oversubscription.

However, if an IPO is oversubscribed to such an extent that all investors cannot be allotted a minimum of one lot each, then the share lots are allotted to subscribers using a lottery system. In such a case, many subscribers may not be allotted any shares.

What are the reasons behind IPO Oversubscription?

IPO subscription is a complicated process and is affected by various factors. Ascribing a single reason as to why oversubscription of an IPO takes place would be simplifying the matter. Usually, an oversubscribed IPO can occur due to the influence of various factors to varying degrees.

When a company launches, it fixes the percentage of shares offered to each category of investors, like the RIIs, NIIs/HNIs and QIBs. When the demand for shares in the IPO from any of these categories crosses their quota, the portion is oversubscribed.

What Are The Factors Responsible For IPO Oversubscription?

While it is not easy to anticipate the oversubscription of an IPO, there are certain factors that contribute to the demand for an offer. They are as follows:

-          The companies offer a fixed number of shares in an IPO. When there is a huge demand for the company’s shares, it may receive a large number of applications in an IPO that may exceed the number of shares offered. This can cause an oversubscription of the IPO.
-          The performance of an IPO is also dependent upon the prevailing market and industry conditions. If the overall sector and industry are performing well with high growth prospects, the IPO of a company from that sector may attract more investors.
-          The overall economic conditions also impact the subscription numbers of an IPO. During economic boom and bull markets, IPOs can be oversubscribed.

Frequently asked questions (FAQs)

Where and how can one know more about the demand for an issue at any point of time?

The status of bidding in a book-built issue is available on the website of the exchanges (BSE/NSE), and this data is also available for different investor categories. Once the IPO pricing has been determined, a public advertisement is issued, which contains the price as well as details of the number of securities and the amount payable by an investor. However, in case of a fixed price issue, this information via a public advertisement is available only after closure of the issue, within 10 days of dispatch of the certificates of allotment/refund orders.

When do the shares allotted to an investor get listed?

Share listing takes place within 12 days from the time of closure of the issue.