What is Oversubscription of Shares?
When applications to buy the shares exceed the actual shares offered by the company, it is known as the Oversubscription of shares. Under this, investors apply for more shares than offered shares, creating a situation of oversubscription ratio.
Oversubscription typically occurs when investors have a significant image of the company in mind. The high demand for company stocks indicates its strong financial health and brand value as more and more people want to buy it. When excess applications are received in order to purchase the shares of the company, practices like declining applications and pro-rata allotment are practised by the company. Oversubscription may lead to disappointment in the mind of investors as they have chances to receive less or no shares. These practices help the company to allocate limited resources among a large number of applications. The situation of oversubscription commonly arises in the case of an Initial Public Offer (IPO), where the demand size is relatively broader as compared to the supply size.
Shares Applications > Shares Offered
Key takeaways from Oversubscription of Shares:
- This type of situation is very common in Initial Public offer (IPO).
- More demand for shares represents the company’s strong financial position, leading to increased prices of shares in the market.
- Major handling procedure of Oversubscription of Shares includes declining applications and/or allotting shares on a pro-rata basis.
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.