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Sources of Finance

Under or Over Subscribed Share Issues

Under Subscription

If a share issue is under subscribed, this means that fewer shares were subscribed for (bought) than were available for sale. In this case all we need to do is to deal with the issue of the shares that were subscribed. The rest of the shares may then be issued at a later date.

However, it might be the case that if a share issue is seriously under subscribed then the offer for sale will be withdrawn. In this case all money received will be returned and no further action will be taken unless the company wants to try again later.

If we imagine that 10,000 shares were offered for sale but only 9,000 applications were received then it is likely that the full 9,000 would be issued exactly along the lines demonstrated in the at par and at a premium examples.

Over Subscription

Over subscription of shares can be relatively tricky. After all, how do we decide what to do with the shares that have been applied for but that are not for sale? That is, if we wish to issue 10,000 but we received applications for 15,000 shares, what happens to the additional 5,000 shares?

The normal solution can be two fold:

1. The company applies a cut off rule and might accept offers from the first people to lodge their application - first come first served.
2. The company might decide that everyone who has applied will receive some shares - often in proportion to their application. So, if two people apply for a total of 15,000 by applying for 9,000 and 6,000 respectively but there are only 10,000 shares available then we could apportion their application as follows:
   • Applicant 1 receives: 10,000 ÷ 15,000 x 9,000 = 6,000
   • Applicant 2 receives: 10,000 ÷ 15,000 x 6,000 = 4,000

Let's look at a more specific example of over subscription, without the need to work out who gets what!

Worked Example

Biz/ed plc issued 10,000 ordinary shares at par for £2 per share. Applications and payments in full were received for 15,000 shares and these are then dealt with as appropriate. Complete the bookkeeping requirements for this share issue.

Solution

Biz/ed plc

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