In India, in the past few years, Initial Public Offerings (IPO) have become a popular investment avenue for both retail and institutional investors. Every now and then we hear or read that a particular IPO has been oversubscribed by “X” times and wonder what these subscription figures signify and how should we interpret them. In this article, we will try to understand IPO subscription status, different categories of investors, and what the subscription numbers mean for potential investors.
What Is IPO Subscription Status?
When a company floats an IPO, it invites potential investors to buy the shares within a specified price band. Every IPO has a particular number of shares reserved for different categories of investors, such as:
- Retail Individual Investors (RII) – Small, individual investors
- Qualified Institutional Buyers (QIB) – Institutions such as mutual funds, banks and other large institutions
- Non-Institutional Investors (NII)-High Net Worth individuals (HNIs) or any other who is investing more than Rs 2 lakhs
The IPO subscription status will reflect how many times investors have bid the shares in each category compared to the no. of shares available in that category. The subscription status will give a snapshot of the demand for the IPO within each category, reflecting the overall interest for the IPO. The IPO subscription status details can be found on NSE and BSE .
IPO Subscription levels, what does it mean for key categories?
A look at the demand for the IPO across the various investor categories can provide valuable insights into the potential performance of the IPO. Let’s break down the three main categories to understand their unique subscription figures:
Retail Individual Investors (RII)
Retail investors play a significant part in the IPO market. Under this category, they can place a bid for a minimum lot size “X” (determined by the company) and its multiples 2X, 3X… up to a maximum limit of Rs 2 lakhs. The subscription levels in the category reflect the demand from small and individual investors.
High RII Subscription: High retail subscriptions tend to indicate a lot of interest from small investors. The high retail demand may be due to the company’s popularity, media attention, or favorable market conditions.
Low RII Subscription: If the demand is low from the retail investors, it might signal caution. This may be due to unfavorable pricing, economic conditions, or insufficient media buzz.
Retail investors typically account for 35% of the shares issued in an IPO. Since for most of investors, the objective of investing in an IPO is short-term, a robust demand may indicate positive sentiment for short-term performance but that does not mean a belief in the company’s long-term potential.
Qualified Institutional Buyers (QIB)
This includes banks, mutual funds, and foreign institutional investors or FIIs. QIBs usually receive 50% of the allocation during an IPO.
High QIB Subscription: The high demand from QIBs often indicates that institutional investors have faith in the company’s fundamentals and its long-term prospects. Since QIBs conduct thorough research and due diligence, a high QIB indicator is often seen as a positive indicator.
Lower QIB Subscription: On the other hand, low QIB interest can signal issues regarding the profitability, valuation, or sector stability of the company.
At times, market volatility as well as interest in competing IPOs may sometimes impact demand from QIBs.
The participation of institutional investors in an IPO can be considered a vote of confidence in the long-term growth prospects of the company. Since, QIBs are big institutional players with financial expertise, a high QIB subscription often encourages retail investors to invest.
Non-Institutional Investors (NII)
Non-institutional investors are also known as High Net-Worth Individuals (HNIs). This particular category comprises individuals and entities investing over Rs.2 lakhs. NIIs are typically allotted around 15% of the IPO shares.
High NII Subscription: A strong NII demand usually indicates that the NIIs see profit-making in the short term due to anticipated listing gains. The high net worth investors are more often inclined towards short-term gains, so high demand in this category could mean that they expect the stock to perform well upon listing.
Low NII Subscription: If NII interest is low, it could mean the company’s pricing isn’t attractive for short-term gains, or that investors see better opportunities elsewhere.
Unlike institutional investors who look for long-term growth, HNIs are more likely to invest for quick returns. The response of NIIs (HNIs) to an IPO can be an indicator of expected short-term performance.
What Does Oversubscription Mean?
When an IPO is oversubscribed, it merely means that the demand exceeds the supply. For instance, if it says that the RII quota is three times oversubscribed, it would mean that the retail investors bid for three times the number of shares available in the retail category.
Positive Implications: Oversubscription in multiple categories suggests there is a high level of interest in the IPO and confidence among the various types of investors that the IPO will do well post-listing.
Possible Downsides: While oversubscription indicates demand, there are a few downsides too.
- Grey Market Premium: The shares may start trading at a premium (higher prices) in the grey (unofficial) market even before their official listing. This creates extra hype but that does not mean there will be better returns on listing.
- No or Lower Share Allotment: When the IPO is oversubscribed the shares are allocated by lottery system for RII and by proportional allotment for QIBs and NIIs.
In short, oversubscription can make it harder for investors to secure a full allotment and may lead to inflated expectations due to grey market activity.
How to Read Subscription Numbers
Here’s a quick guide to interpret subscription figures:
| Investor category | Subscription levels | Meaning |
| RII | Less than 1 times | Lack of retail demand. Retail investors may not find the IPO interesting for short-term gains or due to risk factors |
| 1-2 times | Moderate demand. Cautious optimism for short-term gains | |
| 3+ times | High retail demand. Retail investors expect strong listing gains | |
| QIB (Qualified Institutional Buyers) | Less than 1 times | Low Institutional Demand. Cautious outlook or lack of confidence in the company fundamentals from financial experts and professional investors |
| 1-2 times | Sufficient interest, see moderate growth potential with caution | |
| 3+ times | Strong confidence in company fundamentals expect long-term growth potential | |
| NIIs | Less than 1 times | Weak expectations, don’t expect short-term performance gains |
| 1-2 times | Modest expectations, expect some listing gains. But cautious | |
| 3+ times | Strong confidence, expect significant listing gains |
Understanding the above numbers will help you gauge investor interest and decide if the IPO aligns with your investment strategy.
Why should IPO subscription status matter to investors?
IPO subscription numbers are reflective of investor interest across different categories. Here’s why each type matters to prospective investors.
- Indicates Market Sentiment: High QIB interest tends to indicate confidence in the long-term growth prospects of the company, while high NII and RII interest may indicate short-term performance on the listing.
- Guides Investment Decisions: The subscription levels across different categories will help an investor understand the potential risks and rewards.
- Helps Set Realistic Expectations: In case of oversubscription, the allotment chances may be lower. This insight can help you manage the expectations over share allotment.
Factors Influencing IPO Subscription
Several factors can impact IPO subscription figures:
- Market Conditions: In a bullish market, investors are more confident and are willing to take risk. Leading to a higher subscription.
- Company Fundamentals: Investors are more likely to subscribe heavily if they believe in the company’s growth prospects.
- Grey Market Premium: A high grey market premium can drive retail and NII demand with the expectation of potential listing gains.
- Promoter and Brand Reputation: A well-known brand or a reputable promoter can increase investor interest.
Conclusion: How to Use IPO Subscription Status for Your Investment Strategy?
The IPO subscription data offers valuable insights into the sentiments of various categories of investors. While high subscription levels across categories are a positive indicator. It is however part of the story. As an investor always go through the company’s fundamentals, sector outlook, and overall economic conditions before making an investment decision.
By taking an informed approach, IPOs can be a rewarding part of a diversified investment portfolio.
Happy IPO Investing!
Related Information & Articles
Current & Upcoming IPOs in India
IPO Allotment Status: Process & How to Check
8 Case Studies – Successful and Failed IPOs
Important Role of Anchor Investors in IPOs
