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What is an undersubscribed IPO?

2 Mins 14 May 2021 0 COMMENT

When the demand for an IPO is low, or when the amount of shares supplied by the firm is greater than the demand, the IPO is said to be undersubscribed.

What happens in the event of an Undersubscription?

In such situations, IPO rates get often reduced to ensure that the issue is completely subscribed by investors, even though this means that the issuing company does not raise the expected capital.

Another alternative is available to the afflicted business. Before the Initial Public Offering phase commences, they should get into an arrangement with their underwriters specifying that the latter will be required to buy unsold shares in case of under subscription.

During the IPO phase, businesses usually employ an investment bank as their underwriters to refresh your mind. Underwriters assist businesses in determining the appropriate IPO valuation.

Hope lasts an eternity, and the same is true in the world of IPOs. Companies often hope that the dark clouds will dissipate and that the IPO price will rise on the day of the offering. Since a variety of external factors dictates IPO share prices, such scenarios are possible.

Reasons for under subscription

Lack of knowledge of the IPO, high cost, weak promotion of the IPO, and market conditions are all factors that contribute to an undersubscribed IPO.

If there are any issues or irregularities with the business, many investors will stay away.

According to SEBI (Securities and Exchange Board of India), a minimum subscription of 90% of the issued sum gets required on the date of closure.

If this does not occur, the company will refund the full amount of the subscription. The investors will receive their money back, so there is no risk. However, there will be no payment to the issuing firm.

Even though there will be no benefit or loss, the company's investor confidence will get harmed.

How to avoid undersubscribed IPOs

To begin, look at the SEBI grade assigned to the s business. A 5-point scale gets used to grade the work. If the company's financial situation is strong and compares favourably to its industry rivals, it will receive a high score.

Second, go over the company's red herring prospectus thoroughly. The document, which can be found on SEBI's website, contains various details about the company's finances and future plans.

Allotment of shares

Since the demand for IPO shares is greater than the supply, each bidder receives the entire allotment. Let us say an investor placed an offer for ten lots of stock. She will get all the lots she applied for if the IPO is undersubscribed.

The shares are forfeited, and the money is refunded if the IPO is undersubscribed by less than 90%.

Any corporation may be tainted by under subscription.

Is under subscription likely to result in losses after a listing?

The disparity between the allotment price at the time of the IPO and the stock price on the first day of trading at the stock exchange is known as listing profits. The difference between the opening and closing stock prices is known as a listing benefit.

Oversubscribed IPOs typically make money on their first day on the stock exchange.

Meanwhile, undersubscribed IPOs seldom achieve listing profits. But that does not mean the stock will continue to underperform. Due to improved investor trust, a strong financial position, and favourable market conditions, these stocks can recover over time.

Disclaimer : ICICI Securities Ltd.( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Centre, H. T. Parekh Marg, Churchgate, Mumbai - 400020, India, Tel No : 022 - 2288 2460, 022 - 2288 2470. Please note, I-Sec is acting as a distributor to offer IPO distribution related services and distribution of IPOs are not Exchange traded products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon.