1.

1 INTRODUCTION TO TOPIC:
Everyone is talking of the SENSEX and IPO Markets these days. Almost every successful
company wants to make an IPO at a Premium today. In the financial year (2005-06) up to
December, 88 issues raised in the market. These are the motivating factors for a company and
for an investor to go for an IPO?
 BSE & NSE SENSEX reaching their all-time high during the month of December
2005.
 Investments are spread among retail investors, dispersed around the country, creeping
acquisitions will be difficult.
 Companies enjoy Liquidity at low cost.
 Bank interest rates coming down, so no benefit of saving in banks. That is why
middle class people invest their money in securities. After a very long time, the
common man has money to spare-for the investing.
 During the financial year 2005-06 IPO’s raise 22,836 crore from the market. The
cumulative over subscription was almost 22.86 times. In other words, for every
hundred rupees required, the market generously gave two thousand two hundred and
eighty six rupees.

As stock market is growing so there is a lot of scope for me to go in this area and to get
acquainting with the primary market especially in IPO. It will enhance my conceptual skill
regarding this area. So it is fruitful for me to research on this topic.

Evolution of the Indian IPO System:

The Indian primary market has witnessed significant qualitative and quantitative changes in
recent years. Prior to liberalization, the new issue process was totally regulated in terms of
qualifying to issue, pricing etc. In 1992, with the setting up of SEBI and the scrapping of
Controller of Capital Issues (CCI), the issue process was smoothened, procedures were
simplified and free pricing was allowed, although with certain restrictions. The Indian market
had the concept of par value of equity shares, and anything above par was considered
premium. The only companies that were allowed to come with premium issues were those,
which had a three-year profit track record for the preceding five years. New companies
without this record could float premium issues if their promoting companies had the same
track record, and they had to hold 50% of the post-issue capital. Any new company floated by
the first generation entrepreneurs could only issue equity at par. There was no restriction
about prices in a premium in a premium issue.
The offer was always at a fixed price, whether premium or par. The companies had to appoint
intermediaries like merchant bankers, registrars, bankers etc. for the issues. Merchant bankers
had the responsibility of fixing the process, in consultation with the company, carrying out
with due diligence, preparing the prospectus (offer document) etc. the prospectus had to be
submitted to SEBI for getting security.
There could be firm or preferential allotments to mutual funds, non-resident Indian etc. but
the price in those cases could not be less than that in the public offer. The post- issue
shareholding by the promoters could not be less than 25% of the total paid up capital; also, at
least 25% of the total post issue capital would have to be offered through the prospectus to
the public.

The current IPO System:

With the introduction of the book-building process, and the scrapping of the concept of par
value for shares, the pricing process has become more open, it is now possible to follow the
fixed price route or the book building route for an issue. In case of the book building process,
the price is not fixed, but a price band is suggested, the investors can bid for any price
between the cap and the floor, and the quantum of subscription.
One of the lead managers will work as book runners, the final issue price is determined as the
cut-off, at which the issue is fully subscribed. The book building could be used for 75% of the
issue, which could be subscribed by institution and high net worth individuals, and the
balance 25% could be issued to individual investors as a fixed price issue, the price being the
cut-off determined via book building. It is also possible to have 100% book built issues,
where the individual investors also take part in the book building process. The book building
process can be completely automated (online) using the systems of the stock exchanges. This
process is known as e-IPO.
The price band at present is 20% i.e. the cap could only be 20% higher than the floor. The
price band could be revised during the bidding period, to a maximum of 20% on either side.
The public issue should be open for a minimum of five days, and a maximum of ten days.
The post-issue promoter holding should be at least 20%, whereas earlier it was 50% in the
case of premium issues. If the price band is revised, the bidding period shall be extended by
three days.
In the case of over-subscription, at least 25% will have to be given to individual investors,
and a maximum of 50% could be allotted to qualified institutional investors.
The current IPO system- Book building process: one of the major changes that have a
tremendous impact on the IPO market is the introduction of process of book building. It is
now possible for an unlisted company to follow the fixed price route or the book-building
route for an issue. In the case of the book building process, the price is not fixed, but a price
band is suggested. The investors can bid for any price between the floor price and the cap
price and also bid for any quality. The lead book runner arrives at the final issue price at
which the issue is fully subscribe.

