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The IPO That Nobody Wanted
In the middle of a roaring bull market, it can seem like every IPO is oversubscribed by 50x and the grey market premium is always positive. But markets are cyclical, sentiment shifts, and some IPOs simply do not attract enough investor interest to fill their allotment books.
What happens then? What does SEBI require? What does an applicant experience? And what does undersubscription actually signal? This article answers all of those questions.
The SEBI 90% Minimum Subscription Rule
SEBI mandates that for an IPO to proceed to allotment, it must receive a minimum subscription of 90% of the issue size. This rule exists to protect investors: if a company set out to raise Rs 1,000 crore and only raised Rs 200 crore, it likely cannot execute the business plan it described in the prospectus, and investors who got allotment would be taking on risk they did not sign up for.
The 90% threshold applies to the entire issue, not individual tranches. So even if the Qualified Institutional Buyer (QIB) portion is oversubscribed, if the overall issue is below 90%, the issue cannot proceed as planned.
this rule applies specifically to fixed-price issues and book-built issues where the company has stated specific use of proceeds tied to the total fundraise. For Offer for Sale (OFS) components, where existing shareholders are selling, not the company raising fresh capital, different considerations apply.
What Happens Below 90%: Issue Withdrawn, Money Refunded
If an IPO closes with less than 90% subscription, the company must withdraw the issue. All applications are cancelled and all blocked funds under ASBA are released back to applicants’ accounts. No allotment takes place.
From an applicant’s perspective, the process is clean. Because IPO applications use ASBA (Application Supported by Blocked Amount), your money was never actually debited from your account, it was only blocked. When the issue is withdrawn, the block is lifted and your full funds are available immediately.
The company that withdrew the issue typically has to wait before attempting another IPO. They may revisit their price band, their timing, their narrative, or their investor relations strategy before making another attempt.
Devolvement on Underwriters
Here is a mechanism that most retail investors never encounter but is important to understand: underwriting.
IPOs in India are typically underwritten, meaning merchant bankers and underwriters have contractually committed to subscribing to any unsubscribed portion of the issue, up to a certain level. If an IPO is undersubscribed but the underwriters fulfil their commitment, the issue can still proceed.
This process is called devolvement, the unsubscribed shares devolve onto the underwriters. They are obligated to take those shares onto their books at the issue price.
Devolvement is not a good sign for anyone involved. The underwriters are stuck with shares they did not want. The company lists with a weaker institutional base. And the signal to the market is clear: the issue was mispriced or the company did not generate sufficient investor confidence.
What Undersubscription Actually Signals
An undersubscribed IPO is a market signal, and it is worth reading carefully rather than dismissing.
It may signal that the price band was set too aggressively relative to the company’s fundamentals. Institutional investors, who have the resources to do deep due diligence, voted with their wallets. When the QIB portion is undersubscribed, that is a particularly sharp signal, these are the most sophisticated participants in the process.
It may signal adverse market conditions, a broader selloff, a spike in interest rates, a geopolitical event that changed risk appetite. In these cases, a fundamentally sound company may struggle to get subscribed through no fault of its own business quality.
It may signal poor investor relations execution, an inadequate roadshow, weak communication of the investment thesis, or a DRHP that raised more questions than it answered.
The key question for an investor looking at an undersubscribed IPO post-listing is: which of these explanations applies? A company that was undersubscribed because of market timing, but has strong fundamentals and a durable business, could be interesting to look at after listing, potentially at a lower price. A company that was undersubscribed because sophisticated investors found problems in the prospectus is a different matter entirely.
Undersubscription vs Oversubscription in Different Categories
An IPO can be oversubscribed in one investor category and undersubscribed in another. For instance, retail investors (who respond more to marketing and buzz) might oversubscribe their portion, while the QIB portion remains undersubscribed. This creates an uneven picture.
SEBI’s rules allow for inter-category spillover in some situations, if one category is undersubscribed, unsubscribed shares can be moved to oversubscribed categories. But this has limits. Ultimately, if the overall issue remains below 90%, the withdrawal rule kicks in.
For context on how different investor categories work and what their subscription levels signal, see IPO investor categories explained. And to understand how the cut-off price mechanism works in book-built issues, read what is cut-off price in IPO.
Historical Context: When Has This Happened in India?
Undersubscribed IPOs in India are more common than the headlines suggest, particularly during market downturns. The 2011–2013 period saw several IPOs fail to get fully subscribed as markets were in a prolonged correction. The 2018–2019 NBFC crisis also saw IPO activity dry up and some issues struggle.
These episodes are a useful reminder that the IPO market is not a one-way machine. The frenzied oversubscription of bull markets makes undersubscription seem impossible, until it is not.
Disclaimer: This article is for educational purposes only and does not constitute financial advice. Please consult a SEBI-registered advisor before making investment decisions.