When a company introduces its shares to the public for the first time, many investors rush to apply, hoping to be part of it.
Often, when an issue is popular, the number of shares applied for is much higher than the amount available, resulting in an oversubscribed IPO.
To make the right decisions, investors need to know how IPO allotment works.
How IPOs Affect Investor Portfolios
An IPO is when a company offers shares to the public to raise money. It gives investors the opportunity to engage early with the company’s stock market path.
Yet, some applicants do not receive shares, mainly when there are more people willing to buy shares than there are shares available.
In case of an oversubscribed IPO, both regulators and companies use set rules to make sure shares are distributed evenly among retail, institutional, and non-institutional investors.
Being familiar with this process allows you to manage your expectations and apply them when it’s most advantageous.
How Allotment Takes Place In An Oversubscription
- When an IPO allotment is oversubscribed, there’s usually a process used for assigning shares.
- A lottery system takes place whenever there is an oversubscription in any category.
- First, minimum lot sizes are allocated, and only then is there additional distribution.
- Pro-rata can be the right way for allocating available shares for non-retail categories.
- You will get your refund right away if the money is not allocated to any expenses.
For ordinary investors, the lottery system is very important. If you try for several lots, you could be awarded just one lot or none, depending on how many tickets have been sold and how the lottery is run.
As a result, large investors cannot take over all the shares for small investors.
What Influences A Person’s Chances Of Getting Allotment
Although investors cannot manage how companies are allotted, they should notice a few aspects.
- Select the proper application size and fill out the details correctly.
- Give yourself enough time to apply so you don’t have technical issues.
- Monitor the announcements to check the status of your subscription.
- Learn when the deadline is for submitting your application.
- Remember, if a lot of people apply, the chances of receiving an allotment decrease.
- Applying through different demat accounts or family members can help a little, since every account goes into the lottery on its own.
What Happens Once The Allotment Has Been Made
After the results of the IPO allotment are announced, you should:
- Check your allotment status on the registrar’s website.
- Make sure you get refunds for any unassigned amounts.
- Watch the listing date and decide in advance whether to sell or keep your investment.
- Re-examine the company’s basic information before you choose.
- Watch how investors feel about the stock just before its debut.
What Are The Benefits Of An Oversubscribed IPO?
The demand is more in an oversubscribed IPO than the supply. So, you can easily increase the price of your shares or create a balance between the demand and supply to raise more funds.
However, it is not just about raising funds. It is also about doing so on your own terms.
Furthermore, you can always retain the shares of your company and use them as management incentives or to meet future capital needs.
In an oversubscribed IPO, you can use those shares to accommodate the increasing demand without new security registration.
Moreover, an oversubscribed IPO always helps you earn more capital for your company. Investors will pay higher prices if they genuinely want to own a share of your company.
What Are The Cons Of An Oversubscribed IPO?
However, if the price of your shares goes up beyond the amount they are willing to invest, they will price out.
Also, if a group of investors is unhappy with the rising price of your shares in an oversubscribed IPO, they may create a herd and be a part of a hot IPO.
Now, a hot IPO comes with many demands. Hot IPOs have high risks, and despite gaining all the media attention, hot IPOs can be damaging if your company does not have a proven track record.
Also, in a hot IPO, the initial price of your shares will be higher than the fundamental value. However, the prices only go up to cause a massive or unmanageable drop.
What Are The Real-Life Examples Of Oversubscribed IPO?
The IPO of Facebook in 2012 was an oversubscribed IPO. Now known as Meta, Facebook wanted to raise $10.6 billion through its IPO. The price of each share was $28-$35 each.
However, to make the most of the oversubscribed IPO, Meta pushed a 15% rise in the price of the shares. So, the price of each share reached $34 to $38.
Furthermore, to optimize the benefits, Meta offered more shares to willing investors. Initially, Meta was to disburse only 337 million shares.
However, with the oversubscription, it decided to disburse 421 million shares, pushing a 25% hike.
Overall, the outcome of the oversubscribed IPO was:
- Raising the price and supply of the shares to optimize benefits.
- Diminishing a bad oversubscription by disbursing more shares in the reserve.
- An increase of 40% in the value of shares.
- Facebook (Meta) earned more capital than the target set.
- As a company, it carried a higher valuation.
- Investors have access to the shares they are looking for.
However, the success of this IPO only lasted for a few months. Soon, it was clear that Facebook was not worthy of the new IPO price at that point in time.
Within the first four months of the IPO, the price of Facebook shares dropped dramatically. It took Facebook till July 13th to go beyond the set share value.
Having said that, it has been a steady growth since 2013.
Final Thoughts: An Oversubscribed IPO Can Be Successful, But Only With A Proven Track Record
Understanding how IPO allotment works helps investors manage the thrilling and competitive IPO process.
Even if the demand for shares is high, adequate knowledge will help you prepare your application and expect the best outcome. An oversubscribed IPO can be successful, but it takes more than luck; you also need to plan and be aware.
Also, if your company does not have a proven track record or a legacy, the valuation of the shares may drop drastically and take some time to recover.
So, an oversubscribed IPO is a step you must take with utmost caution.
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