Initial Public Offerings (IPOs) serve as a pivotal moment for companies seeking to raise capital and broaden their investor base. A notable feature of many IPOs is oversubscription, a scenario where the demand for shares significantly exceeds the supply offered. This situation often highlights robust investor enthusiasm and can lead to heightened market interest. However, oversubscription also carries implications for pricing and allocation, affecting both investors and the issuing company. This article aims to explore the intricacies of oversubscription in IPOs, shedding light on its causes, consequences, and what it reveals about market conditions.
What is oversubscription in IPO?
Oversubscription in an Initial Public Offering (IPO) occurs when the number of applications from investors exceeds the total number of shares the company intends to issue. For example, if a company plans to issue 50 lakh shares through an IPO but receives applications for 150 lakh shares, the IPO is considered oversubscribed.
The extent of oversubscription is expressed as a multiple of the shares offered. In this case, the IPO would be described as 3x oversubscribed, meaning demand is three times higher than the available shares.
For example, if a company plans to sell 10,000 shares to the public, it might receive requests for 15,000 shares instead of just 10,000, leading to oversubscription.
IPOs are popular because they can offer great returns to investors. There have been many cases where an IPO with significant potential was fully subscribed within minutes of IPO listing time. When the company gets more requests for shares than it plans to sell, it results in an oversubscription of IPO. On the other hand, undersubscription is when the company gets fewer requests for shares than it wants to sell.
What causes IPO oversubscription?
Investor enthusiasm plays an important role in IPO oversubscription. Due to higher demand and limited availability of the shares, the IPO gets overbooked. Furthermore, higher interest from institutional investors can also positively drive the demand and lead to oversubscription. Overall market conditions can also lead to higher applications as investors may feel that the shares will list at a higher price if there is an ongoing bull run in the share market. The positive fundamental position of the company may also lead to oversubscription.
How does oversubscription in IPO work?
In an oversubscribed IPO, the demand for shares exceeds the number available, meaning that not all investors will receive the full amount they applied for. This can occur in two forms: short-run and long-run oversubscription. Short-run oversubscription arises when the total applications surpass 100% of the shares offered, reflecting strong investor interest. In contrast, long-run oversubscription occurs when less than 1% of the IPO is oversubscribed, indicating a more moderate level of demand.
When a company faces oversubscription, it has a couple of options to manage the heightened interest. It can reallocate shares among investors, adjusting the distribution to ensure a fairer allocation. Alternatively, the company might choose to issue additional shares to satisfy the demand. These strategies help balance the needs of both the issuing company and investors, while also contributing to a more stable market environment.
Types of investors in an IPO
In IPOs, multiple types of investors apply to get the shares of the company. Some of them are:
1.Qualified institutional buyers (QIB):
QIBs mainly include:
- Banks
- Mutual fund houses
- Financial institutions
These are big organisations that buy a large number of shares in IPOs, sometimes even before the company goes public.
2. Non-institutional investors (NII):
While qualified institutional investors (QII) are the registered buyers, NIIs are the ones who have not registered themselves with SEBI. These include:
- Individuals who are residents
- Eligible NRIs
- Hindu Undivided Family (HUF)
- Companies
- Societies and trusts
They are important alongside institutional investors in determining the success and pricing of IPOs. Additionally, NIIs are investors whose application value exceeds Rs. 2 lakh.
3. Retail investors:
Unlike NIIs, retail investors have an application value of less than Rs. 2 lakh. Along with institutional investors, they are significant in deciding the success and pricing of IPOs.
Reasons behind IPO oversubscription
There are several reasons why an IPO might be oversubscribed. A few of them include:
- Investors getting excited about the company's potential.
- There's a lot of interest from experienced investors like anchor investors and qualified institutional buyers.
These situations create a lot of demand, causing more people to apply for shares than shares available. In the market, different options are available for companies looking to go public, including IPOs for large companies and SME IPOs for smaller ones.
What happens when an IPO is oversubscribed?
An IPO oversubscription occurs when the demand for shares in an IPO exceeds the number of shares available for public offering. This situation can arise if a company establishes an appealing price or if investors are particularly keen to invest.
In the case of IPO oversubscription, the company has two main options:
- Reallocation: They can adjust the number of shares given to each investor type.
- Pro-rata allotment: If there are shares still left after reallocation, they can distribute them proportionally among investors.
If your bid is successful, the money will be taken from your account, and you will get your shares. If not, the blocked amount will be returned to you, and you can use it elsewhere.
How does oversubscription impact you as an investor?
In the case of an oversubscription IPO, not everyone who applied will get shares allotted. Some might get fewer shares than they wanted or none, limiting your potential returns. Also, it leads to price volatility; if demand is high during the IPO, the share price may rise sharply initially.
What are the factors responsible for IPO oversubscription?
Before investing in an IPO, you should take an assessment to determine the probability of oversubscription. Apart from the number of shares to be issued by the company, several factors can be responsible for IPO oversubscription, such as:
- Company's reputation and potential
- Market sentiment
- Offer price
- Marketing and promotion
- Retail investor participation
A combination of these factors can also contribute to IPO oversubscription.
10 most oversubscribed IPOs in India
Here are some of the most oversubscribed IPO list:
| Issue Name | Issue Size (Rs. Cr) | Oversubscribed (in times) | Listing Date |
| Latent View Analytics Limited | 600 | 326.49 | 23-Nov-21 |
| Vibhor Steel Tubes Limited | 72.17 | 320.05 | 20-Feb-24 |
| Paras Defence And Space Technologies Limited | 170.78 | 304.26 | 01-Oct-21 |
| Salasar Techno Engineering Ltd | 35.87 | 273.05 | 25-Jul-17 |
| Apollo Micro Systems Limited | 156 | 248.51 | 22-Jan-18 |
| Astron Paper & Board Mill Ltd | 70 | 241.75 | 29-Dec-17 |
| Tega Industries Limited | 619.23 | 219.04 | 13-Dec-21 |
| MTAR Technologies Limited | 596.41 | 200.79 | 15-Mar-21 |
| Mrs. Bectors Food Specialities Limited | 540.54 | 198.02 | 24-Dec-20 |
| Capacit'e Infraprojects Limited | 400 | 183.03 | 25-Sep-17 |
* This is as of April 13, 2024
Conclusion
When many people want to buy shares in an IPO, and the order exceeds the issue, it is called IPO oversubscription. This happens because investors are excited about the company's potential, how well it is doing, and the overall market situation. It is a sign of high demand for shares, but it can make it tough for investors to get the shares they want. To deal with such situations, investors should learn about oversubscription and research before deciding to invest in an IPO. That way, they can make smart choices and understand the risks involved.
