Subscription to a public offer is an indicator of primary market performance
The initial public offering (IPO) of Life Insurance Corporation (LIC) of India got off to a promising start, oversubscribing Rs 5,630 crore in shares earmarked for anchor investors at the top end of the price range. The LIC IPO opened to anchor investors on May 2. Anchor investors are high-profile institutional investors who get shares before retail and other investors can buy them and are required to promise to hold them for a specified amount of time after the company is listed. The IPO is open to other investors today and will close on May 9.
So, what exactly is stock oversubscription? When a company issues shares for public purchase, the IPO can be oversubscribed or underwritten.
Oversubscription of Shares
When the number of shares offered is less than the demand for them during the IPO subscription process, the IPO is considered oversubscribed. This means that the company has received more applications from investors than the number of shares made available to the public.
An oversubscribed IPO suggests that investors are eager to buy the company’s shares, resulting in a higher price and more shares for sale. Ultimately, however, the demand must align with the underlying business fundamentals of security. An oversubscription therefore does not automatically mean that the market will support the higher price for a long time.
When an IPO is oversubscribed, not all applications are approved and the shares are allocated pro rata. Here the subscribed capital and the subscribed capital are equal. For those applications that are rejected, the money will be refunded.
One of the benefits, when a security is oversubscribed, is that the company can either offer more securities, increase the asset’s price, or do a combination of both to meet demand and raise additional capital.
Companies almost always withhold a significant portion of their shares to cover future capital needs and management incentives. So there is usually a permanent reserve of shares that can be added if an IPO is heavily oversubscribed without the need to register new securities with regulators.
Share Subscription
The term subscribed describes a situation where the demand for a stock is less than the number of available shares. Here, the number of shares requested by the public is less than the number of shares issued by the company. Subscription offers sometimes result from overpriced securities for sale or ineffective marketing to potential investors.
A signed IPO is usually a poor indicator, as it shows that individuals are not interested in investing in the company’s offerings.
Here the subscribed capital is higher than the subscribed capital. In the event of a sub-subscription of shares, no pro rata allocation will take place. Also in this case there is no requirement for a refund.
