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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.
What happens in the case of IPO oversubscription?
An IPO oversubscription happens when the demand for shares in an IPO is higher than the number of shares offered to the public as part of the IPO launch. This can happen if a company sets an attractive price or if investors are particularly eager to invest. A heightened market buzz or enhanced investor sentiment often causes such a situation. Typically, the allocation of shares is managed according to specific categories of investors:
Qualified Institutional Buyers (QIBs):
Receive no more than 50% of the total shares.Non-Institutional Investors (NIIs):
Typically get a 10-15% reservation.Retail Investors:
Are allocated up to 35% of the total shares.
Since there are only a limited number of shares that can be allotted, in the instance of an oversubscribed IPO, the company has a couple of options to manage the excess demand. This includes:
Reallocation of Shares:
Adjusting the number of shares allocated to each investor category. This can, possibly, offset the challenge posed by the IPO oversubscription, if it was oversubscribed only in a particular investor category.Issuing Additional Stocks:
Increasing the total number of shares available, if permissible. This can work to fulfil the increased demand, however, releasing additional shares is not a simple process and is uncommon in the real market.
An oversubscribed IPO indicates strong demand, leading to competitive bidding among investors. Companies handling IPO oversubscription must adhere to strict rules: they cannot alter the share price during allocation, and the allocation per investor must be between ₹ 10,000 and ₹ 15,000. This ensures fairness and transparency in the distribution of shares.
How does oversubscription impact you as an investor?
For retail investors, an oversubscribed IPO can impact the allocation process in numerous ways. Here are some of them:
Allocation through Lottery:
Since a company cannot allot more than 35% of the issue size to retail investors, oversubscription leads to shares being allocated through a lottery system. This method is approved by SEBI and is aimed to ensure fairness. However, it also means that not every investor who applies will receive shares. There is an element of luck involved here.Reduced Allocation Chances:
Due to the high demand, the chances of you receiving the desired or applied number of shares decrease. Even if you apply for a substantial quantity, you might end up with a smaller allocation or none at all.Price Regulation:
To prevent the share price from inflating excessively, the company may reallocate shares by deducting up to 15% from promoters and pre-issue investors. This helps stabilise the market but means that fewer shares might be available for distribution among public investors, further reducing your allotment chances.Short-term vs. Long-term Impact:
IPO oversubscription can be either short-term or long-term. Short-term oversubscription refers to situations where the subscription level reaches 100% of the offer size quickly. Long-term oversubscription is when the demand continues to exceed the supply, even if by a small margin. Both scenarios indicate strong investor interest, but the immediate impact on share allocation will be more pronounced in the short-term oversubscription.
In summary, while oversubscription signals strong investor confidence in an IPO, it also introduces uncertainty in share allocation for retail investors. Understanding these dynamics can help you manage expectations and plan your investment strategy accordingly.
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.
Read Also: How to Analyse an IPO?
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