When a company decides to raise capital by going public it issues shares for the very first time to the ‘general public’ which known by initial public offering (IPO). In doing so, it gives an offer in the form of IPO subscription to the buyer to buy soon-to-be-issued stocks. It is beneficial for the company (or seller) in many ways as the capital raised can be used to clear off debts, reinvest in the business, to expand or to improve infrastructure, however, it likes. Not just the seller but the buyer also benefit from IPO in unearthing quality stocks that are yet to be listed. Sometimes demands beat the supply which leads to IPO subscription. For instance, if a company decides to issue IPO size of 30 lakh shares and there was a demand of 1 crore 50 lakh shares, then the IPO said to be oversubscribed by 5 times. The IPO oversubscription shows the interest of the general public in the company.
Reasons behind IPO Oversubscription
There are no standard reasons behind the oversubscription of any particular IPO and it varies with company-to-company. In most cases, the reputation and strong brand name always have been the major key factor behind any company’s IPO oversubscription. IRCTC Ltd, CSB Bank, HDFC Asset Management, Metropolis Healthcare, Amber Enterprises etc., were some of the IPO stocks that were oversubscribed by multi-folds and enjoyed good listing on the stock exchanges.
That leads us to a very important question: Does IPO Oversubscription leads to higher listing gains?
Relation between IPO Oversubscription and Listing Gains
Undoubtedly, popular IPOs lead to the oversubscription ultimately to listing gains as the investors and traders want to capitalize from the listing gains to make quick profits in investing in that particular IPO. But, IPO oversubscription is not the only factor that leads to listing gains. There are other factors such as the IPO Pricing, ongoing market conditions at that time etc. that contribute to the listing gains.
As you know that the listing time in India is around 7 working days. During that time, the other things are done like an allotment, statutory fillings etc. So, there is no established relationship between IPO oversubscription and listing gains that point out that along oversubscription leads to listing gains.
Allotment Procedure under IPO Oversubscription
If you’ve been investing in IPOs then you must’ve encountered oversubscription situation at least once. Let’s find out how a company allow shares under such circumstances.
As you know that allotment of IPO shares is generally done under the rules laid down by the Indian market regulator SEBI (Securities & Exchange Board of India). In IPO, the allotment percentage is categorized as per the distinguished investors:
- Retail Investors (less than Rs. 2 lakh)
- Non-institutional Investors
- Qualified Institutional Investors
- Employee Category (In some cases)
The allotment is different from each category. For instance, the 50% allocation of shares is for qualified institutional investors meanwhile, the 35% allocation of shares is for retail investors.
Allotment Process for Retail Investors
Companies allot shares in lots (a group of shares) so when it comes to allocation in case of IPO oversubscription then the total no. of shares available is divided by the minimum lot size. It helps in finding out the no. of retail investors who will be allotted with shares.
And of the IPO applications of bidders is more than the lots available, then no bidder is allotted with more than one lot. It is to ensure that all investors get the fair and equal chance of being allotted IPO shares. In other words, if a bidder bid for just one lot will be treated the same as the bidder who bid for 10 lots.
Besides, in IPO oversubscription situation, the chances of no. of retail investors surpass the no. of shares are very high. In that case, the eligibility is determined by the draw of lots which is an automated and computerized process leaving no chances for errors.