Subscription of Shares, Minimum Subscription, Over-Subscription, Under Subscription

Subscription of shares refers to the process where investors apply for shares issued by a company. When a company offers shares to the public through an Initial Public Offering (IPO) or other methods, investors submit applications to purchase them. Based on demand, the company may receive full, over, or under-subscription. Full subscription means the exact number of shares offered is applied for, over-subscription occurs when demand exceeds supply, and under-subscription happens when applications are fewer than the issued shares. Companies allocate shares based on predefined criteria, ensuring fair distribution among investors while adhering to regulatory guidelines.

Minimum Subscription of Shares:

The minimum subscription of shares refers to the minimum number of shares that a company must sell to raise a certain amount of capital to proceed with an issue, whether through an Initial Public Offering (IPO), Follow-on Public Offering (FPO), or any other public offering. This minimum subscription amount is typically defined in the prospectus and is a regulatory requirement, ensuring that the company has sufficient investor interest to justify proceeding with the issue.

In India, for instance, the minimum subscription requirement for public offerings is usually 90% of the total issue size. If the company fails to achieve this minimum subscription level, the issue is considered unsuccessful, and the funds collected (if any) must be refunded to the investors. This safeguard protects investors from getting involved in companies that may lack sufficient investor confidence or face difficulties in raising the required capital.

The concept of minimum subscription ensures that the company has a strong foundation of capital to fund its operations or expansion. It also prevents situations where the company might not have enough funds to cover operational or project expenses, thus providing a level of financial security.

Moreover, achieving minimum subscription enhances the credibility of the company in the eyes of investors and regulators, as it demonstrates market confidence in its business model and financial stability.

Over-Subscription of Shares:

Over-subscription occurs when the demand for shares in an initial public offering (IPO) or any other public share issue exceeds the number of shares offered by the company. This situation indicates high investor interest in the company’s shares, often due to favorable market conditions, strong company performance, or investor confidence in the business’s future prospects.

When an issue is over-subscribed, investors apply for more shares than what is available. For example, if a company issues 1,00,000 shares, and investors apply for 2,00,000 shares, the issue is considered over-subscribed by 100%. This scenario usually results in the company having to make decisions on how to allocate shares fairly among investors.

In cases of over-subscription, companies may use various methods to allocate shares, such as:

1. Pro-rata Basis: Shares are allocated in proportion to the number of shares applied for by each investor. If an investor applied for 100 shares and the issue was over-subscribed by 2:1, they would receive only 50 shares.

2. Lottery System: In some cases, especially when demand far exceeds supply, a lottery system is used to randomly allocate shares to applicants.

3. First-Come, First-Served: Shares may be allotted based on the order in which applications are received, with early applications being given priority.

Under Subscription of Shares:

Under subscription occurs when a company issues shares to the public, but the total number of shares applied for is less than the number offered. This indicates low investor demand, possibly due to high pricing, poor market conditions, or weak company reputation. Unlike oversubscription (excess demand), under subscription means the company fails to raise the intended capital.

To resolve this, companies may extend the subscription period, revise the offer price, or rely on underwriters (if any) to purchase the remaining shares. If the minimum subscription (as per regulatory requirements) is not met, the issue may be canceled, and application money refunded. Under subscription can negatively impact the company’s market perception and future fundraising prospects.

Features of Under Subscription:

• Lower Capital Raised

Under subscription means the company cannot collect the full projected capital, forcing it to seek alternative funding (e.g., loans, private placements). This may delay expansion plans or increase financial risk due to reliance on debt.

• Underwriter’s Role Becomes Critical

If shares are underwritten, the underwriter must purchase the unsubscribed shares, ensuring the company receives the intended funds. This safety net comes at a cost (underwriting commission).

• Regulatory Compliance Issues

Companies must meet minimum subscription requirements (e.g., 90% in some jurisdictions). Failure may force refunds and cancellation, requiring re-filing with regulatory bodies (e.g., SEBI, SEC).

• Negative Market Sentiment

Low subscription signals weak investor confidence, potentially lowering share prices in secondary markets. It may also affect future IPO prospects and credit ratings.

• Extended or Revised Offer

Companies may reprice shares or extend the subscription period to attract investors. However, this delays capital availability and increases administrative costs.

• Impact on Share Allotment

Since demand is below supply, all applicants receive full allotment (no proportional distribution). This contrasts with oversubscription, where allotment is partial.