A company that wishes to raise funds may choose to issue its shares to the public through a process known as the Initial Public Offering (IPO). It is one of the easiest ways for companies to gain access to capital, which they can then use to further their business. IPOs are not just beneficial for companies but are advantageous for investors also. By investing in an IPO, investors can join the wealth creation process early on.
Now, if you’re planning on investing in an upcoming IPO in the near future, you need to be first aware of the various terms that are frequently used. One such term is ‘oversubscription’. Wondering what an oversubscribed IPO is? Continue reading to find out.
Now, in any Initial Public Offering from a company, only a limited number of shares are issued to the public. And investors wanting to purchase the shares are required to subscribe for the issue by making an application.
If the company issuing the IPO receives applications for shares that are more than the number of shares offered by it, the IPO is said to be oversubscribed. Oversubscription usually happens when there’s exceptional demand for the shares of the company.
Now, if you take a look at an IPO of a company, you might have seen media outlets exclaiming that a company’s IPO has been subscribed by about 2 times or the issue has been oversubscribed by 2x. What this essentially means is that the company received applications for twice the amount of shares that it issued through the IPO.
Now that you’re aware of what an oversubscribed IPO is, let’s take a look at what would happen if a public issue receives more applications than necessary.
When an issue is oversubscribed, it is obviously not possible for the company to issue those many shares. Therefore, there’s a system devised by the Securities and Exchange Board of India (SEBI) for allotment of shares in the case of an oversubscribed IPO.
According to the system devised by SEBI, in the case of a small oversubscription, the company has to ensure that it allows at least 1 lot for every investor who applied for the issue. Once that is done, the remaining shares, if any, are allotted to the investors on a pro-rata basis.
That said, in the case of massive oversubscription of an IPO, where it is impossible for all investors to get even one lot of shares, a computer-based randomized lottery draw is conducted. In this system, there will be investors who will completely miss out on getting shares allotted to them. In that case, the amount invested will be returned to such investors.
Hope you’re now aware of oversubscribed IPOs and what goes on when a public issue is oversubscribed. If you’re planning to invest in an upcoming IPO, make sure to first open a demat account. It is a mandatory prerequisite without which you will not be able to participate in the stock market. If you’re unsure of how to open one, visit Motilal Oswal. You can open a demat account and a trading account online through a paperless process in just a few minutes.