Important Differences Between Over Subscription and Under Subscription

Recently updated on August 20th, 2023 at 11:54 am

Over Subscription

Over-subscription refers to a situation in the stock market where the demand for shares exceeds the supply of shares offered in a public issue or initial public offering (IPO). This can occur when there is high investor interest in a company or its stock and investors are willing to purchase more shares than are available in the offering. The result is that some investors may be allocated fewer shares than they requested or may not receive any shares at all.

Reason of Over Subscription

There can be several reasons for over-subscription in a stock market:

  1. Popularity of the Company: If a company has a strong brand image and a good reputation in the market, then investors are more likely to participate in its IPO.
  2. Positive Financials: If a company has a history of strong financial performance and has a promising future outlook, then investors are more likely to invest in its IPO.
  3. High Market Demand: A high demand for stocks in the market can increase the popularity of an IPO and result in over-subscription.
  4. Limited Supply of Shares: If a company decides to issue only a limited number of shares in its IPO, then this scarcity can lead to over-subscription.
  5. Market Hype: Sometimes, media attention and market speculation can create a hype around an IPO and increase demand for its shares.
  6. Underwriting: The investment bank that underwrites an IPO may create a sense of scarcity by allocating shares only to select investors, which can drive up demand and lead to over-subscription.

The effects of over-subscription in a stock market can be both positive and negative:

  1. Increased Interest: Over-subscription can indicate a high level of interest in a company and its stock, which can help to increase its value in the long term.
  2. Allocation of Shares: If the demand for shares exceeds the supply, the company or the underwriters may use a lottery or other allocation method to determine who gets to purchase the available shares.
  3. Price Increase: Over-subscription can drive up the price of the shares, making it more expensive for investors to buy in.
  4. Disappointed Investors: Some investors who requested shares in an over-subscribed IPO may not receive any or may receive fewer shares than they requested, which can result in disappointment and frustration.
  5. Short-term Volatility: Over-subscription can lead to short-term volatility in the price of the stock, as investors buy and sell shares based on supply and demand.
  6. Misallocation of Resources: If the demand for a stock is driven by speculation or market hype, rather than the fundamentals of the company, then this can result in a misallocation of resources and negatively impact the long-term value of the stock.

Over Subscription Types

There are several types of over-subscription in a stock market:

  1. Full Over-subscription: This occurs when the demand for shares exceeds the total number of shares available in the offering.
  2. Partial Over-subscription: This occurs when the demand for shares exceeds a portion of the total number of shares available in the offering.
  3. Over-subscription by Retail Investors: Retail investors, who are individuals buying shares for personal use, may over-subscribe an IPO due to high market demand or a strong reputation of the company.
  4. Over-subscription by Institutional Investors: Institutional investors, such as mutual funds, pension funds, and insurance companies, may over-subscribe an IPO due to positive financials or a favorable outlook for the company.
  5. Over-subscription by High Net Worth Individuals (HNIs): High net worth individuals, who have a high level of disposable income, may over-subscribe an IPO due to high market demand or a strong reputation of the company.
  6. Over-subscription by Foreign Investors: Foreign investors may over-subscribe an IPO due to favorable exchange rates or other investment opportunities in the market.

Pros of Over-subscription:

  1. High Demand: Over-subscription indicates high demand for a company’s stock, which can help to increase its value in the long term.
  2. Increased Interest: Over-subscription can attract more investors to a company and increase its visibility in the market.
  3. Attractive Valuation: Companies that are over-subscribed may be able to price their shares at a higher valuation, which can result in a larger return for the company and its investors.
  4. Capital Raising: Over-subscription can allow a company to raise more capital, which can be used for growth or to pay down debt.

Cons of Over-subscription:

  1. Allocation Issues: If the demand for shares exceeds the supply, investors may not receive the number of shares they requested, which can result in disappointment and frustration.
  2. Short-term Volatility: Over-subscription can lead to short-term volatility in the price of the stock, as investors buy and sell shares based on supply and demand.
  3. Misallocation of Resources: If the demand for a stock is driven by speculation or market hype, rather than the fundamentals of the company, then this can result in a misallocation of resources and negatively impact the long-term value of the stock.
  4. High Prices: Over-subscription can drive up the price of the shares, making it more expensive for investors to buy in.
  5. Insider Trading: Over-subscription can create opportunities for insider trading, where individuals with privileged information trade on that information to generate profits.

