Under and Over Subscription

Over Subscription of Shares

A company receives applications for more number of shares than what is offered to the public for subscription. This situation is termed as Over Subscription of shares. However, allotment can be only made to the number of shares that have been issued. The company is not allowed to allot more shares than the issued number even if there is a demand for that particular share. Over Subscription of shares is a situation where the buyers show interest in a new stock for which demand exceeds supply. Before the issue of new shares, the number of potential investors is calculated by the study of the market by underwriters. Based on such calculations of people who may or may not purchase such shares, the company issues a fixed number of shares. 


What is Over Subscription?

One may ask what is Over Subscription. The answer is when a company decides to issue new shares or to go public via Initial Public Offering (IPO), the company allots shares based on the application from buyers. However, in reality, a firm might not receive the same number of applications as the number of shares issued. Hence, it is either Under Subscription or Over Subscription of shares.


Under Subscription of Shares

A company offers shares to the public by inviting applications for its subscriptions. Under subscription occurs when the number of shares issued by the company is more than the number of shares applied by the public. Generally, a new company or the company which is not known to the market receives Under Subscription since it does not have a good reputation. 

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What is Under Subscription?

To answer what is Under Subscription, we have to say that it occurs when received applications of shares are less than the number of shares that have been issued. Under-writing of shares is generally chosen by the new or unknown companies which are start-ups or have a new set up. However, if the minimum subscription is received by the company which is receiving Under Subscription, it can allot shares for which application is received.


How to Deal with Over Subscription of Shares?

According to the Securities and Exchange Board of India (SEBI), rejection of application of shares outright by a company is not allowed. They can only do so if there are any mistakes like incomplete information, discrepancies with signature, absence of the required documents, submission of incorrect application amount or wrongly filled application form. 

In case of Over Subscription of shares, a company cannot fulfil public demand but can opt for certain measures to counter the situation. These are:


1. Pro-rata Allotment: This means no application has been rejected. However, the public will not receive the due amount of shares but will receive the ratio of the total number of applicants to the total number of issued shares. For example, let XYZ be a limited company who is going to offer 50,000 shares to the public via IPO. Now, it receives applications for 1,00,000 shares. Likewise, the company opts for this method to allot total shares to every applicant. So the ratio will be 100,000:50,000, i.e. 2:1. So, every application with two shares will receive at least one share. The pro-rata basis allotment makes sure that at least the applicants get some shares against their application. 


2. Rejecting Applications: Let us say, for example, a company gave 10,000 offers yet applications were received for 1,30,00 offers. Therefore, the company may dismiss the overabundant number of utilisations for 3,000 offers and by doing so, application cash should likewise come back to the candidates.


3. Excess Money on Application: At the point when the support of pro-rata allocation is made, the overabundance of cash received on un-apportioned offers are discounted. For certain situations, the overabundance application is appropriated towards the total due on allocation and afterwards to the sum due on calls. By and large, the abundance cash received on the application might be utilised against the cash due on apportioning and overabundance. Thereof, past the alteration, it might be discounted to the allottees, without a particular direction in the inquiry.

FAQ (Frequently Asked Questions)

Q1. What is Over Subscription? 

Ans: At the point when an organization gets applications for shares more than the number of offers it made to people in general, it is known as Over Subscription of shares. For the most part, the organizations with solid budgetary foundation or great notoriety in the market or gainful future possibilities get Over Subscription of shares. As indicated by the rules of SEBI, an organization cannot appropriately reject any application. It can do so where the data is fragmented, there is no signature and/or the application money is inadequate.

The three methods to manage Over Subscription are:

  • Rejecting excess applications

  • Pro-rata allotment 

  • Excess money on application

Q2. What is Under Subscription of Shares? 

Ans: The applications for shares received is sometimes less than the number of shares issued. For example, a company gave 50,000 offers to people in general and the company got applications for 40,000 shares from the general public. This circumstance is called Under Subscription of shares. In these cases, the allotment can be done to the number of shares that are subscribed for 8,000 shares, which is less than the number of shares issued. If the company fails to receive the minimum subscription, shares cannot be allotted and all the application money will be returned to the applicants.

Q3. How to Manage Over Subscription of Shares?

Ans: The three methods to manage Over Subscription are:

  • Rejecting excess applications

  • Pro-rata allotment

  • Excess money on application