Oversubscription and Undersubscription of Shares
What is oversubscription of shares?
Oversubscription of shares occurs when the demand for a company’s shares exceeds the number of shares offered during an initial public offering (IPO) or other share issuance. This means more investors want to buy shares than are available.
What is undersubscription of shares?
Undersubscription of shares happens when the demand for a company’s shares is less than the number of shares offered during an IPO or other share issuance. This indicates that fewer investors are interested in buying the shares than the company is offering.
Why does oversubscription of shares happen?
Oversubscription typically occurs due to:
- High investor confidence in the company.
- Positive market conditions.
- Strong financial performance or growth prospects of the company.
- Positive media coverage and marketing.
Why does undersubscription of shares happen?
Undersubscription can occur due to:
- Low investor confidence in the company.
- Negative market conditions.
- Poor financial performance or unclear growth prospects.
- Lack of effective marketing or awareness.
How do companies handle oversubscription?
When a company faces oversubscription, they can manage it by:
- Allocating shares on a pro-rata basis.
- Conducting a lottery to allocate shares.
- Increasing the share offering, if allowed.
- Offering refunds to the excess applicants.
How do companies handle undersubscription?
In the case of undersubscription, companies might:
- Extend the subscription period.
- Reduce the offer price to attract more investors.
- Cancel the issuance or reduce the number of shares offered.
- Seek underwriters to purchase the remaining shares.
Difference between Oversubscription and Undersubscription
Any company in order to raise capital, issues shares in various forms like Equity shares, preference shares, etc. When any private company first issues the shares to the general public, it is known as an Initial Public offer (IPO). The general public and various investors send applications to the company in order to buy shares directly from the company. On the basis of applications received by the company from the general public and various kinds of investors, subscription of shares can be divided into two main categories: Oversubscription of Shares and Undersubscription of shares. Oversubscription of Shares is when applications received for the shares exceed the actual shares offered by the company whereas Undersubscription of Shares is when shares offered by the company exceed the applications received to buy the shares.