SEBI Guidelines for Over Subscription

SEBI (Securities and Exchange Board of India) is the regulatory body for the securities market in India. It has guidelines in place for over subscription in public and rights issues of shares.

In case of public issue, SEBI allows for a provision of up to 15% of the issue size for over subscription. The over subscription amount is allotted on pro-rata basis to all applicants.

In case of rights issue, SEBI allows for a provision of up to 25% of the issue size for over subscription. The over subscription amount is allotted on pro-rata basis to all applicants.

SEBI also has regulations in place to ensure fair allotment of shares in case of over subscription. It ensures that the allotment of shares is done through a computerized system, which is fair and transparent, with the use of randomization method.

SEBI also has regulations in place to prevent manipulation of shares during the over subscription period and to ensure that the shares are not allotted to the promoters, directors or their relatives at a higher price than the price fixed in the offer document.

Under Subscription

Under-subscription refers to a situation in a stock market where the demand for shares in a public offering is lower than the number of shares available for sale. This can occur when investors are not confident in the company’s financial performance or future outlook, or when there is a lack of interest in the offering.

The effects of under-subscription can be negative for a company, as it may not be able to raise the capital it was hoping to generate through the offering. In addition, a lack of demand for the stock can signal to the market that there is limited confidence in the company, which can negatively impact its stock price and future growth prospects.

Under-subscription can also be problematic for the underwriters of an offering, as they may have to purchase unsold shares and hold them on their balance sheet until demand for the stock increases. This can result in additional risk and capital requirements for the underwriters.

There are Several reasons why under-subscription may occur in a stock market:

  1. Poor Financial Performance: If a company has a history of poor financial performance or is facing current financial difficulties, investors may be hesitant to buy its shares.
  2. Lack of Market Interest: If there is a lack of interest in the company’s industry or sector, or in the stock market as a whole, this can result in low demand for the shares.
  3. Unattractive Valuation: If the company is pricing its shares at a level that is perceived as too high by investors, this can result in low demand for the shares.
  4. Negative Market Sentiment: If there is negative market sentiment, such as a bear market or economic downturn, this can reduce demand for new stock offerings.
  5. Poor Market Awareness: If the company is not well known or lacks a strong reputation, this can result in low demand for its shares.
  6. Regulatory Issues: If the company is facing regulatory or legal issues, this can result in low demand for its shares.

SEBI Guidelines for Under Subscription

SEBI (Securities and Exchange Board of India) does not have specific guidelines for under subscription for public and rights issues of shares. However, SEBI does have regulations in place to ensure fair allotment of shares in case of under subscription.

In case of a public issue, if the issue is under subscribed, the allotment of shares will be made to the applicants on a pro-rata basis. The number of shares allotted will be based on the number of shares applied for and the number of shares available.

In case of a rights issue, if the issue is under subscribed, the allotment of shares will be made to the shareholders on a pro-rata basis. The number of shares allotted will be based on the number of shares applied for and the number of shares available.

SEBI also has regulations in place to ensure that the shares are not allotted to the promoters, directors or their relatives at a higher price than the price fixed in the offer document.

In case of under subscription, the company may consider to revise the price of the shares or to offer the unallotted shares to other investors.

The effects of under-subscription can be negative for both the company and its investors.

  1. Reduced Capital Raise: If a company experiences under-subscription, it may not be able to raise the capital it was hoping to generate through the offering, which can limit its ability to grow and invest in its business.
  2. Lower Stock Price: If there is limited demand for a company’s stock, this can signal to the market that there is limited confidence in the company, which can negatively impact its stock price and future growth prospects.
  3. Increased Costs: Under-subscription can result in increased costs for the underwriters, as they may have to purchase unsold shares and hold them on their balance sheet until demand for the stock increases.
  4. Risk for Underwriters: If a company experiences under-subscription, the underwriters may be left with a significant number of unsold shares, which can result in additional risk and capital requirements for the underwriters.
  5. Disappointment for Investors: Under-subscription can result in disappointment and frustration for investors who were hoping to purchase shares in the offering, as they may not be able to secure the number of shares they wanted.
  6. Negative Market Perception: Under-subscription can create a negative perception of the company in the market, which can make it harder for the company to raise capital in the future.

