IPO Oversubscription Versus Listing-Gains

Introduction

When participating in an Initial Public Offering (IPO) launch, there are a few concepts that you must stay aware of and updated on as an investor. Two of those crucial concepts include ‘IPO oversubscription’ and ‘listing gains’. Although these two concepts overlap each other, they are not the same or synonymous.

IPO oversubscription can potentially lead to IPO listing gains; however, you must note that oversubscription is not the sole factor behind listing gains; factors like investor sentiment, company fundamentals and market conditions contribute to listing gains. Furthermore, listing gains can occur independently without significant oversubscription.

There are also other nuances, like factors influencing oversubscription and listing gains. So, before everything, let us understand oversubscription and listing gains before making IPO investments.

Understanding IPO Oversubscription

IPO oversubscription usually occurs when the demand for a company's shares in an IPO exceeds the number of shares supply available. This situation indicates strong investor interest and confidence in the company's prospects. The IPO oversubscription can have an effect on the investors. Because when you think about how an IPO is allocated when oversubscribed, the allocation of shares is done on the basis of a lottery for the retail investors or a proportional system for the Non-Institutional investors (NII).

A lottery system is computerised and random, which ensures fair distribution and allotment, which makes sure every investor has an equal chance of getting an allotment. In the proportional system, the shares are allotted proportionally based on the size of each application received relative to the total oversubscription of the NII category. This means in case of an oversubscription, all applicants may not receive the shares for which they have applied.

Moreover, oversubscription is also known for creating a buzz or hype around the company, which leads to high trading volumes in the initial days. For example, the IPO of a company called Tatva Chintan Pharma Chem Ltd was oversubscribed 180 times, which indicates a very high demand compared to the number of shares available.

Understanding Listing Gains

The profit made by an investor on the day a stock is listed on the stock exchange is known as listing gains. They are calculated as the difference between the IPO issue price and the closing price on the first trading day. Substantial listing gains are indicative of a positive market sentiment of investors towards the company, so investors can potentially realise immediate returns on their investment. 

However, as an investor, you must be aware of the risks associated with oversubscription. Share prices can fluctuate significantly on the listing day, leading to potential losses. So, what seemed like gains because of the initial high prices may not be sustainable as prices can drop in the following days or weeks.

Factors Influencing IPO Oversubscription

Several factors influence IPO oversubscription, which indicates a strong demand for a company's shares during an IPO, including:

1. Company Reputation

Investors are more likely to trust and invest in well-known companies. Companies with strong brand recognition and reputation may see higher demand for their IPOs. Companies with a strong financial performance and growth history can also be more attractive to investors​​​​. Effective marketing and other promotional activities can create hype around the IPO, attracting more investors. This boosts investor interest and leads to oversubscription​​.

2. Market Sentiment

Favourable market conditions and a bullish trend (meaning the possibility that investments will increase in value in the future) increase investor confidence, leading to higher demand for IPOs. Those companies with innovative products or services may attract more interest among investors. Therefore, companies in rapidly growing industries often see higher oversubscription due to perceived higher potential returns​​​​. 

3. IPO Pricing

IPO pricing is one of the key factors behind high demand and successful subscriptions. If investors believe that the IPO pricing offers a good deal, they will rush to subscribe. IPOs that are priced attractively relative to the company's perceived value are likely to be oversubscribed. Sometimes, companies may even put a price on their shares below their perceived value. This is done to attract a higher demand and aim for successful subscriptions. 

4. Underwriter Reputation

IPOs that are managed by underwriters who have a good reputation in the market are often seen as more credible. Those IPOs are more likely to be oversubscribed by investors due to their past performance as underwriters in handling successful IPOs.

Factors Influencing Listing Gains

A lot of factors influence the listing gains for an IPO, and some of them include:

1. Market Conditions

Bullish market trends may see higher listing gains as they indicate positive investor sentiments, leading to increased buying pressure on new stocks​​​​. Extensive marketing and media coverage also contribute to the market conditions that can create hype around the IPO, attracting more investors and potentially leading to higher listing gains​​. Favourable reports and recommendations from financial analysts and financial influencers can also increase investor confidence and drive up the listing price​​.

2. IPO Pricing

Undervalued or fairly valued IPOs tend to attract more investors, pushing up the price of the shares on the listing day​​. If the IPO is priced attractively close to the company's value, positive market sentiment or investment sentiment increases, where it is more likely to see listing gains.

3. Oversubscription

As we discussed earlier, oversubscription leads to strong demand for shares, which often translates into higher listing gains as investors compete to buy shares. High interest and investor confidence from both retail and institutional investors can also increase the stock price on the listing day.

Comparison of IPO Oversubscription and Listing Gains