Understanding Share Oversubscription

In the context of issuing shares by a company, oversubscription is a common situation that can occur during the subscription period when investors apply to buy shares.

What is Oversubscription?

Oversubscription happens when the total number of shares applied for by the public is more than the number of shares the company has offered to issue. Imagine a company wants to sell 100 shares, but potential investors apply to buy a total of 150 shares. This is an example of oversubscription.

Let's look at the given options and analyze what each scenario means:

• Option 1: Number of shares applied for is equal to the number of shares issued.
  This situation is known as full subscription. The company receives applications for exactly the same number of shares it offered.
• Option 2: Number of shares applied for is more than the number of shares issued.
  This describes the situation where the demand for shares exceeds the supply. This is precisely what oversubscription means. Investors have applied for more shares than the company intended to sell.
• Option 3: Number of shares applied for is less than the number of shares issued.
  This scenario is called under-subscription. It means the company did not receive enough applications to sell all the shares it offered.
• Option 4: Face value of the share is less than the issue price of the share.
  This relates to whether shares are issued at a premium (issue price > face value) or discount (issue price < face value), or at par (issue price = face value). While important concepts in share issuance, this comparison between face value and issue price does not define oversubscription. Oversubscription is about the *number* of shares applied for versus the *number* of shares issued.

Based on the analysis of the options, oversubscription specifically refers to the situation where the number of shares applied for by investors is greater than the number of shares the company is offering to issue.

Handling Oversubscription

When oversubscription occurs, the company cannot allot shares to everyone who applied for the full amount they requested, as the demand is higher than the available shares. Companies typically handle oversubscription through methods like:

• Pro-rata allotment: Allotting shares proportionally to applicants based on the number of shares they applied for. For example, if applied shares are double the issued shares, an applicant who applied for 10 shares might get 5.
• Lottery system: Randomly selecting applicants or applications for allotment.
• Combination of methods: Using a mix of pro-rata and lottery.

Excess application money received due to oversubscription is usually refunded to the applicants partially or fully, depending on the allotment basis.

Additional Information on Oversubscription

Oversubscription is often seen as a positive sign for a company's Initial Public Offering (IPO) as it indicates high investor interest and confidence in the company's prospects. However, managing the allotment process fairly and efficiently is crucial. The regulations governing share issuance, like those set by SEBI in India, often provide guidelines on how companies should handle oversubscription and the subsequent allotment of shares.