Oversubscription refers to a situation where the demand for a company’s shares offered in an IPO is greater than the number of shares being offered by the company. Oversubscription is usually shown in multiples like a stock got oversubscribed 3 times. A 3 times over subscription multiple means that the demand for the stock was thrice the number of shares that were offered by the company in its IPO.
Companies whose shares are oversubscribed basically have the notion to rise after its listing as the demand is more than the supply, which eventually pushes the prices higher. In many cases the company might even increase the number of shares to be allotted to such investors and also increase the allotment price to fulfill the demand.
A simple example of such oversubscription in the recent markets was during the IPO of Avenue Supermarts (D-Mart) where the stock was oversubscribed 104.5 times – which means that for each single share being offered in the IPO, there was demand to buy 105 shares of the company. The company’s share price on the listing day rallied from 299 (IPO price) to 600 (listing price) and beyond because of the high demand and lower supply of shares in the market.
Though oversubscription indicates a high interest in the stock, it does not always guarantee that the stock will list at a huge premium on listing day.