In the context of Initial Public Offerings (IPOs), the IPO subscription marks a crucial phase where investors express interest in purchasing shares from a company going public.
During the subscription period, investors submit applications and funds to participate in the IPO. The level of subscription, indicating the demand for shares, plays a key role in gauging investor confidence and contributes to the overall success of the IPO
In this article, we will understand the meaning of Oversubscription in IPOs and how it affects investors and the issuing company.
What is IPO oversubscription?
IPO oversubscription occurs when the demand for shares in an IPO exceeds the number of shares available.
When a company decides to go public, it estimates the number of shares to offer, but sometimes underestimates investor interest, resulting in an oversubscribed IPO.
This indicates strong demand, often driven by underpricing or high market enthusiasm. The oversubscription process involves investors applying for more shares than offered, with allocations determined by regulatory guidelines.
Also Read : What is Undersubscription IPOs and What haapens when an IPO is undersubscribed?
Factors responsible for IPO oversubscription
Several factors contribute to Oversubscription of an IPO:
Company Reputation: If the company has a good reputation or is well-known, investors may be more eager to buy its shares, leading to oversubscription.
Market Conditions: A positive market sentiment often triggers oversubscription. In a bullish market, investors are more likely to participate in IPOs, creating higher demand.
Industry Trends: If the company operates in a trendy or high-growth industry, investors may see it as an opportunity for future profits, contributing to oversubscription.
Competitive Landscape: Limited competition from other IPOs during the same period can attract more investors to a particular offering, increasing the likelihood of oversubscription.
Pricing: If the IPO is priced attractively, below what investors believe the shares are worth, it can generate heightened interest and oversubscription.
Underwriters’ Marketing: The effectiveness of underwriters in marketing the IPO plays a crucial role. Well-executed marketing campaigns can create awareness and drive demand.
Track Record: A company with a strong financial track record and past performance may attract more investors, increasing the chances of oversubscription.
Size of Offering: Smaller offerings relative to market demand are more likely to be oversubscribed as the limited number of shares creates a sense of scarcity.
Investor Categories: The presence of diverse investor categories, such as institutional investors, retail investors, and qualified institutional buyers, can contribute to oversubscription as each category seeks a portion of the shares.
Public Perception: Positive media coverage and public perception of the IPO can influence oversubscription. A well-received IPO in the public eye is likely to attract more interest.
How Are Shares Allotted When An IPO Oversubscribed?
Imagine a situation where a company offers 10,000 shares, but 100,000 people want to buy them – that’s oversubscription. Now, when this happens, the company can’t give shares to everyone.
To decide who gets the shares, there are some rules set by the government. There are different types of buyers, like big institutions (Qualified Institutional Buyers (QIB), Non-Institutional Investors (NII)) and regular people (retail investors).
Each type gets a certain percentage of the shares. For example, if 35% of the shares are for retail investors, the company needs to decide who among these people gets the shares.
Among these category, company can adopt any one of the below stratergy to allot the IPO shares.
1. Pro-rata allotment
In a pro-rata allotment, each investor receives a portion of the shares applied for, based on a proportional ratio.
Example:
ABC Corporation decides to go public and issues 50,000 shares in its IPO. However, the demand from investors is much higher, and applications are received for 100,000 shares.
If Investor A applied for 2,000 shares, and Investor B applied for 4,000 shares, the total applied shares from both investors (6,000) represent 6% of the total demand (100,000).
Therefore, both investors will receive a pro-rata allotment of 6% of their applied shares, resulting in Investor A getting 120 shares (2,000 * 6%) and Investor B getting 240 shares (4,000 * 6%). This ensures a fair distribution based on the proportional demand from all applicants.
This method aims to distribute shares fairly among all applicants, preventing outright rejections and promoting equal participation in the IPO allotment process.
2. Rejecting Applications
While companies generally cannot outright reject applications without valid reasons, there are specific circumstances where rejection may occur.
Reasons for rejecting applications include incomplete information, submission of incorrect application amounts, missing required documents, or other procedural flaws.
For instance, if a company issues 100,000 shares in its IPO, but receives applications for 120,000 shares, it may need to reject 20,000 applications due to issues such as incomplete forms or incorrect submission amounts.
