Over subscription of shares occurs when the demand for a company’s stock offering exceeds the number of shares available. This typically happens during an Initial Public Offering (IPO) or when new shares are issued, indicating a strong investor interest in the company’s shares.
- What Is Over Subscription Of Shares?
- Oversubscription Of Shares Example
- Difference Between Over Subscription And Under Subscription
- Benefits Of Over Subscription Of Shares
- How are oversubscribed shares allotted?
- What Is Over Subscription Of Shares? – Quick Summary
- Over Subscription Of Shares – FAQs
What Is Over Subscription Of Shares?
Over subscription of shares is a situation where the number of shares that investors want to buy in an offering exceeds the number of shares being issued. This can happen in an IPO, a rights issue, or any other type of share offering.
When a company experiences over-subscription, it implies a high level of confidence from the market, reflecting positively on its valuation. It also allows the company to adjust the offer terms or allocate shares to benefit the company and its new shareholders.
Oversubscription Of Shares Example
An example of oversubscription can be seen when a popular company like Reliance Industries Limited announces an IPO. If they offer 10 million shares and receive bids for 15 million shares, the IPO is oversubscribed by 5 million shares, indicating strong demand.
This scenario often leads to a situation where not all investors who apply for shares will receive them or may receive fewer shares than they applied for. The oversubscription is seen as a positive signal by the market and can lead to a higher opening price on the stock exchange once the shares are listed.
Difference Between Over Subscription And Under Subscription
The primary difference between over-subscription and under-subscription is that over-subscription occurs when investor demand for shares exceeds the available supply, while under-subscription happens when the number of shares offered by a company is not entirely sold to investors, indicating lower demand.
Here’s a table summarizing the differences:
|Aspect||Over Subscription||Under Subscription|
|Definition||Investor demand exceeds the number of shares offered.||Investor demand falls short of the available number of shares.|
|Investor Interest||Indicates high investor interest and confidence in the company’s future.||Suggests a lack of investor confidence or a valuation that doesn’t match market expectations.|
|Impact on Share Price||Often leads to a higher share price post-listing due to increased demand.||May result in a lower share price or require a reevaluation of the offer terms.|
|Company’s Capital Raise||Can potentially raise more capital than initially targeted.||May struggle to raise the desired capital, impacting the company’s funding goals.|
Benefits Of Over Subscription Of Shares
The primary benefit of over-subscription of shares is the strong signal it sends about investor confidence in a company. It indicates that the market believes the company’s shares are underpriced or that the company has strong prospects.
- Enhanced Company Reputation: Over-subscription is a vote of confidence from the market, potentially enhancing the company’s reputation. This can have long-term benefits, such as better terms on future financings and a stronger negotiating position in corporate deals.
- Potential for Higher Capital Raise: If an offering is oversubscribed, a company might increase the issue price within the permissible range, leading to a higher amount of capital being raised than initially anticipated, which can be crucial for funding expansion plans or reducing debt.
- Improved Liquidity: When a stock is oversubscribed, it often translates to higher trading volumes post-listing, as more investors may seek to buy, contributing to greater liquidity and potentially reducing volatility.
- Price Stabilization: The excess demand over available supply often means that once the shares are listed, they are less likely to face selling pressure that can drive down the stock price, thus aiding in price stabilization.
- Selective Allocation: The company and its underwriters can choose to allocate shares to investors who are likely to hold them over the long term, thus building a stable investor base and reducing the likelihood of large sell-offs.
How are oversubscribed shares allotted?
In an oversubscribed issue, the allocation of shares is carefully managed to balance fairness and strategic objectives. Regulators like SEBI ensure that the process is transparent and equitable.
Over Subscription happens when the issue is worth 100 Crores and the people have subscribed for more than 100 Crores. There are two types of oversubscription:
- Oversubscription by number of people: For instance, let’s assume the Issue is worth 100 crores and the cost of 1 lot is ₹ 10,000. So 1 lakh people can apply for the IPO for 1 lot each (100 crores/10000). If more than 1 lakh people apply for the IPO, the company will have a lucky draw. The 1 lakh people whose name appears in the lucky draw will get the shares.
- Oversubscription by a number of lots: Keeping the above example in mind, overall, people can apply for 1 lakh lots (100 crores divided by the lot size[100 crores/10000]). So let’s say 50,000 people apply for 2 lakh lots. In this case, everyone will get the shares, but some people will get lesser lots as opposed to the number of lots they applied for, while some may get the exact number of lots.
What Is Over Subscription Of Shares? – Quick Summary
- Over subscription of shares occurs when investor demand for a company’s share offering exceeds the available supply, often seen in IPOs.
- Over subscription of shares denotes the situation where more shares are requested by investors than are available for sale, reflecting high market interest.
- A practical instance is a company like Reliance Industries receiving applications for more shares than they offered in their IPO.
- Over-subscription indicates strong demand and confidence, while under-subscription may signal low investor interest and could negatively impact the company’s capital-raising efforts.
- Over-subscription can enhance a company’s reputation, potentially raise more capital, improve post-listing liquidity, stabilize share price, and allow for selective share allocation to long-term investors.
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Over Subscription Of Shares – FAQs
What Is Over Subscription Of Shares?
Over-subscription of shares is when there are more applications from investors to purchase a company’s shares than the total number offered by the company, indicating strong investor demand.
What is an example of over subscription of shares?
An example of over-subscription is when a well-established company like TCS offers 2 million shares in an IPO, but receives applications for 5 million shares, resulting in an oversubscription.
Can we get an IPO that is oversubscribed?
Yes, IPOs can be oversubscribed when the demand from investors to buy shares is higher than the number of shares being offered by the company.
What happens if the rights issue is oversubscribed?
If a rights issue is oversubscribed, the company may decide to allot shares on a pro-rata basis among the subscribers, or they may choose to issue additional shares to meet the demand, subject to regulatory limits and approvals.