DO YOU KNOW THAT IF DANGOTE IPO IS UNDERSUBSCRIBED, YOUR MONEY WILL BE REFUNDED?

DO YOU KNOW THAT IF DANGOTE IPO IS UNDERSUBSCRIBED, YOUR MONEY WILL BE REFUNDED?

Yes, you heard me right.

I know many of you are very certain about Dangote IPO, but before you continue shouting “overhype”, let me explain something that many people don't understand about how an IPO works.

Imagine a company wants to raise money from the public.

They put their shares up for subscription.

Now, what happens if people don't subscribe for all the shares?

IF AN IPO IS UNDERSUBSCRIBED, AND THERE IS NO UNDERWRITER, THE IPO MONEY WILL BE RETURNED BACK TO THE SUBSCRIBERS.

That is how it's done.

And that is why we have underwriters.... In fact the Dangote IPO has a $400 million dedicated underwriting commitment.

Iking Ferry, Abeg which one is Underwriter again?

Oya calm down..

Let me Explain.

Imagine Mama Ngozi wants to expand her tomato business so that the company can generate more revenue.

She decides to go public.

Meaning, she wants to offer part of her company to other investors so they can become part-owners.

Now imagine Mama Ngozi creates 1 billion shares for the IPO.

But after she opens the offer, investors only subscribe for 500 million shares.

What happens to the remaining 500 million?

This is where the underwriter comes in.

The underwriter has agreed to cover the remaining shares under the terms of the underwriting agreement.

So, in simple English:

“If the public doesn't take all of it, I will step in and take the amount I have agreed to underwrite.”

That is one of the reasons underwriters are very important in the capital market.

And this is also why, before an IPO comes to the public, a lot of work happens behind the scenes.

The issuing house and other professionals work on the offer.

The company is valued.

The shares are priced.

The offer is structured.

The risks are examined.

And underwriting arrangements will be put in place.

So when you see a huge marketing campaign around an IPO, don't immediately say:

“They are overhyping it.”

There is another side to it.

Because...

NOBODY WANTS AN IPO TO FAIL.

(If Na you, you go Want your IPO to fail?)

You see?

The company wants to raise the money.

The advisers want the offer to succeed.

The market wants successful capital raising.

And investors need to understand what they are buying.

That is why you have underwriters.

BUT IKING FERRY, WHAT IF THE IPO IS OVERSUBSCRIBED?

This one is the opposite.

Let me Explain...

Imagine Mama Ngozi wants people to subscribe for 1 billion shares, but investors apply for 2 billion shares.

That means the IPO is oversubscribed.

There are more people requesting shares than the shares available.

So allocation has to be done according to the rules of the offer.

Some investors Especially Institutional investors may not receive everything they applied for, and the applicable amount is refunded according to the allotment process.

This is where you hear things like:

“I subscribed for ₦1 million but I was allocated only ₦500,000 worth of shares.”

The remaining money will be Refunded according to the offer's refund process.

And yes, this is also why understanding the difference between retail investors and institutional investors is important.

Retail investors may be buying 10 shares, 100 shares, 1,000 shares.

While...

Institutional investors can be subscribing for billions of naira.

These are the things happening behind the scenes that many people don't see.

So the next time you hear somebody talking about an IPO, don't just ask:

“Will the price go up?”

Understand the structure.

Understand the subscription.

Understand undersubscription.

Understand oversubscription.

Understand underwriting.

Understand allotment.

Understand refunds.

Because the more you understand the capital market, the less mysterious it becomes.

NOW LET ME ASK YOU:

DO YOU THINK DANGOTE IPO WILL BE UNDERSUBSCRIBED?

I want to hear your opinion.

And don't just say YES or NO. Tell me WHY.

My Name is Iking Ferry 

Your Financial Godfather that built Fokona to democratise and localise wealth in Africa.

On a Mission to Build 10 million Financially Free Nigerians and Africans with the right Knowledge.