Fairfield Institute of Management and Technology

Oversubscription- Meaning and Accounting Treatment

Subject Name: Financial Accounting & Analysis

Subject Code: 105

Submitted to: Submitted by:

Mrs. Shweta Gupta Name: Vineet Gola
Enrollment no: IPU037826
Course: BBA(GENERAL)
Semester/Section: 1
 Topic:
Oversubscription- Meaning and
Accounting Treatment

Table of Content
Contents Page No.
Oversubscription
2
Key-Takeaways
3
Accounting Analysis of
Oversubscription
3
Accounting Treatment
of Oversubscription
4-5
Example of
Oversubscription
6-7
Illustration of
Oversubscription
8-9
Conclusion
10
Bibliography
11
Oversubscription
Oversubscription is a term used for when the demand for a new issue of
securities, such as an IPO's shares, is greater than the number of securities
offered. When a new issue is Oversubscription , underwriters or other financial
entities offering the securi ty can adjust the price upward or offer more
securities to reflect the higher -than-anticipated demand.

Oversubscription can be contrasted with an undersubscribed issue, where

demand cannot fully meet the available supply.
Key-Takeaways
 Oversubscription refers to an issue of securities where demand exceeds
the available supply.
 An Oversubscription IPO is indicates that investors are eager to buy the
company's shares, leading to a higher IPO price and/or more shares
offered for sale.
 An Oversubscription issue does not always mean the market will support
the higher price for long, as the demand must eventually reconcile with
the fundamentals.

Accounting Analysis of Oversubscription

 Declining of application - If a company makes 13,000

applications for 10,000 proposed shares, the company will reject
3,000 additional applications. In this case, the application fee must
be refunded to the applicant.

 A l l o c a t i o n o f S t o c ks o n a P r o - R a t a B a s i s - I n t h i s p o l i c y n o
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.
Accounting Treatment of Oversubscription
The company may treat the excess applications received in one or more of
the following ways:

a) Rejection of applications:
Sometimes the applications of shares are not allotted even a
single share. In such a situation the application money received
from such applicants is returned to them.

The necessary entry is:

Share application a/c

Dr. (with total amount refunded To Bank a/c due to non -allotment.)

(Being application money returned, application being rejected)

b) Acceptance of Application Partially:

Sometimes applicants are not assigned the number of shares they

have applied for and the directors partially accept the
application. In such a situation, the applicants are allotted the
fewer shares they have applied for. In such a case, the surplus
funds will be transferred to the partner account upon partially
accepted application.
Journal entry for use of additional application money received
d u e t o a l l o c a t i o n i s a s f o l l o ws :

Share Application a/c

To Share Capital a/c

Dr.(with amount of excess application money to be adjusted toward

allotment).

Where the application money on partially accepted application money is

more than the amount necessary for discharging the total obligation
toward application and allotment money, then the excess money is
returned the applicants. However the Articles Association of the Company
may authorize the Company to withhold such add itional funds in advance.
If the applicant agrees to do so, the money can only be placed on the call
side. A section for this effect is usua lly included in the prospectus.

Admission required to handle such extra money for advance calls:

Share application a/c

To Calls in advance a/c

Dr. (with amount with company after adjusting allotment money out of
excess application money.)

(being additional application money will b e transferred to make calls to

advanced account).
Example of Oversubscription
A applies to the purchase of 300 shares of a company in which
o n e h a s t o p a y R s . 2 o n ap p l i c a t i o n a n d R s . 3 o n a l l o t m e n t . . H e i s
allotted 80 shares. A has paid at the time of application 300 2,
i.e. Rs.600 out of which 160 (i.e. 80 2) will be adjusted towards
the amount due on application. The surplus of Rs.600 — Rs.160
i.e. Rs.440, will be adjusted towards allotment, i.e., (80 3) =
Rs.240 and the balance of Rs.200 will either be retained by the
company Subsequent calls or returns to applicants. In case the
money is retained by the company towards subsequent calls, the
necessary entry would be:

Share application account Dr. 600

To Share capital account (80 2) 160

To Share allotment account (80 3) 240

To Calls in advance account (Balance) 200

On the other hand, if the excess money is not to be utilized
t o wa r d s s u b s e q u e n t c a l l s , a n d t h e c o m p a n y d e c i d e d t o r e f u n d
t h e a m o u n t f o u n d i t s e x c e s s o f a l l o t m e n t , t h e n t h e f o l l o wi n g
entry is passed:
Share application account Dr. 600

To Share capital account (80 2) 160

To Share allotment account (80 3) 240

To Bank Account 200

Illustration of Oversubscription
A company issued 20,000 shares of Rs.10each to the public payableRs.2
on application, Rs.4 on allotment and Rs.4 on final call. Application were
received for 25,000 shares. Pass the journal entries in the following case
assuming that the amounts due were received

(i) When applications for 5,000 shares are rejected and th e application
money is refunded.

(ii) When surplus of application money is utiliz ed towards allotment.

 CONCLUSION
Oversubscription is a condition in which the company receives
more applications from buyers than the number of shares
available publicly. When demand outweighs supply, the company
raises its share price and may propose new shares to reflect more
than demand. However, in general, a company cannot incr ease 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.
 BIBLIOGRAPHY
Books: J.R. Monga, MKM Publishers Pvt. Ltd.
Website: www.investopedia.com
www.byjus.com
www.yourarticlelibrary.com