What Is Under-Subscription in an IPO?
An IPO is under-subscribed when the total bids received are less than the total number of shares offered in the IPO. If an IPO offers 1 crore shares but receives applications for only 60 lakh shares, the IPO is under-subscribed at 0.6 times. Under-subscription signals weak investor demand and is generally a negative indicator for the IPO's near-term listing performance. SEBI has rules that govern what happens in such scenarios.
Causes of Under-Subscription
- Overvaluation: The issue price is too high relative to the company's fundamentals or listed peers.
- Weak business model or poor financial performance.
- Unfavourable market conditions: broad market sell-off during the IPO period.
- Negative news about the company, industry, or promoters during or before the IPO.
- Poor investor awareness or marketing of the IPO.
What Happens When an IPO Is Under-Subscribed?
SEBI regulations require that an IPO must receive a minimum subscription of 90% of the issue size to proceed with allotment. If subscription falls below 90%, the IPO must be withdrawn and all application amounts returned to investors. The company can then choose to refile the IPO later with a revised structure or pricing.
Under-Subscription in Specific Categories
Under-subscription in the QIB (Qualified Institutional Buyer) category is especially significant. Since QIBs are sophisticated institutional investors, their lack of interest signals deeper valuation or business concerns. Under-subscription in QIBs often leads to a weak or discount listing even if retail and HNI categories are fully subscribed.
Under-Subscribed IPO vs. Withdrawn IPO
| Situation | Outcome |
|---|---|
| Subscription below 90% at close | IPO withdrawn; full refund to applicants within 6-8 days |
| Subscription at 90-100% | IPO proceeds; full allotment to all applicants |
| Subscription above 100% | Proportionate or lottery allotment depending on category |
Historical Under-Subscribed IPOs in India
Several companies have had to withdraw or revise their IPOs due to insufficient demand in India, particularly during broad market downturns or when issue pricing was aggressive. Some companies return with revised pricing months or years later and succeed. Understanding why an IPO was under-subscribed is part of evaluating the company's fundamental attractiveness.
Key Takeaway
Under-subscription is a clear market signal of limited investor confidence in an IPO's value at the offered price. As an investor, an undersubscribed IPO should prompt extra due diligence about why institutional investors chose not to participate. Use the Lemonn app to track IPO subscription data across categories and make investment decisions based on demand quality, not just quantity.
