Oversubscription in an IPO is referred to as a condition when the number of shares applied by all the investors is more than the total number of shares offered by the company. This situation occurs when the demand for the shares exceeds the supply.
Let's assume a business issues an IPO and offers 10,000 shares to retail investors, and 1,000 applications are received for 50 shares each - the total demand is 50,000 shares, but only 10,000 shares are available. As a result, the offer was five times oversubscribed in the Retail Investor category.
How does this situation arise?
A company issues the offerings and interested investors file the application with the stock exchange.
After receiving all the applications, the incorrect and incomplete applications are eliminated through a computer scanning procedure. And then, the remaining applicants are assigned the shares subject to availability.
With regards to the number final of applications received, two situations can emerge-
- The final number of lots applied by all the investors is less than the total number of lots offered by the company.
- The final number of lots applied by all the investors is more than the total number of lots offered by the company.
The second case is known as oversubscription in an IPO and it requires a more systematic planning while allocating the shares.
What do SEBI’s guidelines say?
If an IPO is oversubscribed in the retail category, the shares must be distributed in such a way that every retail bidder receives at least one minimum lot, according to the SEBI standards. If there are any leftover shares, they are distributed proportionally among the investors who applied for more than one lot.
Types of Oversubscription
In the situation of an oversubscription, two cases are observed which are dealt with differently.
In the case of small oversubscription, the minimum amount of lots are assigned to all the investors who have applied for the IPO. After this, the remaining lots are distributed equally among the investors who had applied for more than one lot in the application.
This situation arises when the number of applied lots is much greater than the number of available lots and not even one lot can be assigned to each applicant. Here, the allocation of IPOs is done through the procedure of computerized lucky draw without any partiality.
Oversubscription of IPOs is a common phenomenon and hence, one should not expect the guaranteed allocation of the number of shares they applied for.