What is Undersubscription of Shares?
When the applications received to buy the shares are less than the actual shares offered by the company, there arises a situation of Under Subscription of shares. This situation is the opposite of the oversubscription of shares. Offered shares are more than the application received for the shares. This situation is also known as underbooking. Undersubscription gives an alarm to the company of its declining image in the market. Factors like the company’s weak financial health, weak management system, lower financial growth over the years, etc. lead to the situation of undersubscription.
In this scenario, a company only accepts and allots shares to the applicants only after receiving applications for at least 90% of the total shares issued for the subscription. But in case, the company does not receive at least 90% of the amount which they intend to sell, the whole issuing drive got cancelled and all the money received against the share application is returned to the applicants.
Shares Application < Shares Offered
Key takeaways from Undersubscription of Shares:
- Under subscription is a negative signal for the company as it shows less/no demand for the shares of the company, depicting a negative image.
- Factors like the company’s weak financial health, weak management system, lower financial growth over the years, etc. lead to the situation of undersubscription.
- Company must receive at least 90% amount of the amount which they intend to sell in order to carry the process further, otherwise, the drive gets cancelled.
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.