Minimum Subscription

Minimum subscription is the least amount of money a company must collect when issuing shares to the public. This rule applies to all companies raising funds from the public.
Minimum Subscription
3 mins read
21-May-2024

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.

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Frequently asked questions

What is minimum subscription with example?
Minimum subscription of shares is a rule in which a company must attract investors for at least 90% of its offered shares during an IPO. For example, if a company offers 1,00,000 shares to the public during the IPO issue, it must receive applications for at least 90,000 shares.
What is the minimum subscription of an IPO?
The minimum subscription of an IPO is when a company witnesses applications for 90% of the shares offered during an IPO.
How many days is the minimum subscription?

A company must collect the minimum subscription amount within 120 days from the date of opening the issue. If the minimum subscription is not met within this timeframe, the entire issue is canceled, and all application money is refunded to investors. This ensures investor protection and maintains market integrity.

What is the limit of minimum subscription?

The Companies Act mandates that companies must collect a minimum subscription amount from the public before allocating shares. The specific limit for minimum subscription varies depending on the type of issue and the company's financial situation. Typically, it ranges from 90% to 100% of the total issue size. The exact limit is specified in the offer document or prospectus issued by the company.

If a company fails to meet the minimum subscription, the entire issue is canceled, and all application money is refunded to investors. This safeguard ensures investor protection and maintains market integrity.

What is the minimum subscription rate?

A minimum subscription refers to the minimum number of shares a company needs to issue to successfully complete a public offering. Currently, Indian companies are required to receive subscriptions for at least 90% of the total issue size. If this threshold is not met, the entire issue is canceled, and investors' money is refunded. It's important to note that this 90% figure is calculated based on the number of shares subscribed, not the total amount received.

What happens if minimum subscription is not received?

If a company fails to receive the minimum subscription amount for a public issue, the entire issue is canceled. This means that the company cannot allot shares to any of the applicants, and all the application money is refunded to the investors. This ensures that investor funds are protected and prevents the company from proceeding with the issue if there is insufficient public interest.

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