3. Pro-rate + Rejecting Applications
if a company issues 100,000 shares and receives applications for 150,000 shares, it may use pro-rata allotment to distribute the shares among applicants.
However, if after pro-rata allotment there are still more applications, the remaining applications may be rejected based on specific criteria set by regulatory authorities.
How Oversubscription affects Listing Gains?
When an IPO is oversubscribed, meaning more investors want shares than available, it signals strong demand. This heightened interest often translates into positive listing gains, as investors anticipate the stock’s value to rise when it starts trading on the stock exchange.
Oversubscription creates a positive sentiment among investors, prompting them to believe that the stock’s opening price will exceed the IPO price.
This optimism stems from the perception that high demand during the IPO reflects a broader market interest, potentially leading to a higher initial trading price. Obviously the premium in grey market will be high whenever there is an oversubscription in an IPO issue.
As a result, investors may expect to sell their shares at a profit during the early trading days, commonly known as listing gains.
However, it’s essential to note that oversubscription alone does not guarantee listing gains. External factors, such as overall market conditions, economic trends, and the company’s fundamentals, also influence stock performance post-listing.
Investors should exercise caution and consider a holistic view of various indicators when assessing the potential relationship between oversubscription and listing gains in an IPO
Top 10 Oversubscribed IPOs of India:
Below are the 10 most subscribed IPOs till date.
| Sl No | IPO Name | Oversubscription (Approx.) |
|---|---|---|
| 1 | Latent View Analytics | 326 times |
| 2 | Paras Defence and Space Technologies | 304 times |
| 3 | Salasar Techno Engineering Ltd (2017) | 270 times |
| 4 | CDSL (2017) | 170 times |
| 5 | Ujjivan Small Finance Bank (2019) | 165 times |
| 6 | Quess Corp (2016) | 145 times |
| 7 | Happiest Minds Technologies Ltd (2020) | 150 times |
| 8 | Avenue Supermarts (2017) | 104 times |
| 9 | IRCTC (2019) | 112 times |
| 10 | DMart (Avenue Supermarts) (2017) | 104 times |
Also Read : What is Lock-In period in IPOs and what is it’s purpose
Conclusion
When more investors want to buy shares than a company offers in an IPO, it’s called oversubscription. This shows strong interest and can lead to quick profits. Allocations follow rules, favoring different investor groups.
In major oversubscriptions, a fair lottery system is used. While traders may benefit short-term, long-term investors should consider the company’s basics. Analyzing market conditions, IPO pricing, and demand is important.
FAQs on IPO Oversubscription
Q1: What is IPO Oversubscription?
Answer: IPO oversubscription occurs when the number of shares applied for by investors surpasses the total shares offered by a company.
Q2: How does IPO Oversubscription happen?
Answer: IPO oversubscription is a result of high demand for a company’s shares, often caused by factors like strong market interest, underpricing, and positive company outlook.
Q3: Can you give an example of IPO Oversubscription?
Answer: Certainly! If a company issues 10,000 shares in its IPO, but investors apply for 50,000 shares, it’s a fivefold oversubscription.
Q4: What happens in case of IPO Oversubscription?
Answer: In oversubscribed IPOs, shares are typically allocated through methods like pro-rata allotment or a lottery system, ensuring fair distribution.
Q5: How are shares allotted during IPO Oversubscription?
Answer: Shares can be allotted through pro-rata allocation, where each investor gets a proportionate share, or via a lottery system if demand is significantly high.
Q6: What influences IPO Oversubscription?
Answer: Factors like market conditions, company reputation, underwriting, and competition can impact IPO oversubscription.
Q7: Is IPO Oversubscription a positive sign?
Answer: Yes, IPO oversubscription is often considered a positive sign, indicating strong investor interest and potential listing gains.
Q8: Can retail investors participate in oversubscribed IPOs?
Answer: Yes, retail investors can participate, and shares are typically allocated to various investor categories based on predefined percentages.
Q9: How does oversubscription affect listing gains?
Answer: Oversubscription can contribute to positive listing gains, as high demand may lead to an increase in stock prices on the listing day.
Q10: Are oversubscribed IPOs always successful?
Answer: While oversubscription is generally positive, success depends on various factors, including market conditions and the company’s performance post-listing.
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