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IPO Oversubscription Versus Listing Gains

IPO Oversubscription Versus Listing Gains

What do we understand by IPO oversubscription? It shows up the investor demand for an IPO. For example, if the issue is for 4 crore shares and the bids were received for 50 crore shares of the IPO then the issue is 12.5 times oversubscribed. Normally oversubscription is expressed separately for the 3 categories; retail / non-institutional / QIB and also the consolidated oversubscription.

What Does Oversubscription Indicate?

Normally oversubscription of an issue is indicative of the attractiveness of the value perception of an IPO. It is also an indication of the state of markets and the past experience with IPOs. To get a clear picture one needs to look at the specific category oversubscription; retail, non-institutional and QIB category. Normally, better listings are not assured just because the issue is oversubscribed but it has been observed that in the past, issues that get substantially oversubscribed tend to list at a fair premium to the issue price. However, that is just a broad observation.

What Actually Impacts and Drives Oversubscription?

About oversubscription
The most important factor that drives the oversubscription of the IPO is the pricing of the IPO. If the pricing is very conservative with the intent to leave much on the table for the IPO investors, then the IPO will get a good oversubscription. The situation may be very different if the valuations are too steep.

Depends on market conditions
The state of the market also impacts the extent of oversubscription. When IPOs are brought out at the peak of the markets or in the midst of rising markets then the oversubscription is automatically a lot higher. The situation can change drastically in the midst of bad market conditions, even for the best of IPOs.

About funding costs
The funding costs make a lot of difference to the IPO oversubscription, especially for the non-institutional category. This category of investors typically prefers to borrow and invest. That means they must cover the cost of their investment and also the cost of their funding. In most cases, the overall cost becomes too high even for breaking even.

IPO overload in markets
Bunching of issues can make a big difference to the extent of oversubscription. For example, if the IPO of a private company is bunched in the midst of large divestment plans of the government of India, then the oversubscription is likely to be much lower. The limited investable corpus gets spread out evenly among the issues.

Track record
Past experience is the most important trigger. If investors see consistent premium listing of IPOs and subsequent outperformance, then the demand for IPOs is a lot higher and those results in heavy oversubscription for IPOs. This is very true of the retail category and the HNI category of investors.

IPO Oversubscription and Listing Price

There is a link between IPO oversubscription and the listing price but there is nothing certain to fall back upon

Case of Avenue Supermart
We have seen cases like Avenue Supermart and Shankara Building Products which saw smart oversubscription and also saw a very good listing as well as strong post listing performance. But we have also seen a lot of IPOs getting steeply oversubscribed but ending up disappointing post listing. Actual valuations do matter, especially when markets are vulnerable.

Oversubscriptions through IPO funding
Normally, when the oversubscription is largely driven by the HNI segment one needs to be cautious. HNIs typically finance their IPO applications and hence they will look at a good opportunity to sell and exit the IPO on listing. This is more so if the listing price of the IPO is very attractive.

Importance of retail participation
Normally, it is very strong retail oversubscription that sustains the price of the IPO at an elevated level after the IPO. That puts the link between oversubscription and listing price in perspective.

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