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
What Actually Impacts and Drives 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.
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.