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

Oversubscription is a commonly encountered term in accountancy, especially in the context of issuing shares to the public. To understand oversubscription, it is essential to be familiar with the processes involved in issuing shares: 

The company announces a certain number of shares to be issued, which is known as the "number of shares issued." Investors then apply to purchase these shares. The amount or number of shares for which the investors apply is termed as the "number of shares applied for."

In the scenario where oversubscription occurs, the number of shares applied for by the investors surpasses the number of shares that the company has issued. This results in a situation where there are more requests for shares than shares available from the issue.

Based on the given options, the correct scenario describing oversubscription is:

• Number of shares applied for is more than the number of shares issued

Understanding this concept is crucial for managing share allocations during an initial public offering (IPO) where companies need to devise methods to fairly distribute the available shares among a larger pool of applicants.

Answer 2

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.

• 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.