Question

Oversubscription is a situation where the

• A. Number of shares applied for is equal to the number of shares issued
• B. Number of shares applied for is more than the number of shares issued
• C. Number of shares applied for is less than the number of shares issued
• D. Face value of the share is less than the issue price of the share

Answer 1

The Correct Option is B

Understanding Oversubscription in Share Offerings 

Oversubscription occurs when the number of shares applied for by potential investors exceeds the number of shares that the company is actually issuing in a public offering. This situation typically arises when a company's share offering is highly popular or in high demand, indicating strong investor interest.

Key Characteristics of Oversubscription

• Excess Demand: There are more investors wanting to buy the company's shares than there are shares available.
• Positive Signal: It often signals strong investor confidence in the company's prospects.
• Allocation Challenges: The company needs to decide how to allocate the limited number of shares among the many applicants.

Handling Oversubscription

In cases of oversubscription, companies typically choose one of the following options:

• Pro-rata Allotment: Allot shares to each applicant in proportion to the number of shares they applied for. This means everyone gets a percentage of what they requested.
• Refund of Excess Application Money: Return the excess application money to investors for the shares they didn't receive.

Analysis of Other Options

• Option (1) is incorrect: It describes the situation where the shares applied for are exactly equal to the shares issued, which is a fully subscribed offering, not oversubscription.
• Option (3) describes undersubscription: This is where fewer shares are applied for than the company is offering.
• Option (4) describes share premium: This refers to the amount investors pay above the par value of the shares, not the situation of excess demand.

Conclusion

Therefore, the correct answer is Option (2): The number of shares applied for is more than the number of shares issued.