loader2
Partner With Us NRI

Open Free Demat Account Online with ICICIDIRECT

What is an undersubscribed IPO?

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.

Most Popular

  • 13 May 2022
  • ICICI Securities

The Five-Point Financial Planning Checklist For Your Family

Whether you just got married or planning to have a baby or have dependents, you should have financial plans for every stage in your life to ensure a secured future for your family members. Here are five things you can do financially for your family.   

  • 12 May 2022
  • ICICI Securities

What is a Zero Coupon Bond?

You get fixed returns in the form of interest until maturity when you invest in a bond. Zero-coupon bonds work a little differently. In this article, find out what zero-coupon bonds are, their advantages and whether you should invest in them. 

  • 12 May 2022
  • ICICI Securities

What are Cross Currency Pairs?

The forex market is the largest financial market globally. Currency trading is a lucrative and booming business. While most currencies trading happens in relation to the US Dollar, some don’t. That forms the basis of cross currency pairs. Here’s what you need to know about it. 

  • 12 May 2022
  • ICICI Securities

Investing principles from Benjamin Graham: The Father of Value Investing

Benjamin Graham was a British born economist, professor, and investor who taught at Columbia University. He was also a mentor to some of the most famous investors of the 20th century, including Irving Khan, John Templeton, & Warren Buffett. Buffett called him "the second most influential figure in his life, only after my father". 

  • 12 May 2022
  • ICICI Securities

How to Invest in Nifty 50?

The Nifty 50 is the benchmark index of the National Stock Exchange. It represents the 50 largest companies listed in India. Investing in the Nifty 50 can be a good idea for those looking to make index-linked returns. Here’s how you can invest in the index. 

  • 12 May 2022
  • ICICI Securities

Investment philosophy of Cathie Wood: The most powerful woman on Wall Street

Catherine Duddy Wood, also called Cathie Wood, is an investor who primarily invests in disruptive technologies and is the founder, chief executive officer, and chief investment officer of ARK Investment Management, LLC, an investment management firm mostly active in the United States.

  • 11 May 2022
  • ICICI Securities

How to Use Technology to Improve Your Finances

Technology has made life simpler for everyone. In the realm of personal finance, technology has streamlined many processes—from budgeting to automating your payments. On National Technology Day, let’s look at how technology has transformed our finances. 

  • 11 May 2022
  • ICICI Securities

How to Invest in your Every Goal with Mutual Funds?

Each of us is unique. We have different needs and goals in life. Some of us can ride along swinging markets, while some may need a relatively conservative investment tool. 

  • 11 May 2022
  • ICICI Securities

Four Reasons Why Entrepreneurs should Invest in Equity Mutual Funds

Equity mutual funds provide growth opportunities not just for individual investors but also for entrepreneurs and corporates. They make excellent investments for anyone looking for wealth creation. This article will give you four reasons why businesspeople should consider investing in equity mutual funds.