When a private company decides to go public, it enters the process of making an initial public offering or IPO in the stock market. If the company has a good reputation among potential investors, there is a high chance that the demand for its shares exceeds the supply. 


This is known as the oversubscription of shares. There are many reasons why shares may be oversubscribed and why these instances are common in the Indian stock markets. Some factors include the overall health of the economy, preferences of retail investors, and lack of competition, among other reasons. 


Read on to learn what an oversubscribed IPO means, the reasons for oversubscription, and how companies find solutions for this issue.

What Does an Oversubscription of an IPO Mean?

Before learning why an IPO may be oversubscribed, meaning when the demand for its shares exceeds availability, know how IPOs work. During the IPO process, companies place several shares in the stock market. This number is called the offering size. 


Sometimes, the number of investors or their demand for shares exceeds the actual number available during the initial public offering. In this case, it is said that the IPO has been oversubscribed. 


To understand this better, assume the company has offered 10,000 shares in the IPO, and the demand is for 30,000 shares. In this case, the company is thrice or three times oversubscribed. Companies must plan out a new way to go about the allotment of shares to bridge the gap between the two. 

Reasons for the Oversubscription of an IPO

Sometimes, companies only release a small portion of their shares in the stock market to enjoy the benefits of the post-IPO boost. So, they may offer a lower number of shares based on the projected demand, leading to an IPO oversubscription. 


Another reason for this may be that the underwriting firm has underestimated the demand. IPOs being convertible to debt securities are also a reason that contributes to an oversubscription. 


In addition, a healthy economy with lots of investors looking to trade and a lack of competition in the share market can lead to this phenomenon. 


Remember, if the IPO closes its first day of listing with a price above the set IPO price, it is an underpriced IPO. Underpriced syndicates will attract more investors in the next offering.

What Happens When IPOs are Oversubscribed?

When any company’s IPO is oversubscribed, it has two options. It can either reject the application or offer a ratio of the shares to the investor. 


While SEBI does not allow companies to reject applications, in the case of IPO oversubscription, any incorrect information from the application can result in rejection. 


In other cases, investors can get shares in the event of an oversubscription of an IPO through a pro-rata allotment. This includes getting a certain ratio of the shares the investor has applied for.  


For example, if the net shares are 10,000, but the demand is for 30,000, then investors will get shares on a 3:1 ratio. So, if an investor has applied for 6 shares, they may get 2 shares. Similarly, if they have applied for 3 shares, they can get 1 unit and so on. 


In other cases, the company will conduct an IPO allotment through a lottery system. Here, Qualified Institutional Buyers or QIBs get 50% of the reserved shares, and retail investors get up to 35% of allocated IPO shares. Non-Institutional Investors (NIIs) get the remaining 15% reserve of the shares. 

Benefits of an IPO Oversubscription

Here are a few benefits of oversubscription of shares for any business creating an IPO:

  • With higher demand, companies can leverage value by selling the shares to the highest bidder, making more profit

  • Companies with an oversubscribed IPO can raise funds from the market without borrowing from banks or financial institutions

  • Oversubscription can pique the public’s interest and boost the company's reputation in the market 

  • Companies can decide on a suitable investor in their business venture from a pool of potential investors

Remember, in case of an oversubscription of shares, investors have to fight to buy the shares they initially thought of investing in. Sometimes, investors may only get a fraction of the shares they hoped for or face rejection due to the failure to fulfil certain conditions. 

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FAQs on Oversubscription in an IPO

With an oversubscribed IPO, investors may not be able to get the desired units of shares. In such a case, getting multiple shares is very difficult.

Oversubscription is good news for the company as they can raise more capital for their business needs by taking advantage of high demand. Companies can list units of shares, raise the price and offer the shares to the higher bidder. This way, an oversubscribed IPO has a positive impact on the company. In addition, it shows that a company has a high potential for future growth.

Companies can take a lottery approach to allotment in case of oversubscription of shares. This way, investors are allotted shares randomly, and there is no guarantee of allotment. 

No. The IPO allotment is a randomised process for oversubscribed shares. Hence, IPO allotment does not work on a first-come, first-serve basis.

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