Before we know about what an Oversubscribed IPO is it is important to know what an IPO Allotment and the other topics is related to Allotment.
IPO Allotment is nothing but a fair division of shares among the investors.
Now here comes the next questions, who are the investors? And How all the allotted shares are divided among the investor. Are they divided equally? Do they all get an equal number of shares?
A lastly How to know a company’s IPO gone well? So below we will get the answers to the questions and from there we will easily get to know about what Oversubscribed IPO is.
Types of IPO Investors:
It is necessary to know about the types of IPO investors before knowing about the allotment process in details.
Oversubscribed IPO comes under the allotment process, but first knowing about the investors is much more crucial. There are three types of IPO investors. Let’s know about the categories of them in details:
1. Qualified Institutional Buyers/ OIB
Big companies come under this category who invests for their own portfolio or for the public.
Like-Mutual funds, Insurance Company, Provident Fund, Pension Fund. There are three different quotas for different investors. qualified institutional buyers get the highest amount of quota for investing in IPO.
Because the money they invest in IPO is highest than the rest of the categories so 50% quota is always given to them no matter which companies.
2. Non-Institutional Buyers/ NIB
Individual investors, NRI, HUF Falls under this category. The people from this category had to invest a minimum amount of Two lacs.
They did not invest an amount lesser than 2 lacs. This category gets the minimum amount of quota that is only 15%. NIB is also known as high net worth investors.
3. Retail investors
Out of a hundred per cent of shares retail investors gets 35 per cent shares for investing. That means for retail investors 35% of shares been reserved.
Retail investors are generally those people whose bid amount is lesser than 2 lacs. if their bid amount is more than 2 lacs Then they will fall under NIB category.
Retail investors invest for their own not behalf of any company. they generally trade a smaller amount than the other categories.
Now the very important part of this article is about the share allotment, among the investors and the oversubscribed IPO.
We will also get to know about undersubscribed IPO. so that this whole thing will be a clear picture to you all. There should not be any furthermore queried about the subscription process.
So, let’s start with share Allotment process & oversubscribed situation of investors. If you study about IPO you will get to know that, buying a share depends on lots of things.
Like the company which registered on IPO, sales their share in a lot. And 1 lot can be any number of shares. So, in that case, you cannot buy 5 shares or 25 shares as you like.
You must take 1 lot or 2 lot of share and so on and have to follow company rules. that means if a company set 1 lot = 10 shares, then you are buying either 1 lot=10 shares or 2 lot=20 shares and so on. this is a basic rule of buying an IPO. This was about the lot.
Now let’s take there is a company name XYZ. PVT.LTD who are participated in IPO for the first time. And they are issuing fixed-price rate. And the company wants to sale a total of 10 lacs of the shares.
Their share value is 1000rs = 1 share, And 1 lot = 14 shares. among these 10 lakhs shares 35% that means 3.5 lacs amounts are reserved for retail investors.
If you are a retail investor you have to buy a minimum one lot that is 14 shares. that means you must spend a minimum of 14000 rupees for buying 1 lot of that company.
And maximum you can buy a total of 14 Lots. in that case, you must spend a total of 196000. but if you spend more than 2,00,000 rupees then you will know more be a retail investor. you will be shifted to, non-institutional buyers’ category.
like I have said earlier that in one lot, the company XYZ had kept 14 shares that means 14 thousand rupees for one lot. so if I take the example of 3.5 lacs of share (which is for the retail investor) there will be a total 25000 of Lots.
14 shares (value 14*1000) = 1 lot
350000 shares (value 350000*1000) = 25000 lot (1*350000/14)
Retail investors can bid for a total of 25000 lots. It will be good news for the company if it’s all 25000 shares for retail investors been sold out.
That means all the share lots been subscribed by the retail investors. And the distribution is done in such a way that ever gets an equal number of shares that they have subscribed for.
People who have subscribed 1 lot will get their 1 lot and those who have subscribed more than 1, also get at least one. And rest depends on the subscription, sometimes it has been observed company has allotted 25,000 lot for their retail investors.
But subscription has come for let’s saying 30000 lots. Now such situation we call this as OVERSUBSCRIBED IPO. Where all the investors don’t get the shares, they have applied for. In such a situation, the company organises for a lottery system which decides who will get how many shares.
The company always try to distribute proportionately among the investors all the shares but due oversubscription or too much bidding make few investors deprived of buying IPO.
Most of the time it depends on your luck that you will win or not or will be able to get the share or not.
We can call Oversubscription is a disadvantage for people are well capable of buying more than 1 lot shares, but they couldn’t even get a single lot due to high rate of subscription.
The lottery-based allotment process is a totally automated and computerised. The more IPO will be oversubscribed the more chances of getting shares will be less.
And the same procedure is applicable for other category investors also.
In my last example the company has allotted 25,000 lot shares for retail investors, but due to oversubscription if we see bidding has come for 50000 shares then we call it a 2X Oversubscription.
If investors bid for 75,000 lot shares, then we will call it a 3X Oversubscription.
It is not always necessary that every time A company comes in the public market will be oversubscribed. sometimes the company faces and undersubscribed IPO situation, where the demand for shares become less than the allotted shares.
In that case, the company fails to sell all their allotted shares. we call the situation an undersubscribed IPO. There are many more concepts in IPO like this, which we all need to know before participating and investing in the share market. One thing I can say that this is a work of patience and experience. The more experienced & patient you will be, the more you will become successful.
Stockquantum was founded by Dharmendra Mukati in 2018. I am a Trader and Investor in the last 10 years.
I am writing here about stock broker review, broker comparison, IPO investment, Crypto currencies, technical analysis, fundamental analysis, sub brokership, mutual fund, personal finance, and our experiences.