The SEBI (Securities and Exchange Board of India) requires every IPO to get at least an overall 90% subscription to proceed to the allotment process. If an IPO fails to get a 90% overall subscription (including the QIB, NII, and Retail category) by the last day of the issue then the IPO is cancelled and the money collected from the investors is refunded back.
What is an IPO?
IPO stands for Initial Public Offerings which is a process where a private company turns public by selling some of its Equity shares to Investors in return for their money. This is done to mainly raise capital.
IPO Subscription is a big process. It involved participation of the following parties:
- Investors- individuals, QIB
- Brokers- it can be banks or brokerage companies. (For example- Zerodha, Yes Bank securities)
- Stock Exchanges- BSE, NSE
- Registrar
To determine if the IPOs are oversubscribed or undersubscribed, you have to understand how IPO subscription is determined. To do that you have to know the shares offered and the bid. All this information is available on the broker & exchange website.
What is the Minimum Subscription for IPO?
The percentage of subscription that is required to consider as an IPO to be fully subscribed is 100% but the bare minimum amount of subscription that is required for the IPO to be successful is 90%.
For example, if a company is issuing 1000 shares in total and the overall bids received is for 1400 shared then the overall subscription can be considered to be 1.4 times which is known as Oversubscription. Whereas if the total number of bids turns out to be 600 shares then the IPO is considered to be undersubscribed at only 60%. In this case, the IPO is scrapped and all the money collected till then has to be returned to the investors as the IPO failed to get the minimum subscription of 90% of 900 shares in this case.
What happens if the IPO is Under Subscribed?
If any IPO fails to get the minimum subscription which is 90%, then the IPO is called off as according to SEBI (Securities and Exchange Board of India) every company should get at least 90% before going ahead with the allotment process.
IPOs are divided into 3 categories for the subscription process which are QIB, NII & Retail.
The subscription of an IPO is considered as a total of all three categories and not anyone individually.
Different Scenarios
Most investors apply for an IPO under the Retail segment hence we will study 2 different scenarios wherein one the Retail segment is fully subscribed but the overall IPO is not fully subscribed and the other where the retail segment is Fully subscribed but the overall IPO is not fully subscribed.
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If the IPO is Fully Subscribed but the Retail Category is Undersubscribed- In case the overall IPO is fully subscribed but undersubscribed in the Retail category then all the investors who had applied under the Retail category will get Full allotment for the shares applied. If one had applied for multiple Lots under the Retail category then they will be allotted the full quantity of shares that they had applied for.
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When Retail category is Oversubscribed but Overall IPO is Undersubscribed- In a case where the Retail Category is fully subscribed or oversubscribed but the overall IPO is subscribed by only 85% including the QIB & NII category then the IPO has to be canceled as the minimum subscription of 90% is not met hence all the money collected from the Retail participants as well as the Qualified buyers and NII’s will be returned by the company and the IPO will be scrapped.
What happens if IPO Undersubscribed?
By the above discussion it must be clear that an IPO has to get a minimum of 90% Subscription including all the three categories (QIB, NII &Retail). Then only it will be processed further to the allotment.
And by any chance, if the IPO fails to get the minimum subscription status of 90% by the last day of subscription, then the overall IPO will be scrapped and all the money collected by the investors will have to be returned.