Undersubscribed IPO – What Happens if the IPO is Undersubscribed?

Undersubscribed IPO

What is Undersubscribed IPO?


When a company in India issues shares to the public. Subscribers will “subscribe” to the offering through the underwriters of the issue. Companies normally hire an investment bank as their underwriters during an IPO process.
Underwriters assist companies to evaluate the correct IPO valuation.

Let’s take the example of Undersubscribed IPO.

ABC company is going public. Investors do quite a bit of business through one of the underwriting brokers, so you are given the opportunity to purchase shares in the offering.
One of the key roles of the underwriter is to make sure that all available shares in the offering have been successfully placed with subscribers.

Underwriter(s) require to balance the demand for the offering with the proposed offering price range.
If the price is too low, then the offering will be “oversubscribed”,
which means too much demand. If the price is too high, then the offering will be “undersubscribed”,
which means too little demand.

Companies issue IPOs to the public in order to raise capital.
Therefore, they are obviously interested in looking at their shares priced as high as possible.

If there is too much demand for an offering, then an issuing company will be unhappy that the offering wasn’t made available at a higher price.
If the issue is “undersubscribed”, then demand for the offering is poor and the underwriting brokers will likely lower the price range for the offering.

The affected company has another option.
Before the IPOs process, they can get into an agreement with their underwriter(s) stating that the latter would be required to purchase unsold shares in case of under-subscription.

Listing Gains on Undersubscribed IPO?


Listing gains in an IPO can be described as the difference between the allotment price at the time of the IPO and the stock price on an opening day at the stock exchange.

If the launching day’s stock price is higher, the difference is called listing gain.
Normally, oversubscribed IPOs tend to make gains on the launching day, of the stock exchange.
The under-subscribed IPOs, meanwhile, rarely record listing gains. However, that’s not to mean the stock is condemned to underperform throughout.

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IPO Undersubscribed: Does Anyone Lose Money?


Due to under subscription of IPO no one will lose amount because now the subscription is done by ASBA service.

The amount will be handed over once the stock is allotted,
if there is a loss due to lower listing price,
then it is the risk a prudent investor is aware of the maxim investment is subjected to market risk.

If in case of an adverse listing one needs to wait patiently until the recovery takes place else book one loss.

Also Read Listing Gains in IPO | Highest Listing Gain IPO in India |IPO Listing Price

Tips for Avoid Undersubscribed IPOs


Firstly, check the grade assigned by SEBI i.e. Securities and Exchange Board of India by the company floating an IPO. The grading is done on a Five Point scale.
The grade will be higher if the issuer’s financial condition is in good stead and compares well to its competitors in the market.

Next step, it is advisable to go through the company’s red herring prospectus in detail.
The document, which is uploaded on SEBI’s authorized website, provides a range of details about the company’s finances, future plans, among others.

Also Read IPOs Definition | Types of IPOs | Fixed Price vs Book Building | Investors Types | Eligibility 2021