[Commerce Class Notes] on Under and Over Subscription Pdf for Exam

A company receives applications for more shares than what is offered to the public for subscription. This situation is termed as Over Subscription of shares. However, allotment can be only made to the number of shares that have been issued. The company is not allowed to allot more shares than the issued number even if there is a demand for that particular share. Over Subscription of shares is a situation where the buyers show interest in a new stock for which demand exceeds supply. Before the issue of new shares, the number of potential investors is calculated by the study of the market by underwriters. Based on such calculations of people who may or may not purchase such shares, the company issues a fixed number of shares. 

What is a Subscription of Shares?

Companies or enterprises are the driving force of an economy. They create real value in terms of goods and services for the betterment of the society they serve. Establishing a company or any business requires an initial amount of money as capital. The sheer amount of money required to start any business is often not possible to arrange for an individual or even by a small group of investors for that matter. In such situations, there are some other options available by which they can plan and step ahead in their endeavor. Besides getting a loan from the banking institutions the other suitable option is calling people with money to invest to come together. In this process, the distributed resources are pulled together by the owners for better utilization by establishing a business unit. They are known as the shareholders and are promised a share of profit in proportion to their money invested. 

In a traditional way, this is achieved by offering shares to the interested buyers before the establishment of the company. The individuals with the plan of starting a business estimate the required capital that is needed to be procured from the public. After surveying the expected number of buyers in the market they decide the number of shares to be created. These shares are underwritten with the determined value and are issued in an IPO. Shares can also be created after the establishment of a business also. An expansion of the business or for increasing the capacity also needs more capital so it can also be met either by getting a loan or providing shares.

After the offer of shares 3 things can happen. There can be optimum buyers as per the shares offered which is an idle situation to be expected. Contrarily the buyers can be either more than the shares offered or can be less. When applicants buy more with respect to the shares issued then this condition is known as oversubscription. And if the applicants are less than the total shares issued such a condition is known as under subscription.