Under-Subscription Types

There are several types of under-subscription in the stock market:

  1. Complete Under-subscription: This occurs when there is no demand for the shares being offered, and the company is unable to sell any of the shares.
  2. Partial Under-subscription: This occurs when there is some demand for the shares being offered, but not enough to sell all of the shares.
  3. Selective Under-subscription: This occurs when there is demand for some shares in a multiple tranche offering, but not enough demand for other shares.
  4. Segmented Under-subscription: This occurs when there is low demand for shares in certain segments of the market, such as specific regions or demographic groups.
  5. Under-subscription by Institutional Investors: This occurs when institutional investors, such as mutual funds or pension funds, do not participate in the offering, resulting in low demand for the shares.
  6. Retail Under-subscription: This occurs when individual retail investors do not participate in the offering, resulting in low demand for the shares.

Pros of Under-subscription:

  1. Better Valuation: If a company experiences under-subscription, it may need to revise its pricing strategy and offer its shares at a lower price, which can make them more attractive to investors.
  2. Reduced Financial Risk: If a company is unable to raise the capital it was hoping to generate through a stock offering, this can reduce its financial risk, as it will not have to take on additional debt or equity.
  3. Improved Future Offerings: If a company experiences under-subscription, it may take steps to improve its financial performance or market awareness in order to make future offerings more attractive to investors.

Cons of Under-subscription:

  1. Reduced Capital Raise: If a company experiences under-subscription, it may not be able to raise the capital it was hoping to generate through the offering, which can limit its ability to grow and invest in its business.
  2. Lower Stock Price: If there is limited demand for a company’s stock, this can signal to the market that there is limited confidence in the company, which can negatively impact its stock price and future growth prospects.
  3. Increased Costs: Under-subscription can result in increased costs for the underwriters, as they may have to purchase unsold shares and hold them on their balance sheet until demand for the stock increases.
  4. Risk for Underwriters: If a company experiences under-subscription, the underwriters may be left with a significant number of unsold shares, which can result in additional risk and capital requirements for the underwriters.
  5. Disappointment for Investors: Under-subscription can result in disappointment and frustration for investors who were hoping to purchase shares in the offering, as they may not be able to secure the number of shares they wanted.
  6. Negative Market Perception: Under-subscription can create a negative perception of the company in the market, which can make it harder for the company to raise capital in the future.

Important Between Over Subscription and Under Subscription

Feature Over Subscription Under Subscription
Definition More resources are allocated than actually needed. Not enough resources are allocated.
Impact on Performance Can lead to reduced performance and degraded user experience. Can lead to insufficient resources and decreased ability to handle sudden spikes in demand.
Cost Can result in wasted resources and unnecessary spending. Can result in additional expenses to acquire more resources.
Example Allocating more CPU capacity than necessary in a cloud computing environment. Insufficient bandwidth allocation in a network environment leading to slow speeds.

Key Differences Between Over Subscription and Under Subscription

The key differences between over-subscription and under-subscription in the stock market are:

  1. Capital Raise: Over-subscription results in a higher capital raise for the company, while under-subscription results in a lower capital raise.
  2. Market Demand: Over-subscription indicates high demand for a company’s stock, while under-subscription indicates low demand for the stock.
  3. Stock Price: Over-subscription can result in a higher stock price, while under-subscription can result in a lower stock price.
  4. Risk for Underwriters: Over-subscription reduces the risk for underwriters, while under-subscription increases the risk for underwriters.
  5. Market Perception: Over-subscription creates a positive perception of the company in the market, while under-subscription creates a negative perception of the company.
  6. Future Offerings: Over-subscription can make it easier for the company to raise capital in the future, while under-subscription can make it harder for the company to raise capital in the future.
  7. Investors: Over-subscription can result in disappointment for investors who are unable to secure the number of shares they wanted, while under-subscription can result in disappointment for investors who were hoping to purchase shares in the offering.

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