Over Subscription of Shares
A company receives applications for more 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 a Subscription of Shares?
Companies or enterprises are the driving force of an economy. They create real value in terms of goods and services for the betterment of the society they serve. Establishing a company or any business requires an initial amount of money as capital. The sheer amount of money required to start any business is often not possible to arrange for an individual or even by a small group of investors for that matter. In such situations, there are some other options available by which they can plan and step ahead in their endeavor. Besides getting a loan from the banking institutions the other suitable option is calling people with money to invest to come together. In this process, the distributed resources are pulled together by the owners for better utilization by establishing a business unit. They are known as the shareholders and are promised a share of profit in proportion to their money invested.
In a traditional way, this is achieved by offering shares to the interested buyers before the establishment of the company. The individuals with the plan of starting a business estimate the required capital that is needed to be procured from the public. After surveying the expected number of buyers in the market they decide the number of shares to be created. These shares are underwritten with the determined value and are issued in an IPO. Shares can also be created after the establishment of a business also. An expansion of the business or for increasing the capacity also needs more capital so it can also be met either by getting a loan or providing shares.
After the offer of shares 3 things can happen. There can be optimum buyers as per the shares offered which is an idle situation to be expected. Contrarily the buyers can be either more than the shares offered or can be less. When applicants buy more with respect to the shares issued then this condition is known as oversubscription. And if the applicants are less than the total shares issued such a condition is known as under subscription.
FAQs on Under and Over Subscription
1. What is Over Subscription?
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
2. What is Under Subscription of Shares?
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.
3. How to Manage Over Subscription of Shares?
The three methods to manage Over Subscription are:
Rejecting excess applications
Pro-rata allotment
Excess money on application
4. How does a company deal with the oversubscription of shares?
When more applicants than the shares issued are ready to buy shares and have provided valid and accurate documents to do so then the company cannot discard any of the contenders as per the SEBI regulations. Instead, it can resort to various remedies and formulas for getting the shares purchased. By the provision of pro-rata allotment all the shares are recalculated and are equally distributed among the total applicants. The capital received doesn't decrease but the value of share with each individual decreases proportionately.
5. What is an IPO?
When a private company wants to become public it extends out its shares in the market to be purchased by the interested investors. This is done by the investment banks who underwrite the shares that are to be offered to the public and list them in one or more stock exchanges. This act of listing shares of a company that is first to be floated in the market as IPO or initial public offering. After the IPO shares get open to be purchased and sold in the financial market or at stock exchanges of a country or abroad.
6. Who is SEBI?
SEBI stands for Security Exchange Board of India. It is a statutory body of the Government of India created in 1992 that came into effect by an act which is known as. Securities and Exchange Board of India Act. It is the regulatory body over all the activities related to the finance market of the companies and the individuals taking part in it in India. It has got its headquarters at different locations to oversee the activities in its jurisdiction. The managing body or authority at SEBI is provided by the central government. Reserve bank of India is also associated with the SEBI for finalizing any decisions taken by it.
7. What is the stock exchange?
Shares or stocks are the units of an enterprise that are available to the general public to be a part of the corporation offering the shares. The shareholders can buy them at their will and can also sell them to anyone if they want to. This right is obtained in the form of bond papers that are known as securities. The exchange of these securities takes place at a particular place or building known as a stock exchange. Traders or stockbrokers facilitate this exchange by linking the customers at the stock exchange. In recent times due to digitalization, this exchange is now taking place more by electronic mediums.
8. Which book is best for understanding the financial markets of India?
The mechanism of running companies or corporations comes under the purview of microeconomics. It deals with the study of economics at the organizational or individual level. But the effects of these small units on the larger economy is covered under the macroeconomy branch. For students of commerce, the chapters of macroeconomy are mentioned in the standard books of NCERTfor Economics. It covers the financial market of India elaborately. articles for various topics under these chapters are also available on the Vedantu website that the students can follow to get a better understanding of the financial market in India.
