To protect investors, the Companies Act mandates a minimum subscription requirement for public issues. This means companies must secure a minimum amount of funds from the public before they can allot shares. If the company fails to meet this threshold, the entire issue is deemed unsuccessful, and all application money must be refunded to investors.
This regulation is essential to safeguard investor interests. By ensuring that a certain level of public support is garnered, it helps prevent companies from exploiting investors and ensures that the funds raised are used for the intended purpose. This measure also helps maintain investor confidence in the capital market.
Let us learn how this works.
What is minimum subscription?
The minimum subscription of shares is the minimum number of shares that investors must apply for during an IPO. Currently, the minimum subscription quota is 90% of the total issue size of the IPO. Apart from infrastructure companies, all other companies must have 90% of their shares subscribed during the IPO. If a company fails to attract investors and the minimum subscription quota is not met, the company has to refund all the money and close its IPO. This rule is only for shares offered during an IPO and not for other asset classes, such as when you buy bonds such as junk bonds or mutual funds.
Understanding minimum subscription
When companies are started, all their ownership is with private investors such as owners or promoters. However, with time, companies grow their businesses and require more capital to ensure they have adequate funds to manage the growth. Hence, companies launch an IPO, where they offer their privately held shares to the general public in return for their money.
Companies hire investment bankers and underwriters to manage the IPO issue and help in setting a share price at which the company will sell its shares. During the IPO, investors apply to the IPO issue, and depending on IPO allotment process, they get the shares that are later listed on the stock exchanges.
However, there are situations when investors do not like some factors about the company, such as its financials, revenue, risk level, future growth prospects, etc., and avoid applying to the IPO issue. They feel that even if they get the shares during the IPO, the shares may open at a discount (listing price lower than the IPO price), forcing them to incur losses.
Since most investors avoid applying to an IPO because of negative company factors, SEBI has created the minimum subscription of shares rule to protect investors' investments. Under the Companies Act, 2013, a company has to refund all the money it has received from investors during an IPO if its IPO issue is not subscribed to at least 90%.
There is no limit to the maximum number of shares a company can get applications for during an IPO. When a company receives applications that are higher than the shares it is offering, the situation is called oversubscription. On the other hand, if a company receives applications for shares lower than the shares it is offering, it is called under subscription. SEBI only allows an undersubscribed IPO issue if the applications exceed 90% of the offered shares.
Calculation of minimum subscription
The investment bankers calculate the minimum subscription of shares percentage on the date of closing the IPO issue. The bankers take into account the applications that were withdrawn by investors and the applications that were rejected due to incorrect information. Afterwards, the bankers have the total number of applications (lots), which they compare with the shares they are offering to find the minimum subscription percentage. If it is lower than 90% of the issue size, SEBI cancels the IPO issue and orders the company to refund all the amount to the respective investors.
Advantages of the minimum subscription rule
Here are some advantages of the minimum subscription rule for companies and investors:
- Adequate raised capital
Companies raise capital to ensure they have enough funds for business purposes, such as expansion and debt repayment. However, if SEBI allows companies to go ahead with the IPO even after less than 90% subscription, the company may fail to execute its set plans post-IPO, and the shares may be sold through block trade Without adequate capital, business operations may get hurt, further lowering the share price and forcing investors to incur losses. - Reduced risk for investors
The minimum subscription rule ensures that a company will have to cancel its IPO and refund the money if it fails to meet the 90% minimum subscription rule. This helps reduce the risk for investors, as they might have invested in an IPO of a company that is not fundamentally sound enough to have its shares listed on the stock exchanges. - Market analysis tool
Experienced investors use the minimum subscription scenario to analyse the current market trend. For example, if multiple IPOs have failed due to not getting 90% of their shares subscribed, other investors know that the market sentiment is negative, and the market may witness a bear run. This helps investors adjust their current investments and ensure better portfolio health.
Other important details on minimum subscription
Here are some other important details on the minimum subscription of shares:
- If a company fails to fulfil the minimum share subscription, it must refund the money collected during the IPO within 15 days from the date of the IPO closing.
- If a company fails to refund the money within 15 days, it will have to pay the investors interest on the held amount at the rate of 15% per annum.
- A company that fails to refund the money within 15 days will be liable for a fine of Rs. 1,000 per day, with a maximum penalty of Rs. 1,00,000.
Conclusion
The minimum subscription of shares is a rule created under the Indian Companies Act 2013 to protect the investors in case a company fails to attract investors for subscribing to 90% of the shares the company is offering during an IPO. If you have applied to an IPO and it has not received a subscription for at least 90% of its shares, worry not; you will receive your money back in the next 15 days.