What is Oversubscription in IPO?
In the current rage of IPOs, several issues were oversubscribed. So, what is an oversubscribed IPO, and how does it impact regular investors? Let’s start by learning the oversubscribed IPO meaning.
What is IPO oversubscription?
IPO oversubscription is a condition when an IPO receive more applications from investors than the total number of shares offered. For example, Latent View Analytics Limited’s IPO was oversubscribed 326.49x, meaning there were 326,49 interested investors for 100 shares of the company.
IPO oversubscription is a phenomenon when investors are keen to invest in a new company and offer more money to the company than it is ready to accept.
What causes IPO oversubscription?
When a company issues its initial public offer, it needs to determine the number of shares or the offered size. Determining offer size is the most critical part of the IPO as it decides who gets to invest and how much they pay for the shares, which affects the amount to be raised.
When a segment of an IPO is overbooked, it means that more people have shown interest than initially available shares. It results in a higher price for the stakes than the company’s net asset value.
Types of investors in an IPO:
The investor categories in an IPO are three types.
Qualified Institutional Buyers (QIB):
Banks, Financial institutions, FII and mutual fund companies registered with the SEBI are the qualified institutional buyers. The QIBs invest on behalf of small investors who invest through mutual funds, ULIP schemes and Pension Funds.
Non-institutional buyers (NII):
High net worth individuals, NRI, and trusts who bid for more than Rs 2 lakhs come in the category of NII. Investors in the NII segment must register themselves with SEBI as qualified institutional investors.
Individual investors bidding up to Rs 2 lakh come under the retail investors’ category. NRIs who apply for less than Rs 2 lakh are also RII investors.
Reasons behind IPO oversubscription:
Usually, when a company decides the offering size, it fixes specific amounts for each investor category. A segment is called over-allocated when more people apply for the shares than the available quantity.
There are several reasons for companies to list through the oversubscription route.
Companies issue IPOs to raise funds from the market. When an issue is over-booked, it becomes possible for the company to raise more funds through market mechanisms than by borrowing from banks or financial institutions. IPO oversubscription allows companies to list shares in premium and generate better returns for investors.
What happens when an issue is oversubscribed?
Oversubscription is when the demand exceeds the shares available in the IPO. It can happen when a company sets an unrealistic price or investors are keen to invest in the issue.
There is a fixed percentage allotted for each category of investors like
- QIBs can’t receive more than 50% in any IPO
- NII investors get a 10-15% reservation
- Retail investors don’t get more than 35% of the total IPO allocation
A company usually have two options when its IPO is over-booked.
- Reallocation of number of shares
- Issuing additional stocks to the market
An oversubscribed IPO is a hot issue since there is solid demand from investors, and investors have to fight against each other. Companies dealing with oversubscription can’t change the share price during allocation. Also, the allocation amount can’t fall below Rs 10,000 or exceed Rs 15,000 for each investor.
How does oversubscription impact you as an investor?
Technically, a company can’t allot more than 35% of the issue size to retail investors. So, in the case of oversubscription, the company issues shares through a lottery after removing all technically incorrect buyers. One should know that SEBI approves the lottery method of IPO allocation.
While reallocating shares, the company needs to regulate the share price from getting inflated by deducting up to 15% shares from promoters and pre-issue investors. The additional shares are excess stocks.
Oversubscription can be short-run or long-run. Short-run oversubscription is when 100% of the subscription is offered. Long-run oversubscription happens when less than 1% of the offering amount is oversubscribed.
What are the factors responsible for IPO oversubscription?
It isn’t easy to anticipate if an IPO will be over-booked. But there are a few factors investors need to consider while guessing the demand of an offer.
The underwriting firm:
The reputation of the underwriting firm is responsible for creating enough demand for an offer. IPOs backed by large underwriting banks attract more interest than offers written by small underwriters.
IPOs strongly correlate with the economy’s performance. There is more demand for new investment offers in an uptrend than when the market is bearish.
If multiple companies from the same segment issue IPOs around the same time, it can reduce the interest of the investors and make it harder to list the IPO successfully.
Reasons for your IPO application getting rejected:
Your application can get rejected because of the following.
- Incomplete or wrongly filled out applications
- Not submitting required documents
- Signature mismatch
- Submitting incorrect application amount
- Incomplete information
10 most oversubscribed IPOs in India:
|Issue Name||Issue Size (in ₹crore)||Listing Date||Oversubscription|
|Latent View Analytics Ltd.||600.00||November 23, 2021||326.49|
|Paras Defence And Space Technologies Limited||170.78||October 01, 2021||304.26|
|Salasar Techno Engineering Ltd||35.87||July 25, 2017||273.05|
|Apollo Micro Systems Limited||156.00||January 22, 2018||248.51|
|Astron Paper & Board Mill Ltd||70.00||December 29, 2017||241.75|
|Tega Industries Limited||619.23||December 13, 2021||219.04|
|MTAR Technologies Limited||596.41||March 15, 2021||200.79|
|Mrs. Bectors Food Specialities Limited||540.54||December 24, 2020||198.02|
|Capacit’e Infraprojects Limited||400.00||September 25, 2017||183.03|
|Tatva Chintan Pharma Chem Ltd||500.00||July 29, 2021||180.36|
Oversubscription is when an IPO’s interest far exceeds the number of available IPO shares. Before issuing an IPO, the underwriter studies the market demand regarding who may or may not apply for the offer and, based on the analysis, fix the IPO size. Oversubscribed IPOs are often underpriced to some extent to create room for post-IPO pop or strong trading to continue the excitement.