The term unsubscribed refers to shares in an initial public offering (IPO) that are not purchased ahead of the official release date. This lack of demand indicates little to no interest in the security prior to the company’s public debut.
Put simply, being unsubscribed signals that the demand for these shares is low. Analysts and investors might interpret uninspired subscriptions as a sign that an IPO is overpriced. This scenario can impede companies from raising the capital they need to achieve their objectives.
Key Takeaways
- Unsubscribed Shares: A portion of shares in an IPO that remain unsold.
- Demand Imbalance: Unsubscribed IPOs indicate lower share demand than supply.
- Contributing Factors: Reasons for being unsubscribed could include an overpriced IPO, company issues, or market conditions.
- Capital Implications: Low subscriptions mean companies may struggle to raise necessary funds for operations or growth plans.
- Alternative Actions: Companies might resort to increased debt or selling their business if their IPO remains unsubscribed.
The Essence of Unsubscribed Shares
Private companies undergo the IPO process to transition into public companies, thus allowing them to sell shares and raise funds. Investors, often institutional ones, place orders for newly issued securities before their official release in what’s known as an IPO subscription.
Understanding Unsubscription
Unsubscribed shares are those left unsold before the IPO, suggesting that demand does not meet the overall supply. This overpricing occurs when the price set for the IPO outweighs bidder interest, typically gauged by companies and their underwriters.
Capital and Operational Impact
Companies execute IPOs with a target capital amount to support their operational and growth strategies. If unsubscribed, businesses may face operational disruptions or stifling in their growth plans. For investors, a lack of interest may suggest a potential IPO flop.
Unsubscribed shares fluctuate according to open market dynamics. They can subsequently be traded on the secondary market among investors, mainly via public stock exchanges or brokers.
In undersubscribed IPOs, the issuing company may retract remaining shares and refund the few expressed interests, unlike oversubscribed IPOs that see overwhelming demand and can adjust prices or offer more shares to fulfill demand.
Preparing for an IPO
Investment banks generally underwrite a company’s IPO. These banks assess and aim for an optimal offering price to secure adequate subscription levels. Overpriced IPOs often result in unsubscribed portions, which subsequently affect the overall pricing of the entire shares lot.
Various Reasons for Unsubscribed Shares
An IPO may remain unsubscribed for several potential reasons including:
- High Share Prices: If set too high, potential investors may shy away.
- Internal Company Issues: Financial irregularities or management problems can deter investment.
- Lack of Awareness: Poor marketing and promotion may lead to insufficient investor knowledge.
- Market Conditions: Unfavorable economic or market conditions undermine subscription rates.
- Poor Timing: Scheduling IPOs during financial unrest or uncertain market periods can negatively impact subscription rates.
Exploring Other Funding Strategies
Successful IPOs bring substantial capital aiding business longevity and growth plans. However, failed or unsubscribed IPOs force companies to seek alternative funding methods such as:
- Debt Financing: Securing loans or taking on additional debt.
- Government Grants: Applying for various public funding opportunities.
- Additional Investor Rounds: Engaging existing investors in further financing rounds.
- Business Sale: Considering a full or partial sale of the company.
Hypothetical Example of Unsubscribed Shares
Imagine Company X plans to go public by issuing eight million shares in its IPO. The investment bank underwriting the IPO prepares the necessary documentation and pitches around for potential buyers. Suppose buyer interest is found only for seven million out of eight million shares set at $20 apiece. Thus, Company X finds itself with a million shares unsubscribed, not meeting its capital-raising target.
Additional Inquiries on IPOs
What Is the Purpose of an Initial Public Offering?
A primary goal of an IPO is for companies to secure funds through share sales. This process provides capital for continued operations and various growth initiatives while potentially allowing the business to avoid additional debt.
What Is an Oversubscribed IPO?
An oversubscribed IPO indicates high investor interest, surpassing the available share supply. Underwriters might then adjust the offering price or increase the number of shares to meet the demand.
Who Buys Unsubscribed Shares?
If an IPO remains unsubscribed, the initial underwriting bank(s) might be obliged to purchase the remaining unsold shares.
How Do IPO Underwriters Get Paid?
Underwriters, selected by the issuing company, take a lead role in the IPO. Most commonly, they are assured a fee—typically a percentage of IPO proceeds—ensuring they fulfill financial due diligence. The lead underwriter garners a portion of the gross spread, while the rest is divided among other underwriters. The issuing company may cover extra, out-of-pocket expenses brought about during the underwriting process.
Related Terms: Stock Market, Investment Banking, Underwriting, Secondary Market.
References
- ICICI direct.com. “What is an undersubscribed IPO?”
- Diligent. “What Happens When Your IPO Fails?”
