Find Out What Are Oversubscribed And Undersubscribed Securities, Here
The initial public offering (IPO) of Life Insurance Corporation (LIC) of India got off to a promising start, with Rs 5,630 crore worth of shares designated for anchor investors being oversubscribed at the upper end of the pricing range. The LIC IPO opened for anchor investors on May 2. Anchor investors are high-profile institutional investors who are given shares before retail and other investors can buy them and must promise to keep them for a set amount of time after the company is listed. The IPO opened for other investors today and will close on May 9.
So, what exactly is share oversubscription? When a company issues shares for public purchase, the IPO can be oversubscribed or undersubscribed.
Oversubscription of shares
When the number of shares on offer is less than the demand for the same during the IPO subscription process, the IPO is considered to be oversubscribed. This signifies that the company has received more applications from investors than the number of shares made available for the public.
An oversubscribed IPO suggests that investors are eager to purchase the company's stock, resulting in a higher price and more shares being offered for sale. However, the demand must eventually reconcile with the security's underlying company fundamentals. So, an oversubscription does not automatically indicate that the market will support the higher price for long.
When an IPO is oversubscribed, all the applications will not be approved, with the shares being allotted on a pro-rata basis. Here, the issued capital and subscribed capital are the same. For those applications that are refused, the money will be refunded.
One of the benefits, when a security is oversubscribed, is that the company can either offer more securities, raise the price of the asset, or do a mix of the two to meet demand and raise additional capital.
Companies almost always hold back a significant portion of their shares to cover future capital needs and management incentives. So, there is usually a standing reserve of shares that can be added if an IPO is heavily oversubscribed without requiring new securities to be registered with regulators.
Under-subscription of shares
The term undersubscribed describes a situation in which demand for a share is lower than the number of shares available. Here, the number of shares applied for by the public is less than the number of shares issued by the company. Undersubscribed offers are sometimes the result of overpricing the securities for sale or ineffective marketing to potential investors.
An undersubscribed IPO is usually a bad indicator since it shows that individuals aren't interested in investing in the company's offering.
Here, the issued capital exceeds the subscribed capital. In the event of an under-subscription of shares, there will be no pro-rata allocation. Also, there won't be any requirement for a refund in this case.
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