What is Over subscription in IPO?

Oversubscription in an IPO (Initial Public Offering) occurs when the demand for shares from investors exceeds the number of shares that the company has made available for sale to the public. This indicates that there is more interest in purchasing the company’s shares than there are shares available, and it can lead to various scenarios and actions by the company and underwriters.

What is IPO oversubscription? 

IPO oversubscription occurs when an initial public offering receives a greater number of applications from investors than the total number of shares available for purchase. For instance, in the case of the Ratnaveer Precision IPO, it was oversubscribed at a ratio of 93.97, indicating that there were nearly 94 interested investors for every 100 shares offered by the company.

This phenomenon of oversubscription reflects investors’ strong eagerness to invest in a newly-listed company and their willingness to commit more capital than the company had initially intended to accept.

What causes IPO oversubscription?

Several factors can contribute to the oversubscription of an IPO. While it’s challenging to predict with certainty whether an IPO will be oversubscribed, investors often consider the following factors when assessing the demand for an offering:

1. Underwriting Firm’s Reputation: The reputation and track record of the underwriting firm play a significant role in generating demand for an IPO. IPOs underwritten by well-established and reputable investment banks tend to attract more investor interest compared to offerings underwritten by smaller, less-known firms.
2. Overall Economic Conditions: The performance of the economy can strongly influence the demand for IPOs. In bullish or upward-trending market conditions, there is typically greater demand for new investment opportunities, including IPOs. Conversely, during bearish or downturns in the market, investor appetite for IPOs may diminish.
3. Competition: The presence of multiple companies from the same industry or sector issuing IPOs around the same time can impact investor interest. If there is excessive competition among IPOs in a particular segment, it can dilute investor attention and make it more challenging for individual IPOs to attract sufficient demand.
4. Company-Specific Factors: The company’s financial health, growth prospects, industry position, and the valuation at which it offers its shares are crucial determinants of IPO demand. Companies with strong fundamentals and compelling growth stories are more likely to garner significant investor interest.
5. Market Sentiment: Investor sentiment and perception of the overall market conditions can affect IPO demand. Positive market sentiment can boost enthusiasm for IPOs, while negative sentiment can have the opposite effect.
6. Marketing and Promotion: The marketing and promotional efforts made by the company and its underwriters can impact investor awareness and interest in the IPO. Effective marketing campaigns and roadshows can generate more demand.
7. Size and Offering Structure: The size of the IPO, as well as the offering structure (e.g., price range, number of shares offered), can influence investor participation. Smaller IPOs or those with attractive pricing may attract more interest.

It’s important for investors to conduct thorough due diligence and consider these factors when evaluating the potential demand for an IPO. However, predicting over subscription accurately remains a complex task, and market dynamics can change rapidly.

What happens when an issue is oversubscribed?

When an IPO becomes oversubscribed, it indeed poses challenges for the issuing company. Under the guidelines of SEBI (Securities and Exchange Board of India), companies are not allowed to reject applications unless they are deemed ineligible. Here’s how companies typically handle oversubscription:

1. Rejection of Application: Companies cannot reject applications, even in the case of oversubscription, as per SEBI guidelines. Eligible investors’ applications may be partially allotted, but complete rejection is not permitted. However, companies can reject applications that are incomplete or contain errors, such as missing or incorrect information. In case of rejection, the collected funds are returned to the rejected investors.
2. Pro-rata Allotment: Instead of rejection, companies can opt for pro-rata allotment. In this approach, shares are allocated to investors in proportion to their applications or in a fixed ratio. The company distributes shares using the following ratio: the number of applicants divided by the total number of shares issued. For example, if an IPO offers 80,000 shares and 10,000 applicants have applied for a total of 160,000 shares, each investor will receive 8 shares (80,000/10,000) in a 2:1 ratio instead of the originally applied 16 shares each.
3. Fully Allotted + Pro-rata: If there are no flawed applications, resulting in zero rejections, the company may fully allot shares to complete applications on a first-come, first-served basis. Any remaining applications are then allotted on a pro-rata basis.
4. Lottery Allotment + Rejection: Companies often resort to a lottery system to allocate shares in cases of oversubscription. In this scenario, the company allocates a predetermined number of lots or shares to a select group of investors chosen through a computerized lottery draw. The remaining applicants are rejected, and their subscription funds are returned. It’s important to note that, according to SEBI, companies can use a lottery for allocation, but each investor selected through the lottery must be allotted a minimum of 1 lot of shares.

These methods allow companies to manage the challenges of over subscription while adhering to SEBI guidelines and ensuring fairness in the allocation process.

There are several reasons why your IPO application may be rejected:

1. Incomplete or Incorrectly Filled Applications: If your application is not filled out accurately or lacks essential information, it may be rejected. This includes errors in personal details, contact information, or payment instructions.
2. Missing Required Documents: Some IPOs may require specific documents to be submitted along with the application, such as proof of identity or address. Failing to include these documents can lead to rejection.
3. Signature Mismatch: If the signature on your application form does not match the official records or the signature provided in your KYC (Know Your Customer) documents, it can result in rejection.
4. Incorrect Application Amount: Submitting an incorrect application amount, such as overpayment or underpayment, may lead to rejection. It’s essential to follow the specified instructions regarding the application fee.
5. Incomplete Information: Incomplete or inaccurate information regarding your bank account details, demat account information, or any other required details can result in the rejection of your application.

To ensure that your IPO application is processed smoothly, it’s crucial to carefully review and fill out the application form, provide all necessary documents, ensure that your signature matches the records, and double-check all the information before submission. Following the IPO issuer’s guidelines and requirements is essential to minimize the chances of rejection.

Relation Between Oversubscription And Listing Gains

The relationship between oversubscription and listing gains in an IPO. Oversubscription is indeed a key factor that can contribute to positive listing gains, but it’s not the only factor at play. The pricing of the IPO, overall market conditions, investor sentiment, and the behavior of different types of investors all play a role in determining how a stock performs when it begins trading on the stock exchange. Traders looking for short-term gains often focus on oversubscribed IPOs, while long-term investors prioritize the company’s fundamentals and growth potential. Both perspectives are valid, but they lead to different investment strategies. It’s essential for investors to carefully consider their own investment goals and risk tolerance when participating in IPOs.