Over Subscription

Over Subscription

When a company receives more applications for shares than the number it offered to the public, this situation is called over subscription. This typically happens with well-managed and financially strong companies whose shares are in high demand.

The key point to understand is that over subscription is resolved at the time of allotment. From an accounting perspective, the entire process — receiving application money, recording the amount due on allotment, and collecting that money — is handled within the same framework as a normal issue. The only difference is how the excess application money is dealt with.

The directors have three alternatives to handle over subscription:

Alternative 1: Full Acceptance and Full Rejection

The directors accept some applications in full and reject the others outright. The application money received on rejected applications is fully refunded.

Example: A company invited applications for 20,000 shares and received applications for 25,000 shares. The directors rejected applications for 5,000 shares and refunded their application money.

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Alternative 2: Pro-rata Allotment

The directors make a proportionate allotment to all applicants. The excess application money received is normally adjusted towards the amount due on allotment. If the excess application money is more than the allotment amount due, the surplus may either be refunded or credited to Calls-in-Advance A/c.

Example: Applications for 20,000 shares were invited and 25,000 applications were received. Shares are allotted in the ratio of 4:5 (i.e., for every 5 shares applied, 4 shares are allotted). The excess application money on 5,000 shares is adjusted towards allotment.

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Alternative 3: Combination of Rejection and Pro-rata Allotment

This is the most common course adopted in practice. Some applications are rejected outright, and pro-rata allotment is made to the remaining applicants. The money on rejected applications is refunded, and the excess application money from pro-rata allottees is adjusted towards allotment.

Example: A company invited applications for 10,000 shares and received applications for 15,000 shares. The directors rejected applications for 2,500 shares outright and made a pro-rata allotment of 10,000 shares to the remaining 12,500 applicants (4 shares for every 5 applied). The excess on 2,500 shares (12,500 applied − 10,000 allotted) is adjusted against allotment.

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