IPO Oversubscription Versus Listing Gains

While oversubscription reflects high interest, it is not a guarantee of listing gains. Final performance depends heavily on market sentiment and valuation. 

Issues with marginal oversubscription are statistically more likely to underperform or trade at a discount after listing on the exchange. 

Smaller IPOs often see massive oversubscription and higher initial jumps, whereas larger issues tend to have more modest, stable listing gains. 

In case of oversubscription, retail allotment shifts to a lottery system, while HNIs and institutional investors receive shares on a proportional basis. 

For retail investors, the basis of allotment will be done to ensure that as many distinct applicants as possible get IPO allotment via a lottery system that provides a minimum bid lot to successful applicants. 

In the case of HNI investors (who apply for more than ₹2 lakh), the allotment is proportional based on the oversubscription. 

So if an HNI applies for 10,000 shares and the oversubscription is 10 times in the HNI category, then they get an allotment of 1000 shares. 

In the case of institutional QIBs, the IPO allotment is done on a proportional basis.  

It can be seen that paltry oversubscription levels can be related to weak post-listing price performance. Take the cases of some IPOs like Fujiyama Power Systems and Shreeji Global FMCG. While some issues like these were relatively small issues by size, in all these cases, the oversubscription was marginal or modest. The price-performance has been flat to negative in some of these cases. 

While substantial oversubscription is a good sign, it does not guarantee post-listing performance. For example, many SME IPOs in 2024 were oversubscribed by hundreds of times, like GP Eco Solutions (739x) and Divine Power Energy (369x), and saw huge listing gains. However, subsequent long-term performance varies, with some cooling off after the initial jump. Similarly, some mainboard IPOs like LIC, Paytm, or Zomato had strong oversubscription but varying listing gains, showing no direct linear guarantee of massive returns based purely on oversubscription level. 

Size has been an issue for post-listing returns. For example, larger IPOs like Tata Capital had modest initial gains (around 1-2%), while smaller companies often show higher volatility and can provide outsized returns if they capture investor interest. All these go to prove that smaller companies that get oversubscribed tend to be more fleet-footed and can give better returns post-listing, though they also carry higher risks and potential for sharp declines post-listing. 

There is also a very strong sectoral and structural play in most of these post-listening performances. For example, insurance companies have recently experienced varied outcomes, with some, like Canara HSBC, showing modest listing gains (around 5%) amid high competition. Companies like those in specific booming sectors like renewable energy or specialised manufacturing that operate in favourable market segments have the benefit of being in the right place at the right time. 

Even in a tough industry, individual merit does count. Examples are stocks like those in the financial sector, where some outperform despite a competitive environment. Ultimately, robust fundamentals and appropriate market timing remain crucial for strong performance. 

Good business: Good business basics and expansion opportunities will capture the attention of investors. When a company shows stable earnings, an evident growth direction, or is in a high-growth industry, it automatically stimulates the involvement of investors.  

Favourable market sentiment: The bullish market will encourage more retail and institutional investors to request IPOs, and it is more likely to oversubscribe.   

Pricing successfully: When the share is priced desirably, it will result in increased demand, which will translate into increased IPO oversubscription.   

Brand recognition: Robust brand recognition or backing by reputed promoters and anchor investors instils confidence, encouraging greater participation.