When a debut fails: What happens if an IPO remains undersubscribed in India?

In a year when the world IPO market volumes are in the trenches, down about 12%, India is an exception. So far this year, the NSE and EEB I’ve seen 66 motherboards and 213 SME IPOs (initial public offering). And, according to experts, the express IPO does not intend to stop anytime soon.

According to the EY Global IPO Trends Q2 2024 report, with a total of 76 major IPOs scheduled for FY2024, India’s IPO market has seen a 111% jump from the mere 36 listings that were seen in 2023 .The amount of funds raised through these IPOs has also increased. , from Rs569 billion in FY23 to Rs619 billion in FY24.

While all this highlights the immense and ongoing success of India’s primary markets, have you ever wondered what happens if an IPO is not fully subscribed? Or, in simple terms, what if people don’t subscribe to all the shares the company offered during the issuance?

The country’s biggest IPO to date, that of Hyundai Motor India, was subscribed 0.19 times on the second day and is apparently heading in that direction. The Rs 27,870.16 crore IPO offered a total of 9,97,69,810 shares, of which
only 1,93,40,223 shares have been tendered so far.

One IPO with subscription can negatively damage a company’s image and reputation. To understand this, let’s take the example of company A, which launched its IPO between April 10 and 12 this year, where it offered 5,00,000 of its shares to investors, with a price band of Rs 100-110.

Now, there are two possibilities: either investors believe the company has a bright future ahead of them and snap up all the shares on offer. Or the IPO fails to attract enough investors, which means there are fewer buyers, compared to the A shares offered during the issuance. As a result, only 3,00,000 of the 5,00,000 shares offered are subscribed.

In the latter case, that is, where the IPO is partially subscribed, what does the company do?

If the subscription for the issue exceeds 90% (4,50,000 shares in case A), investors will receive their shares and the issue will be considered successful.

But here, as is the case with A, less than 90% of the issue was subscribed. Therefore, A will have two choices:

1. Extend the deadline for a maximum of 10 days, in order to arouse public interest.

2. Reduce the issue price, that is, modify the existing price range. In this case, the issuance will automatically extend for three days. Note that while this change is not possible in a fixed-price IPO, most IPOs today happen through book building, which offers this flexibility.

3. If nothing works, A’s last resort is to refund the entire subscription amount to the investors and cancel the issue.

In an IPO, only retail investors can cancel, increase or decrease their bids. QIB (qualified institutional buyers) and NII (non-institutional investors) cannot cancel or reduce the size of their proposals. The only option available to these investors is to increase the size of their bids.