Under-subscription

3 key takeaways

• Under subscription happens when the demand for a new issuance of securities is lower than the number of securities offered.
• It can indicate a lack of investor confidence or interest in the issuing company or the market conditions.
• Under subscription may lead to the issuer adjusting the offer terms, seeking alternative funding, or facing reputational damage.

What is under subscription?

Under subscription refers to a situation where an offering of securities, such as shares or bonds, does not attract enough investor interest to sell all the available units. This can happen during an initial public offering (IPO), rights issue, or bond issuance. When an offering is under-subscribed, the issuing company or entity does not raise the anticipated amount of capital, which can impact its financial plans and market perception.

Causes of under subscription

Several factors can contribute to under subscription:

• Market conditions: Poor overall market conditions, such as economic downturns or high volatility, can reduce investor appetite for new securities.
• Company performance: If the issuing company’s financial health, growth prospects, or management are perceived negatively, investors may be reluctant to buy its securities.
• Pricing: If the offer price of the securities is set too high relative to market expectations or the company’s valuation, investors may avoid the offering.
• Investor sentiment: Negative sentiment towards the industry or sector in which the issuing company operates can also lead to under subscription.

Implications of under subscription

Under subscription can have several significant implications:

• Financial impact: The issuer may not raise the necessary capital to fund projects, pay down debt, or expand operations, potentially leading to financial strain.
• Reputational damage: An under-subscribed offering can harm the issuer’s reputation, signaling to the market a lack of confidence or support from investors.
• Adjustment of offer terms: The issuer may need to adjust the terms of the offer, such as lowering the price, extending the subscription period, or offering additional incentives to attract investors.
• Alternative funding: If the offering is under-subscribed, the issuer might need to seek alternative funding sources, such as bank loans, private placements, or strategic partnerships.

Examples of under subscription

Under subscription can occur in various financial markets and contexts:

• Initial Public Offerings (IPOs): When a company’s IPO does not attract enough interest to sell all the offered shares, it is considered under-subscribed. This can lead to a lower-than-expected capital raise and may force the company to rethink its growth strategies.
• Rights issues: In a rights issue, existing shareholders are given the opportunity to purchase additional shares. If they choose not to take up their rights and the offering is under-subscribed, the company may not raise the targeted funds.
• Bond issuances: Governments or corporations issuing bonds may face under subscription if investors are not confident in the issuer’s ability to repay or if market interest rates are more attractive elsewhere.

Addressing under subscription

Issuers and underwriters can take several steps to address or mitigate the effects of under subscription:

• Pricing adjustment: Reviewing and adjusting the offer price to make it more attractive to potential investors can help increase subscription levels.
• Marketing efforts: Enhancing marketing and communication efforts to highlight the strengths and potential of the offering can attract more investors.
• Incentives: Offering additional incentives, such as discounts, bonuses, or favorable terms, can encourage more investors to participate in the offering.
• Underwriting arrangements: Securing underwriting agreements, where underwriters commit to purchasing unsold securities, can provide a safety net for issuers against under subscription.

Understanding under subscription is crucial for issuers, investors, and financial professionals as it affects the success of capital-raising efforts and reflects market conditions and investor sentiment. For further exploration, topics such as securities issuance, market analysis, and investor behavior provide deeper insights into the dynamics and implications of under subscription in financial markets.