Difference between Oversubscription and Undersubscription

Any company in order to raise capital, issues shares in various forms like Equity shares, preference shares, etc. When any private company first issues the shares to the general public, it is known as an Initial Public offer (IPO). The general public and various investors send applications to the company in order to buy shares directly from the company. On the basis of applications received by the company from the general public and various kinds of investors, subscription of shares can be divided into two main categories: Oversubscription of Shares and Under subscription of shares. Oversubscription of Shares is when applications received for the shares exceed the actual shares offered by the company whereas Undersubscription of Shares is when shares offered by the company exceed the applications received to buy the shares.

What is Oversubscription of Shares?

When applications to buy the shares exceed the actual shares offered by the company, it is known as the Oversubscription of shares. Under this, investors apply for more shares than offered shares, creating a situation of oversubscription ratio. 

Oversubscription typically occurs when investors have a significant image of the company in mind. The high demand for company stocks indicates its strong financial health and brand value as more and more people want to buy it. When excess applications are received in order to purchase the shares of the company, practices like declining applications and pro-rata allotment are practised by the company. Oversubscription may lead to disappointment in the mind of investors as they have chances to receive less or no shares. These practices help the company to allocate limited resources among a large number of applications. The situation of oversubscription commonly arises in the case of an Initial Public Offer (IPO), where the demand size is relatively broader as compared to the supply size.

Shares Applications > Shares Offered

Key takeaways from Oversubscription of Shares:

• This type of situation is very common in Initial Public offer (IPO).
• More demand for shares represents the company’s strong financial position, leading to increased prices of shares in the market.
• Major handling procedure of Oversubscription of Shares includes declining applications and/or allotting shares on a pro-rata basis.

What is Undersubscription of Shares?

When the applications received to buy the shares are less than the actual shares offered by the company, there arises a situation of Under Subscription of shares. This situation is the opposite of the oversubscription of shares. Offered shares are more than the application received for the shares. This situation is also known as underbooking. Undersubscription gives an alarm to the company of its declining image in the market. Factors like the company’s weak financial health, weak management system, lower financial growth over the years, etc. lead to the situation of undersubscription.

In this scenario, a company only accepts and allots shares to the applicants only after receiving applications for at least 90% of the total shares issued for the subscription. But in case, the company does not receive at least 90% of the amount which they intend to sell, the whole issuing drive got cancelled and all the money received against the share application is returned to the applicants.

Shares Application < Shares Offered

Key takeaways from Undersubscription of Shares:

• Under subscription is a negative signal for the company as it shows less/no demand for the shares of the company, depicting a negative image.
• Factors like the company’s weak financial health, weak management system, lower financial growth over the years, etc. lead to the situation of undersubscription.
• Company must receive at least 90% amount of the amount which they intend to sell in order to carry the process further, otherwise, the drive gets cancelled.

Differences between Oversubscription and Under subscription of Shares

Basis	Oversubscription of Shares	Undersubscription of Shares
Meaning	When the application received for shares exceeds the actual shares offered.	When the actual shares offered exceed the application received for shares.
Impacts	High demand leads to: Good image of the company Increased prices of the shares low	Low demand leads to: Poor image of the company Decreased prices of the shares
Customer Experience	Potential buyers have to wait for the allotment of shares and may face the decline of applications or pro-rata allotment.	If the company does not receive at least 90% of the amount which they intend to sell, the whole issuing drive got cancelled.
Refunds	Refunds are being made for excess applications received.	Refund situations arise in the case when the company does not receive at least 90% of the amount it wishes to sell.
Minimum subscription	No questions of minimum subscription arise in this case.	Company sets a bar for minimum subscriptions to be made under such conditions.
Investors’ Mindset	Investors have a positive image of the company in mind, hence over subscription arises.	Under subscription arises due to a negative image in the mind of investors regarding the company.