What Is Under-Subscription

What Is Under-subscription?

Under-subscription occurs when the demand for a company’s shares during an initial public offering (IPO) or other issuance is less than the number of shares issued. This means there aren’t enough investors willing to buy the shares at the offered price, resulting in a surplus of shares. 

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Under-subscription Of Shares

Under-subscription of shares happens when investor demand during a public offering is less than the total shares available. This shortfall is recognized once the application period ends and the sum of bids received is lower than the number of shares offered. This can be due to factors such as market volatility, unattractive company valuation, or even broader economic concerns. 

Subsequently, the company and its underwriters must deal with the leftover shares, which could involve scaling back the offering or seeking alternative investors. Under-subscription can reflect deeper issues within the company or market perceptions. 

For instance, if a company is not well-known or operates in a niche market, it may need to attract more investor attention. Alternatively, even solid companies may face Under-subscription if the market is experiencing a downturn. It’s a complex event that requires careful analysis to understand and address the underlying causes effectively.

Under-subscription Of Shares Example

Suppose a company named “FutureTech” launches an IPO for 2 million shares and receives bids for only 1.5 million. It faces under-subscription, likely due to market hesitancy about its prospects. FutureTech may need to lower its price or find other means to draw investor interest.

With under-subscription, the company might not raise the capital it anticipated, affecting its expansion plans. The company must consult with its underwriters to decide whether to proceed with the IPO, reduce the price, or postpone the public offering. This decision-making process is critical as it can significantly impact the company’s market debut and long-term financial strategy.

Difference Between Over Subscription And Under-subscription

The primary difference between under-subscription and over-subscription is that under-subscription indicates insufficient demand for shares, while over-subscription shows demand exceeding supply. 

Let’s put this into a table for a clear, side-by-side comparison:

FeatureOver SubscriptionUnder-subscription
DefinitionOccurs when the demand for shares exceeds the available supply during an offering.Happens when there is insufficient demand for the available shares in an offering.
Demand vs. SupplyInvestor demand is greater than the number of shares offered.Investor demand is less than the number of shares offered.
Market PerceptionOften viewed as a positive indicator of the company’s potential and investor confidence.Seen as a negative signal, suggesting investors may have concerns about the company’s prospects.
Pricing ImpactMay result in a higher share price post-listing due to increased demand.Could lead to a lower share price or necessitate price adjustments to attract buyers.
Allotment ProcessMay involve a pro-rata distribution, a lottery system, or other methods to manage excess demand.All investors who applied will likely get the number of shares they requested, sometimes with leftover shares.

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Over Subscription Of Shares

What Is Under-subscription? – Quick Summary

  1. Under-subscription is a condition where the number of shares offered is greater than the number investors are willing to buy, often signaling a lack of confidence or interest in the offering.
  2. Over-subscription indicates robust demand, possibly leading to share rationing, whereas Under-subscription reflects tepid demand and may result in unsold shares.
  3. You can invest in stocks, mutual funds, & IPOs completely free of cost. Most importantly, with our 15 Rs brokerage plan, you can save up to ₹ 1100 brokerage every month. We also don’t levy clearing charges. 

Under-subscription Of Shares – FAQs

What Is Under-subscription?

Under-subscription is a situation in a public offering where the total number of shares that investors apply for is less than the number of shares available. It suggests a lack of investor interest or confidence in the company’s valuation or future growth potential.

What is the difference between over-subscription and under-subscription of shares?

The main difference between over-subscription and under-subscription is in demand levels, where over-subscription reflects a surplus of demand over available shares, in contrast to under-subscription, which reveals a lack of sufficient interest. 

Why would a company’s shares be under-subscribed?

A company’s shares might be under-subscribed due to various reasons such as high pricing, poor market conditions, lack of investor awareness, or negative perception of the company’s future profitability and growth. 

What happens if shares are undersubscribed?

If an IPO is undersubscribed, the company may not raise the intended capital, which could affect its expansion plans or debt repayment schedules. The underwriters may have to buy the remaining shares, the offer might be withdrawn, or the company may proceed with the IPO but with fewer funds than expected.

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