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When an IPO is oversubscribed, it means that demand for the company’s shares has exceeded the number of shares available for sale.
Know how IPO allotment works if oversubscription
IPO Oversubscribed Meaning: Imagine you’re eyeing an exciting new Initial Public Offering for a company. You’ve done your research, studied the company’s growth potential, and decided to invest. But as the IPO day approaches, news breaks that demand for shares has skyrocketed—everyone seems eager to get a piece of the action. With more investors clamouring for shares, than the company planned to issue, the IPO becomes oversubscribed. So, how does the company decide who gets shares and how much?
When an IPO is oversubscribed, companies allocate shares using a standardised process to ensure fairness. In this article, know how the process works. First, let’s understand what an IPO is.
What Is An IPO?
An IPO is the process by which a private company offers shares to the public for the first time, transforming into a publicly traded company. Through an IPO, a company can raise capital from individual and institutional investors, which can be used to fund business expansion, pay off debt, or invest in research and development.
An IPO allows early investors, founders, and employees to realise some of the value of their shares, while public investors get an opportunity to own part of the company and potentially benefit from its future growth.
What Does It Mean When An IPO Is Oversubscribed?
When an IPO is oversubscribed, it means that the demand for the company’s shares has exceeded the number of shares available for sale. Investors have shown more interest in buying shares than the company had planned to offer in its IPO. For example, if a company issues 1 million shares but receives applications for 3 million shares, the IPO is oversubscribed by three times.
How Does The Allotment Process Work If The IPO Is Oversubscribed?
Example of Share Allotment When IPO Is Oversubscribed
According to an example scenario available on the official website of Zerodha, an online brokerage platform for stock trading & investing, the registrar conducts a lottery to allot shares to the applicants. Check the two tables below;
The first table lists the applicants, while the second table details the process for share allotment.
Assume that 10 investors have applied for an IPO at the cut-off price (the final offer price at which shares are issued to investors). Each investor has placed a bid for a number of shares, ranging from 1 to 5. The list of investors and their respective share applications might look like this:
If the total number of shares available for allotment is 5, the shares could be distributed as follows:
Investors (2), (3), (5), (9), and (10) have won the lottery conducted by the registrar and will receive shares based on their IPO applications. Any investor who bid below the upper price band would not have been eligible for the allotment lottery.
Here’s a breakdown of how it typically works:
Retail Category Allotment:
The registrar will conduct a lottery to allot shares to the applicants.
In India, retail investors are often allocated shares through a lottery system. This is because, in oversubscribed IPOs, not everyone who applies will receive shares.
Each applicant is considered for at least one lot, and if demand exceeds supply, the allotment is done randomly by the registrar to the IPO, through a computerised lottery process.
Proportionate Allotment for Non-Retail Investors:
High Net-Worth Individuals (HNIs) and institutional investors may receive allotment proportionately. If an IPO is oversubscribed by 10 times, each investor might receive only 1/10th of their requested shares.
Smallest Bid Allotment:
Priority is given to the smallest bid, which means if an investor has bid for just one lot (minimum bid amount), they may have a higher chance of allotment than large bid applications.
Refunds for Unsuccessful Bids:
For retail investors who do not receive shares, the blocked amount is unblocked or refunded to their bank accounts through an ASBA (Application Supported by Blocked Amount) mechanism, usually within a few days after the allotment process.
This allotment process, regulated by SEBI in India, aims to ensure a fair distribution and increase the chances for retail investors to participate in popular IPOs.
