What is Oversubscription In IPO

A firm that wishes to raise capital may choose to release its shares to the public through a procedure known as the Initial Public Offering (IPO). It is one of the simplest ways for businesses to obtain funds, which they can then utilize to expand their operations. IPOs benefit both companies and investors. Investing in an IPO allows investors to participate in the wealth generating process early on.

If you intend to invest in an impending IPO in the near future, you need first be familiar with the numerous phrases that are commonly employed. The term 'oversubscription' is one example. What exactly is an oversubscribed IPO? Continue reading to discover out.

What is oversubscription in an IPO?

Now, in any company's IPO, the number of shares available to the public is strictly capped. Those interested in buying shares must submit a subscription application to the issuance. 

Oversubscription occurs when the number of applications for shares exceeds the quantity of shares being issued by the company. Oversubscription typically occurs when there is unusually high demand for the company's shares. 

You may have heard the term "oversubscribed by 2x" or "IPO subscribed by about 2 times" in reference to a company's initial public offering. This means that the firm received twice as many requests for shares as it issued in the initial public offering.

What happens when an issue is oversubscribed? 

Now that you know what an oversubscribed IPO is, let's look at what happens if a public offering receives more applications than necessary. 

When an issue is oversubscribed, it is evident that the corporation cannot issue that many shares. As a result, the Securities and Exchange Board of India (SEBI) has created a system for allotment of shares in the event of an oversubscribed IPO. 

According to the SEBI system, in the event of a slight oversubscription, the business must ensure that at least one lot is available for each investor who applied for the issuance. After that, any residual shares are distributed to investors on a pro-rata basis. 

However, in the event of a large oversubscription of an IPO, where all investors are unable to obtain even one lot of shares, a computer-based randomized lottery draw is held. There will be investors who will completely miss out on receiving shares under this approach. The cash deposited will be repaid to such investors in that circumstance. 

Conclusion

I hope you're now familiar with oversubscribed IPOs and what happens when a public offering is oversubscribed. If you intend to invest in an impending IPO in 2023, you must first register a demat account. It is a need that you have before you may engage in the stock market. If you're not sure how to open one, go to Paytm. In just a few minutes, you can open a demat account and a trading account online through a paperless process.

Also read :- What Does IPO Mean