Home » Ipo » Learn What Ipo Oversubscription

Chapter 10: IPO Oversubscription

  • What oversubscription is
  • Listing gains: Meaning
  • Difference between listing gains and oversubscription
  • How shares allotted during oversubscription

It is said an IPO oversubscribed when the number of shares that investors want to buy is higher than the number of shares available in the stock exchanges. To put it simply, oversubscription occurs when the number of shares supplied by a company is not enough to meet the demand.

When a company decides to go public, underwriters assess the market to gauge the potential interest of the investors. During this process, there is always a chance of underwriters underestimating the interest in the IPO and price it lower than the market would actually pay for. This results in the demand for shares exceeding the number of shares issued. 

For example, a fixed number of shares offered in an IPO is, say, 10,000 shares. A ten-time oversubscription means investors’ demand is about one lakh shares.

If the demand for an IPO exceeds the supply, the issuing house can charge a higher price resulting in more capital raised for the issuer.

In this scenario, underwriters can exercise the greenshoe option. The greenshoe option allows underwriters to issue 15% more shares than officially planned.

How are shares allotted when an IPO oversubscribed?

Every subscriber has encountered a situation where an IPO oversubscribed. So, let’s take a look at how companies allot shares in such times.

The allotment of shares is done by predefined rules laid down by Securities and Exchange Board of India (SEBI).

In every IPO, investor categories are distinguished and a percentage of shares are allotted to every category.

Investor categories are distinguished as:

  • Qualified institutional investors
  • Non-institutional investors
  • Retail investors (who have invested less than Rs 2 lakh)
  • There could be an employee’s category as well.

The process of allocating shares is different for every investor category. While 50% of shares are allocated to qualified institutional investors, nearly 35% of the shares are allotted to retail investors.

Allocation process for retail investors

Let’s look at how retail investors are allotted shares. First, let us understand what lots are. Companies issue shares in lots. A lot, in general terms, is a collection of shares.

So, when it comes to allocation in case of oversubscription, the total number of shares available for retail investors is divided by the minimum lot size. This helps in determining the number of retail investors who will be allocated shares.

Also, if the total number of applications is more than the number of lots available, no application is allotted more than one lot. This is to ensure that all investors have an equal chance of being allotted IPO shares, regardless of the number of lots they have bid for. In other words, an investor who bid for just 1 lot will be treated on par with another investor who bid for 10 lots. This way, fairness is ensured in IPO allotment.

Let us look at the example of BSE IPO to understand this. In this case, the IPO oversubscribed 51.01 times. That means the total demand was for 55 crore shares, when only 1.07 crore shares were on offer.

If one considered the retail section alone, the oversubscription was 6.48 times the allotted shares. Remember that investors can bid for more than one lot each. Looking at the lots of retail shares and assuming each investor had applied for one share only, the total demand was 3.98 times. That means a retail investor had a 1 in 3.98 chance of being allotted one lot of shares. In other words, close to 75% of retail investors were allotted no IPO shares at all.

However, there is always a chance that the number of retail investors surpass the maximum number of shares issued. In that case, the eligibility for the minimum bid lot is determined by the draw of lots. This is an automated and a computerized process, leaving no room for any errors.

Relation between oversubscription and listing gains

Popular IPOs are often oversubscribed because many traders want to make listing gains.

Very often, the stock price on the opening day at the exchanges is higher than the IPO price. This gives an opportunity to a trader to sell the shares in order to make a quick profit. The difference, therefore, is described as listing gains.

So, when an IPO gets oversubscribed and is priced reasonably, it has the potential to enjoy a good listing on the stock exchange.

While oversubscription is one of the reasons for a good listing, it also depends on various other factors, such as the IPO pricing, market conditions at the time of listing etc.

In 2015, of the 52 large- and small-sized IPOs, 26 listed at a gain of less than 10% and 11 listed with negative returns.

For traders, the lure of listing gains is high, but at the same time they also need to make sure they analyze how the market is reacting to the IPO, the demand for the IPO and other external factors.

On the other hand, long-term investors are more concerned about future growth, earnings and being a part of the company.

The last word

Good IPOs are very often oversubscribed, meaning there is a high demand for that particular company’s shares. This also exposes you to the fact that you could miss out on getting any shares and taking advantange of listing gains made on the first day in the stock exchanges.

What next

Conversely, an IPO can be undersubscribed too. That’s because not all IPOs are a success. So, let’s look at what happens when an initial issue is underwhelming and how it affects the allotment process. You can find the answers to these in the chapter after this.