Over Subscription of Shares
A company receives applications for more shares than what is offered to the public for subscription. This situation is termed as Over Subscription of shares. However, allotment can be only made to the number of shares that have been issued. The company is not allowed to allot more shares than the issued number even if there is a demand for that particular share. Over Subscription of shares is a situation where the buyers show interest in a new stock for which demand exceeds supply. Before the issue of new shares, the number of potential investors is calculated by the study of the market by underwriters. Based on such calculations of people who may or may not purchase such shares, the company issues a fixed number of shares.
What is a Subscription of Shares?
Companies or enterprises are the driving force of an economy. They create real value in terms of goods and services for the betterment of the society they serve. Establishing a company or any business requires an initial amount of money as capital. The sheer amount of money required to start any business is often not possible to arrange for an individual or even by a small group of investors for that matter. In such situations, there are some other options available by which they can plan and step ahead in their endeavor. Besides getting a loan from the banking institutions the other suitable option is calling people with money to invest to come together. In this process, the distributed resources are pulled together by the owners for better utilization by establishing a business unit. They are known as the shareholders and are promised a share of profit in proportion to their money invested.
In a traditional way, this is achieved by offering shares to the interested buyers before the establishment of the company. The individuals with the plan of starting a business estimate the required capital that is needed to be procured from the public. After surveying the expected number of buyers in the market they decide the number of shares to be created. These shares are underwritten with the determined value and are issued in an IPO. Shares can also be created after the establishment of a business also. An expansion of the business or for increasing the capacity also needs more capital so it can also be met either by getting a loan or providing shares.
After the offer of shares 3 things can happen. There can be optimum buyers as per the shares offered which is an idle situation to be expected. Contrarily the buyers can be either more than the shares offered or can be less. When applicants buy more with respect to the shares issued then this condition is known as oversubscription. And if the applicants are less than the total shares issued such a condition is known as under subscription.
FAQs on Under and Over Subscription of Shares
1. What is meant by oversubscription of shares in the context of a company's public issue?
Oversubscription of shares occurs when a company receives applications for more shares than the number it has offered to the public for subscription. For example, if a company offers 50,000 shares but receives applications for 60,000 shares, it is a situation of oversubscription. This typically happens when a company has a strong financial reputation and high investor confidence.
2. What is under subscription of shares and when does it occur?
Under subscription of shares is a situation where the number of shares applied for by the public is less than the number of shares offered by the company. For instance, if a company issues 20,000 shares but only receives applications for 18,000 shares, it is considered an under subscription. In this case, the company can only allot the 18,000 shares that were subscribed for.
3. What is the primary difference between oversubscription and under subscription of shares?
The primary difference lies in the public's demand versus the company's supply of shares. In oversubscription, demand exceeds supply, indicating high investor interest. In under subscription, demand is lower than supply, often suggesting weaker investor confidence. This difference directly impacts how the company proceeds with the allotment of shares.
4. What methods can a company use to manage an oversubscription of shares?
As per the Companies Act and SEBI guidelines, a company has three main options to handle oversubscription:
- Rejection of Excess Applications: The company can accept some applications in full and completely reject the others.
- Pro-rata Allotment: The company allots shares proportionally to all applicants. For example, an applicant who applied for 100 shares might be allotted 75 shares.
- Combination of Both: The company may use a mix of the above methods, such as rejecting some applications and making a pro-rata allotment to the rest.
5. Why is oversubscription generally considered a positive sign for a company?
Oversubscription is viewed positively because it signals strong market confidence and high demand for the company's shares. It suggests that investors believe in the company's financial health, brand reputation, and future growth prospects. A successful, oversubscribed IPO can enhance the company's prestige in the market.
6. What is 'minimum subscription,' and what happens if a company fails to achieve it?
Minimum subscription is the minimum amount that, in the opinion of the directors, must be raised through a share issue. As per SEBI guidelines, this is set at 90% of the issued amount. If a company fails to receive applications for at least 90% of the shares offered, it cannot proceed with the allotment and must refund the entire application money to the applicants within a stipulated time.
7. Can a company legally allot more shares than it offered in its prospectus if it gets heavily oversubscribed?
No, a company cannot legally allot more shares than what was specified in the prospectus or offer document. The number of shares issued is a fixed legal limit for that particular offer. Even with overwhelming demand, the company must manage the allotment within the issued quantity using methods like pro-rata allotment or rejection of excess applications.
8. How does 'pro-rata allotment' work, and how is the excess money treated?
Pro-rata allotment means allotting shares in a fixed proportion to every applicant. For example, if a company receives applications for 1,00,000 shares against an offer of 75,000 shares, it may allot shares in the ratio of 3:4 (3 shares allotted for every 4 applied for). The excess application money received is not refunded immediately but is instead adjusted against the amount due on share allotment and subsequent calls.
9. Can you provide a simple numerical example of an under subscription scenario?
Certainly. Suppose ABC Ltd. issues an IPO for 1,00,000 equity shares. The public applies for only 92,000 shares. Since the applications (92%) are above the minimum subscription threshold (90%), the company can proceed with the allotment. ABC Ltd. will allot all 92,000 shares to the applicants. The remaining 8,000 shares remain unissued.
