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What is Oversubscription in an IPO?
In any given Initial Public Offering (IPO), the number of shares issued and the number of shares that investors apply for is rarely, if ever, equal. The subscriptions are always either above or below the number of shares issued via the IPO. This situation can lead to an oversubscribed IPO, where the number of applications received is greater than the number of shares offered.
What is Oversubscription in IPO?
Oversubscription of shares in an IPO is a phenomenon where the applications received from investors exceeds the total number of shares that the company plans to issue. For example, if a company decides to issue 10 lakh shares via an IPO, and applications have been received for 20 lakh shares instead, it is deemed as an oversubscribed IPO. The extent of IPO oversubscription is expressed as a multiple of the original number of shares issued. For instance, in the above example, the IPO is considered to be 2x oversubscribed.
What are the reasons for Oversubscription in IPO?
Oversubscription generally happens when a company is very popular among investors for various reasons. Here is a closer look at when an IPO may be oversubscribed:
- If investors are eager to invest in the issue because of its potential
- If the company has set an unrealistic price band
These scenarios lead to high levels of demand, often causing the number of applications to exceed the number of shares being offered. The result is an oversubscribed IPO.
How does Oversubscription in IPO work?
In an oversubscribed IPO, the demand exceeds the supply, so it is natural that investors will not be able to receive all the shares they bid for. Oversubscription can be short-run or long-run. In a short-run oversubscription, over 100% of the subscription is offered to investors, while in a long-run oversubscription, less than 1% of the IPO is oversubscribed.
When there is an IPO oversubscription, a company can either reallocate the number of shares or issue additional shares to meet the demand. In case of reallocation, the shares are allotted according to a fixed percentage for each category of investors, as follows:
- Up to 35% of the IPO allocation for retail investors
- Up to 50% for Qualified Institutional Buyers (QIBs)
- 10% to 15% for Non-Institutional Investors (NIIs)
Which parameters are involved in IPO Oversubscription?
The Underwriting Firm
If the firm underwriting the subscription has a good market reputation, investors may flock to the IPO. It can cause high levels of demand and a possible oversubscription of shares.The Competition
If too many companies in the same industry issue IPOs around the same time, the demand may be adversely affected. This minimises the possibility of oversubscription.The Economic State of Affairs
If the overall economy is on an upward trend, this may influence the demand for an IPO in a positive manner.
10 Most Oversubscribed IPOs in India
Check out the most oversubscribed IPOs in the Indian stock market to date.
| Company | Issue Size (in ₹ crores) | Over subscription | Listing Date |
|---|---|---|---|
| Latent View Analytics Limited | 600.00 | 326.49x | November 23, 2021 |
| Paras Defence And Space Technologies Limited | 170.78 | 304.26x | October 1, 2021 |
| Salasar Techno Engineering Limited | 35.87 | 273.05x | July 25, 2017 |
| Apollo Micro Systems Limited | 156.00 | 248.51x | January 22, 2018 |
| Astron Paper & Board Mill Limited | 70.00 | 241.75x | December 29, 2017 |
| Tega Industries Limited | 619.23 | 219.04x | December 13, 2021 |
| MTAR Technologies Limited | 596.41 | 200.79x | March 15, 2021 |
| Mrs. Bectors Food Specialities Limited | 540.54 | 198.02x | December 24, 2020 |
| Capacit'e Infraprojects Limited | 400.00 | 183.03x | September 25, 2017 |
| Tatva Chintan Pharma Chem Ltd | 500.00 | 180.36x | July 29, 2021 |
As an investor, you need to be aware that in case of an oversubscribed IPO, the chances of share allotment reduce drastically. To increase your chances of being allotted shares, you can apply for an IPO at the cut-off price, apply early and use multiple demat accounts to submit multiple applications.
