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Oversubscription occurs when more shares in an IPO are requested than are actually available. The phenomenon happens when people are so eager to invest in a new business that they give more cash than the business needs or is willing to accept.

Are you attempting to determine the ideal offering size for your IPO? Since there are so many things to take into account, it might be difficult.

What Does Oversubscription in IPO Mean?

Determining the number of shares to issue is a necessary step in a company’s preparations for an Initial Public Offering (IPO) of its stock. The “offering size” is established in this manner. One of the most crucial factors regarding an IPO is the offering size. It has an impact on the amount raised through the offering, the eligibility of investors, and the price shareholders pay for their shares.

Oversubscribed IPOs are those that have received more investment interest than there are shares available. This type of IPO offering includes a portion of a company going public. For instance, there will be an oversubscription if 2 million shares are desired but only 1 million are offered for sale.
When there is more demand than supply for an initial public offering (IPO) of a particular fund, this is known as oversubscription. This results in a price for the stake that is more than the company’s net asset value (NAV).

What Are the Reasons for Oversubscription in IPO?

When a firm chooses the size of its offering, it sets aside a specific number of shares for institutional investors (like mutual funds and hedge funds). Additionally, some shares are held aside to be sold in a separate transaction to only individual investors. Because more individuals desire those shares than there are available, the portion that is only offered to individual investors is referred to as being “over-allocated” (or “oversubscribed IPO”).

Companies are listed through the oversubscription process for a variety of reasons.
The company grows its business using the money it receives from an IPO. A corporation may be able to raise more money through market mechanisms than from banks or other financial institutions at a high cost if demand outpaces supply.

Listing via oversubscription is logical. It enables ordinary investors to participate in IPOs early and earn profitable returns. When IPO demand is strong, a company can list at a premium price and provide investors better returns.

How is shares allotted in an oversubscriped IPO ?

The shares in a public offering are allocated to three types of investors: retail institutional investors (RIIs), qualified institutional buyers (QIBs), and non-institutional investors (NIIs). The value of retail investors’ bids in an IPO is limited to Rs 2 lakh.

According to SEBI, if the retail investor category of an IPO is oversubscribed, the share issuance must be done in such a way that each investor receives at least one lot. Following that, the remaining shares are distributed proportionally. This is true for problems that have a minor oversubscription.

A lottery technique is used to distribute the share lots to subscribers in cases where an IPO is so heavily oversubscribed such that all investors cannot receive at least one lot each. Many subscribers might not receive any shares in such a scenario.

Factors Responsible for Oversubscription in IPO:-

Predicting wether an IPO will be oversubscribed or not is somewhat very complex. There are many variables that are deciding factors, making it difficult to predict whether or not an IPO will be oversubscribed. These comprise:

The size of the underwriting syndicate: A larger syndicate can encourage more investors to take part in an IPO, whereas a smaller syndicate may result in lower demand for shares. Interest in an IPO could also depend on the kind of security being used.

Convertible debt securities, for instance, are more desirable than conventional bonds since they turn into equity upon maturity.

The overall health of the economy: The quality of a company’s business operations can affect investors’ willingness to take part in an IPO. The economic health of the nation where the company is looking to float its IPO is an effective cause in the subscription IPO. If the health of economy is on track or flourishing then the chances of oversubscription is higher as investors are in position to invest looking after the growth of company followed by the growth of economy.

The level of competition: If several companies are launching initial public offerings at once, this may deter investors.

The strength of competition: If other companies are launching IPOs around the same time, this can reduce investor interest and make it harder for them to generate strong demand for their stocks. And also investors are enjoying the previlege of multiple options and this can create two situations

1. Investors looking for Maximum return on their Investment
2. Shortage of cash in the market to invest.

RELATION BETWEEN OVERSUBSCRIPTION AND LISTING GAINS

Because many traders seek to profit from listing, popular IPOs are frequently oversubscribed.

The stock price on the first trading day at the exchanges frequently exceeds the IPO price. This presents a trader with the chance to sell the shares for a rapid profit. Therefore, the difference is referred to as listing gains.

Therefore, an initial public offering (IPO) has the potential to have a successful listing on the stock exchange when it is oversubscribed and priced fairly.

While oversubscription is one of the factors that contribute to a successful launching, other elements including the IPO pricing and market circumstances at the time of listing also play a role.

Of the 52 large- and small-sized IPOs in 2015, 26 listed with gains of less than 10% and 11 with losses.

For traders, the appeal of listing gains is great, but they must also consider other external considerations such as how the market will respond to the IPO and how much demand there will be for it.

Long-term investors, on the other hand, are more focused on the company’s potential for growth, earnings, and ownership.

Summary

IPO oversubscription occurs when demand for an IPO exceeds the number of offered shares. This phenomenon occurs when the public are eager to invest in a new company and they have offer more money than the company needs or is prepared to accept.