Q.What is under-subscription? Explain how a company deals with it, and the difference this makes to whether allotment can proceed at all.
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Start your 14-day free trial to unlock the full solution →Under-subscription occurs when the number of shares actually applied for in a public issue falls short of the number of shares the company offered — the mirror-image problem to over-subscription, and one that raises a genuine question of whether the company can proceed with the issue at all.
The answer turns entirely on where the shortfall lands relative to minimum subscription, the figure discussed in the preceding section of this chapter. If the total amount actually subscribed for — counting, where the issue is underwritten, any amount that underwriters are obliged to take up under their underwriting agreement to make good a shortfall — still falls short of the minimum subscription disclosed in the prospectus, Section 39 of the Companies Act, 2013 applies in its full, unqualified force: the company is barred from making any allotment whatsoever, and it must refund the entire application money received, without interest, within the time the rules prescribe, failing which every officer in default becomes personally liable to repay the money with interest at the prescribed rate for the delay. In this scenario, under-subscription and a failure to reach minimum subscription are simply the same event looked at from two angles, and the consequence is exactly as severe as discussed earlier — no allotment at all, and a mandatory refund.
If, however, the shortfall is real but not severe enough to breach minimum subscription — that is, the amount actually subscribed for, including any underwriters' devolvement, still equals or exceeds the disclosed minimum — the company is not required to abandon the issue. It may instead proceed to allot shares only to the extent actually subscribed for, provided doing so is consistent with the terms stated in the prospectus (which should itself have contemplated that the full issue size might not always be taken up) and, where the issue was underwritten, provided the underwriters honour their commitment to take up the balance so that the company still receives, in total, no less than its stated minimum requirement. In this situation, the company simply raises a smaller amount of capital than it had hoped for, rather than the full amount originally offered, but the issue and the resulting allotment remain entirely valid. …
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