Definition
Undersubscription
Undersubscription is when an IPO fails to attract bids for all the shares on offer.
SEBI rules require a book-built IPO to achieve at least 90% subscription of the net offer, and at least the minimum QIB subscription, for it to proceed. If these minimums are not met, the issue is withdrawn and the blocked funds are released to applicants.
Undersubscription is more common for SME IPOs and weaker mainboard issues. Underwriters may step in to subscribe to a shortfall if the issue is underwritten, but persistent undersubscription usually signals poor pricing or weak investor appetite.
Related terms
- OversubscriptionOversubscription is when an IPO receives bids for more shares than are on offer, expressed as a multiple such as '10x'.
- UnderwritingUnderwriting is the process by which an insurer evaluates a risk, decides whether to accept it, and on what terms and premium.
- Withdrawal of IssueWithdrawal of issue is when a company pulls its IPO before listing, either because investors did not subscribe enough or because market conditions and regulators force its hand.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.