When debut falls flat: What happens if an IPO remains undersubscribed in India?

In a year when the global IPO market volumes are in the trenches, down around 12%, India is an outlier. So far this year, the NSE and BSE have already seen 66 mainboards and 213 SME IPOs (initial public offer). And per experts, the IPO express is not looking to halt anytime soon.

Per the EY Global IPO Trends Q2 2024 report, with a total of 76 mainboard IPOs scheduled for FY24, India's IPO market recorded a 111% jump from the mere 36 listings that were seen in 2023. The quantum of funds raised via these IPOs also surged, from Rs 569 billion in FY23 to Rs 619 billion in FY24.

While all this shines a spotlight on the ongoing, immense success of India's primary markets, have you wondered what happens if an IPO is not fully subscribed? Or, in simple terms, what if people do not subscribe to all the shares that the company has offered during the issue?

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

An undersubscribed IPO can adversely dent the image and reputation of a company. To understand this, take the example of company A, which launched its IPO between April 10-12 this year, where it offered 5,00,000 of its shares to investors, with a price band of Rs 100-110.

Now, there are 2 possibilities-either the investors believe that the company has a bright future ahead of it and lap up all the shares on offer. Or, the IPO fails to attract enough investors, which means there are fewer takers, as compared to shares A offered during the issue. As a result, only 3,00,000 of the 5,00,000 shares offered are subscribed.

In the latter case, i.e. where the IPO is partially subscribed, what does the company do?

If the issue subscription exceeds 90% (4,50,000 shares in the case of A), then investors will get their shares, and the issue will be deemed successful.

But here, as the case with A is, less than 90% of the issue has been subscribed to. Hence, A will have two choices:

1. Extend the deadline by a maximum of 10 days in order to invite public interest.

2. Reduce the issue price i.e. modify the existing price band. In this case, the issue will automatically extend by three days. Note that while this change is not possible in a fixed price IPO, most IPOs today happen via book building, which offers this flexibility.

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

In an IPO, only retail investors are allowed to cancel, increase or decrease their bids. QIBs (qualified institutional buyers) and NIIs (non institutional investors) can neither cancel nor reduce the size of their bids. The only option available to such investors is of increase their bidding size.