What is an Oversubscribed IPO?

An oversubscribed IPO is an excessive demand for IPO shares versus the company’s actual supply in the market. Essentially, more investors show an expression of interest in buying shares than the ones that the company offers in its IPO. This normally indicates strong interest on the part of the investors, which means the presence of good sentiments and high expectations for future performance from that company. But then that also implies that all investors don’t always get the full amount of shares applied for a new issue as the shares have to be proportioned among the bidders.

Key Highlights

• An oversubscribed IPO occurs when investor demand exceeds the available shares offered by the company.

• Oversubscription is a positive signal, showing strong market interest and confidence in the company’s future performance.

• Investors may receive a partial allocation of the shares they applied for.

• Companies can use the green shoe option to issue more shares and manage the high demand, stabilising the share price post-IPO.

Oversubscribed IPO Meaning

An ‘oversubscribed IPO’ occurs when the demand from investors to buy a company’s newly offered shares exceeds the number of shares available. For instance, a company has offered 1 million shares, yet investors bid for 2 million shares. This means the IPO is oversubscribed by two times. Oversubscription is often viewed positively by investors, as it suggests strong market confidence in the investment. However, it also leads to increased competition for share allotment, which can sometimes result in partial or no allotment for some applicants.

Reasons for Oversubscription in IPO 

An oversubscription of an IPO generally occurs when the IPO is very popular with investors due to various reasons. Here’s a closer look at reasons an IPO could be oversubscribed:

• If investors are very keen on investing in the issue because of its potential.
• If the company has over-ambitious or unrealistic pricing boundaries

These situations create a high demand, and this is often the case, the number of applications is more than those of the shares being offered—hence, an oversubscribed IPO.

Benefits and Costs of Oversubscribed Securities

Understanding what oversubscription of shares means brings out several key advantages that companies and investors have been enjoying within the stock market.

• Market Confidence: The case of oversubscription is proof that investor confidence in the company is good. It might imply that such strong demand has led people to believe in its growth and its financial stability, thus helping to build a reputation in the market for the company.

• Higher Share Price: Oversubscription is mostly accompanied by higher initial share prices. Naturally, prices rise when more investors compete for a limited number of shares, hence benefiting the issuing company and early investors who almost immediately appreciate their holdings.

• More Capital: The oversubscription provides a firm with an opportunity to raise more funds than planned, especially if the green shoe option has been exercised. A firm may expand on credit, settle indebtedness, or otherwise use this additional capital for strategic reasons that improve its financial position and future prospects.

• Better Market Perception: With successful oversubscription, the company would enjoy better market perception, finding it even more attractive for further investments and partnerships. This may also mean better terms in subsequent fundraising activities..

How can a Company Issue More Shares?

The green shoe option can be used by an organisation as a strategic weapon in case of oversubscription. This technique would allow the corporation to issue more shares than expected and make up for any over-subscription. Here’s how:

• Green Shoe Option: This is an option that avails flexibility to a business by increasing the share offering by up to 15% of the initial amount. It ensures that the company cashes in fully on this strong demand and helps stabilise the share price post-IPO, raising more capital.
• Stabilising Share Price: The volatility of the share price could be avoided to a great extent by better management of the supply-demand dynamics for the same, simply by issuing more shares under the green shoe option. This would foster stability in the trading environment and protect investor confidence.
• Meets Investor Demand: With the issuance of more shares, more applications can be accepted to make sure that more investors get to participate in the IPO. The bigger the base of investors, the more liquidity trading volume is likely to be witnessed in the market.

Disadvantages of Oversubscription

Oversubscription presents a few obstacles that businesses and investors must overcome:

• Unmet Demand: A major disadvantage of oversubscription is that a lot of investors might not get all the shares they asked for. Investor unhappiness may result from this, which may affect their decisions to make investments in the future.
• Market Volatility: This can result in enormous price swings because of the surge in strong demand for oversubscription after listing. Such volatility might be a cause of concern for investors who would rather operate within stable and predictable financial environments.
• Increased Expectations: Oversubscription mostly leads to increased expectations of the firm’s performance. These expectations are often hard to live up to, even more so when the company’s later financial results fail to match the high level of investor confidence shown in the beginning

Examples of an Oversubscribed IPO 

Two notable examples of oversubscribed IPOs in India highlight the intense demand in the market. 

The Ujjivan Bank IPO received a stunning reception on December 2, 2019, with 2,053 crore bids coming in for the 12.40 crore shares on offer. That had worked out to an oversubscription of 165.66 times, reflecting stupendous interest in the offering by the bank.

Meanwhile, the Rs 600-crore initial public offering of Latent View Analytics Ltd broke a record in the Indian primary market. Priced at Rs 190-197 per share price, the IPO was subscribed massively, at 338 times to receive bids worth Rs 1.13 lakh crore. These examples go on to show the huge appetite that seems to be for new offers where post-listing gains are believed strongly.

Over Subscription Vs Under Subscription in IPO

The terms “undersubscription” and “oversubscription” refer to the quantity of subscriptions received by an issue. The primary differences between oversubscription and undersubscription are outlined here for a better understanding of the concepts.

Conclusion

Oversubscribed IPOs are strong indicators that project high confidence in the market and a keen interest in a firm’s potential. While this reflects well on the company and suggests a promising future, it also leads to tougher competition for share allocation and potential market volatility after listing. Knowing how oversubscription works allows investors in their investment strategies in fine detail—either by tuning into market sentiment or recognising the risks involved. Be it in the examples of Ujjivan Bank or Latent View Analytics, oversubscription can be a strong signal; however, there needs to be a balance between the enthusiasm it may bring and an informed decision at its core.

FAQs on Oversubscribed IPOs