Oversubscription is referred to as the situation where a company receives more applications from share buyers than the number of shares made available for public. When the demand is higher than the supply, the company might increase the price of their share and propose new shares to reflect more than anticipated demand. However, in general, a company cannot increase the number of shares even if the demand is high.
In other words, when an enterprise receives applications for an enormous number of stocks than offered to the buyers for a subscription. This circumstance is known as oversubscription.
Accounting Analysis of Oversubscription
- Declining of application- If a company 13,000 applications for 10,000 proposed share, the company rejects the 3,000 extra applications. In this case, the application fee must be returned to the applicant.
- Allocation of Stocks on a Pro-Rata Basis- In this policy no buyer should be refused to buy shares and at the same time, no contender is granted with claimed share. Each contender is assigned stocks on a portion basis (Total stock issued to total stock applied). For example- A company received 12,000 application for 10,000 stocks provided. On a pro-rata basis, total 10/12 stocks are allocated. So if one buyer applies for 12 shares then only 10 shares will be allocated to him.
- Combination of both- In this system, company may accept some application while also rejecting some applications. The applications that are selected will be allotted in a pro-rata basis.
An organisation with a sanctioned capital of ₹. 30,00,000/- proposed for 2,00,000 application for share at a ₹. 10/- each at a premium of ₹. 1/-.
The share can be paid by:
- ₹. 3/- on application
- ₹. 4/- on the allotment (includes premium)
- ₹. 4/- on a first and final call
For ₹. 3/- there were 60,000 of oversubscription of share applications.
Here, the company received an excess application that the stocks issued, this situation is oversubscribed. The company allocates share to 1,50,000 applicant with no excess amount. No shares were allocated for 25,000 applicants, therefore, the whole money was refunded (25,000 X ₹ 3 = ₹ 75,000)
The above mentioned is the concept, that is elucidated in detail about ‘What is oversubscription?’ for the Commerce students. To know more, stay tuned to BYJU’S.