Oversubscription is a situation where the.....

Number of shares applied for is more than the number of shares issued

The correct answer is option 2- Number of shares applied for is more than the number of shares issued.

Oversubscription is a situation where number of shares applied by the applicants is more than the number of shares issued. For e.g. company issued 50000 shares of ₹10 each but receives applications for 75000 shares.

In a case of oversubscription, three alternatives are available to the directors to deal with the situation:
(1) they can accept some applications in full and totally reject the others;
(2) they can make a pro-rata allotment to all; and
(3) they can adopt a combination of the above two alternatives which happens to be the most common course adopted in practice.