The key difference between over subscription and under subscription is that over-subscription refers to a situation where investors demand more shares than a company offers, while under-subscription occurs when the number of shares offered exceeds investor demand.
What Is Over Subscription Of Shares?
Over-subscription of shares occurs when the demand for a company’s shares exceeds the number of shares available during an issue. This happens when investor interest is high, leading to more applications for shares than what is offered by the company.
Over-subscription typically indicates strong investor confidence in the company or its prospects. When this happens, companies may allot shares proportionally or by lottery, depending on regulatory guidelines. Investors might not receive the full number of shares they applied for due to limited availability.
For example, if a company offers 1 lakh shares at ₹100 each, but receives applications for 2 lakh shares, this results in an over-subscription of ₹2 crore, while the company can only allot ₹1 crore worth of shares. Investors will either receive fewer shares or a refund for the excess amount applied.
What Is Under Subscription Of Shares?
Under-subscription of shares occurs when the demand for a company’s shares is lower than the number of shares offered during an issue. This happens when investor interest is weak, leading to fewer applications than what the company offers.
Under-subscription may reflect a lack of investor confidence or unattractive pricing. In such cases, the company may have to revise its terms, extend the subscription period, or cancel the issue altogether. Companies may also turn to underwriters to purchase the remaining unsold shares.
If a company offers 1 lakh shares at ₹100 each but only receives applications for 60,000 shares, this leads to an under-subscription of ₹60 lakhs, meaning ₹40 lakhs worth of shares remain unsold. The company may have to adjust its strategy or rely on underwriters.
Difference Between Over Subscription and Under Subscription
One primary difference between Over Subscription and Under Subscription is that over-subscription occurs when demand for shares exceeds the supply, while under-subscription happens when demand is less than the number of shares offered.
| Parameter | Over Subscription | Under Subscription |
| Demand vs Supply | Demand exceeds supply | Demand is less than supply |
| Investor Interest | High investor interest | Low investor interest |
| Share Allotment | Shares allotted proportionally or by lottery | Company may struggle to sell shares |
| Company Action | Company may reject excess applications | May revise terms or rely on underwriters |
| Investor Impact | Investors may receive fewer shares than applied | Investors typically receive full allotment |
How to Deal With Oversubscription?
To deal with oversubscription, companies typically allocate shares proportionally or through a lottery system. This ensures fairness among investors when demand exceeds supply. Alternatively, they may refund excess application money or increase the share offering in certain cases.
To manage oversubscription effectively, companies often follow specific strategies that ensure all investors are treated fairly:
- Proportional allotment: Shares are allocated based on the proportion of shares each investor applied for. For example, if an investor applies for 10% of the total shares, they may receive only 5% in case of oversubscription. This method ensures fairness across all investors.
- Lottery system: A random draw is conducted to decide which investors receive shares. This method is often used when the number of shares is limited and a proportional allotment isn’t feasible. It ensures everyone has an equal chance of being allotted shares.
- Refund of excess application money: Companies refund the extra money received from oversubscribed applications. Investors who do not receive full allotment or any shares get back their excess payment. This ensures transparency and avoids any financial complications for investors.
- Green shoe option: Sometimes, companies increase the share issue to accommodate more investors. This option allows the company to issue more shares than originally planned, helping meet the excess demand. It is a way to stabilize the stock price and reduce oversubscription issues.
- Preferential allotment: Priority may be given to certain investors, such as retail investors or institutional buyers. This approach helps secure important stakeholders’ investment in the company, ensuring they receive shares before others. It can enhance relationships with strategic investors.
How to Deal With Undersubscription
To deal with undersubscription, companies may extend the issue period or reduce the share price. These actions aim to attract more investors when demand is lower than expected. Additionally, companies can rely on underwriters to purchase unsold shares.
To manage undersubscription effectively, companies often adopt various strategies:
- Extend the issue period: Companies may extend the subscription window to give investors more time to apply. This extension increases the chances of attracting additional buyers who missed the initial period or were undecided.
- Reduce the share price: The company may lower the issue price to make shares more attractive to investors. A price cut can boost demand and encourage more people to buy, balancing out the undersubscription.
- Rely on underwriters: Underwriters agree to purchase unsold shares in the case of undersubscription. This arrangement ensures that the company raises the required capital, even if public demand is insufficient.
- Cancel or modify the issue: If undersubscription is severe, companies may cancel or adjust the issue. They might modify the terms, like reducing the total number of shares offered, to make the offering more appealing.
Offer discounts to large investors: Companies may offer bulk discounts to institutional investors or large buyers to fill the gap in demand. This method helps secure significant investments, balancing the lower retail interest.Offer discounts to large investors: Companies may offer bulk discounts to institutional investors or large buyers to fill the gap in demand. This method helps secure significant investments, balancing the lower retail interest.
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Over Subscription Vs Under Subscription – Quick Summary
- The key difference between Over Subscription and Under Subscription is that Over-subscription occurs when demand exceeds available shares, while under-subscription happens when demand falls short of the shares offered. Both situations reflect varying levels of investor interest.
- Over-subscription happens when investor demand exceeds the number of shares offered. Companies may use proportional allotment, lottery systems, or refund excess applications. For example, if a company offers 1 lakh shares and receives applications for 2 lakhs, it’s oversubscribed.
- Under-subscription occurs when investor demand is lower than the number of shares offered. Companies may need to rely on underwriters or change the terms of the issue. For example, offering 1 lakh shares but receiving applications for 60,000.
- One of the major distinctions between over subscription and under subscription is that Over-subscription sees more demand than shares available, while under-subscription sees fewer buyers. The table provides five key differences in terms of demand, allotment methods, and company actions.
- Companies manage oversubscription by using strategies like proportional allotment, lottery systems, or refunding excess money. Some companies may also increase share offerings using a green shoe option or give preference to specific investors.
- In cases of undersubscription, companies may extend the issue period, reduce the share price, or rely on underwriters to buy unsold shares. Adjusting the terms or offering discounts to large investors are also effective strategies.
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Difference Between Over Subscription And Under Subscription? – FAQs
The key difference between over subscription and under subscription is that Over-subscription occurs when demand for shares exceeds supply, while under-subscription happens when demand is lower than the shares offered.
Under-subscription of shares occurs when the number of shares applied for by investors is less than the total shares offered by a company during an issue, indicating insufficient demand or lack of investor interest.
Over-subscription happens when more investors apply for shares than the number offered by a company during an issue. This indicates strong investor demand, leading to a need for proportionate share allotment or refunds.
In under-subscription, shares are typically allotted in full to all applicants. If the issue remains undersubscribed, underwriters may step in to purchase unsold shares to meet the company’s capital-raising goals.
If shares are undersubscribed, the company may extend the issue period, lower the share price, or cancel the issue. Underwriters may also purchase unsold shares to ensure the company raises its intended capital.
Yes, oversubscription is considered a positive indicator for an IPO. It shows strong investor interest and confidence in the company’s potential, which can lead to higher valuations and a successful issue.
If an IPO is oversubscribed, there’s no guarantee you’ll get the full shares applied for. Shares are typically allotted proportionately or through a lottery system, and excess application money is refunded.
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