Oversubscription at Octopus tells a tale of too much regulation
To avoid ridiculous levels of oversubscription, the free market must be allowed to do its job
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By Ariba Shahid
ast week, Profit discussed the ins and outs of how Initial Public Offers (IPOs) work, and more specifically how they work in Pakistan. Essentially, a company makes an IPO whenever they feel they need to raise capital and are comfortable with the idea of going from a private company to a public company. Because these companies set their own share prices for these IPOs, as discussed last week, we can have one of three possibilities - under subscription, full subscription, and over subscription. The names are quite telling. Under subscription is when not enough people show interest in the shares being offered and the prices of the shares come crashing down. Full subscription is when the exact number of shares match the exact number of shares people are willing to buy. Over subscription means that there are not enough shares to go around because of high demand, and they then have to be allotted via a lucky draw. We are here to talk about the last one of these possibilities. Now, immediately one might think that oversubscription is the ideal scenario. However, what it means is that the company set a price lower than what the mar-
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ket would have naturally determined. Meaning if there was no ceiling price and price set by the companies, as there currently is in Pakistan, the free market would do its job right. This is exactly what has happened recently to Octopus Digital - an up and coming IT services management company that has found its IPO has been oversubscribed. So what happened exactly, and is it cause to celebrate or rue what could have been? Profit explains.
What happened to Octopus?
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akistani companies generally shy away from IPOs. Even massive behemoths like Tapal and Shan Foods shy away from going public because of the business culture in Pakistan of keeping things in the family and not opening up to the public. However, an influx of new kinds of companies have meant that more executives have been considering IPOs and some have gone through with it - from industries ranging from meat production to IT service management. This has been the case with Octopus. A subsidiary company of Avanceon, Octopus Digital helps businesses digitize their manufacturing, supply chain and financial workflows backed by strategic and operational maintenance support services - business in-
telligence essentially. It is a tech company that trades in products of automation and control equipment. It provides other related technical services too. Now, to recap, IPOs are new issues brought out by companies to list on the Stock Exchange. In case of an oversubscribed IPO, the demand for the IPO was more than the supply of shares. Let’s say the issue was for 1 million shares and there was demand for 10 million share s – one could say the IPO was oversubscribed by 10 times. Greater oversubscription is a greater sign of investor interest and does have an impact on the listing price of the stock. However, there is no established relationship between oversubscription and IPO listing price. While oversubscription could have an impact on the listing price, the market conditions, market sentiments, and macroeconomic environment at the time of listing play an important role too. It is also about being in the right space at the right time when it comes to listing. In the case of Octopus, a strike price of Rs 40.6 per share was determined through the Dutch Book building process. This has been explained by us in more detail here. In short, a strike price is the fixed price that a company determines itself at which the owner of a share option can buy, or sell, the underlying security or commodity.
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