Corporate may raise capital in the primary market by way of an initial public offer, rights
issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the
public in the primary market. It is the largest source of funds with long or indefinite maturity
for the company. Requirement of funds in order to finance the business activities motivates
small entrepreneurs to approach the new issue market. Initial Public Offer (IPO) is a route for
a company to raise capital from investors to meet the expenses for its projects and to get a
global exposure by listed in the Stock Exchange. An Initial Public Offer (IPO) is the selling
of securities to the public in the primary stock market. Company raising money through IPO
is also called as company ‘going public'. From an investor’s point of view, IPO gives a
chance to buy shares of a company, directly from the company at the price of their choice (In
book build IPO's). Many a times there is a big difference between the price at which
companies decides for their shares and the price on which investor are willing to buy shares
and that gives good listing gain for shares allocated to the investor in IPO. From a company’s
perspective, IPO’s help them to identify their real value which is decided by millions of
investors once their shares are listed on stock exchanges. IPO's also provide funds for their
future growth or for paying their previous borrowings. “An initial public offering (IPO),
referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues
common stock or shares to the public for the first time.” IPOs are often issued by smaller,
younger companies seeking capital to expand, but can also be done by large privately owned
companies looking to become publicly traded. When a company lists its securities on a public
exchange, the money paid by Estelar investors for the newly-issued shares goes directly to
the company (in contrast to a later trade of shares on the exchange, where the money passes
between investors). An IPO, therefore, allows a company to tap a wide pool of investors to
provide it with capital for future growth, repayment of debt or working capital. IPO can be
used as both a financing strategy and an exit strategy. In a financing strategy the main
purpose of the IPO is to raise funds for the company. In an exit strategy for existing investors,
IPOs may be used to offload equity holdings to the public through a public issue. A company
selling common shares is never required to repay the capital to investors. Once a company is
listed, it is able to issue additional common shares via a secondary offering, thereby again
providing itself with capital for expansion without incurring any debt. This ability to quickly
raise large amounts of capital from the market is a key reason many companies seek to go
public.
There are several benefits for being a public company, namely: ·

 Bolstering and diversifying equity base

 enabling cheaper access to capital

 Exposure, prestige and public image

 Attracting and retaining better management and employees through liquid equity
participation

 facilitating acquisitions

 Creating multiple financing opportunities: equity, convertible debt, cheaper bank

loans, etc.

 Increased liquidity for equity holder

IPO market in India has had its share of ups and downs over a period, for more than the last
decade. It has seen a steep rise in the initial years of the post liberalization of Indian
Economy. The growth observed during the first half of the 90s is mostly attributed to the
financial liberalization of the economy. An Initial Public Offering (IPO) is the first sale of
corporation’s common shares to investors on a public stock exchange. The main purpose of
an IPO is to raise capital for the corporation. This study investigates 251 IPOs for measuring
listing performance and 225 IPOs for measuring medium and long term performance, which
raised capital, have been listed on NSE between Nov. 1994 and April 2006. Underpricing of
an IPO has been measured as the return on the first day of trading while Underperformance
means negative returns accrued to the investors holding these IPOs in the long run. The
finding of study reveals an average initial returns or underpricing of 40.08 Per cent and if
underpricing is adjusted to market return (using Nifty) for same period, the returns decline to
39.36 Per cent. To get possible explanation for short run, medium and long run underpricing
for IPOs, factors like Offer Price, Offer Date, Offer Size, Listing Date, Age, Industry, Lead
manager and Oversubscription of IPOs are considered. The empirical results suggests that
factors including oversubscription, inverse of IPO price, year dummy for 2001, activity based
industry dummy for software and Lead Manager have significant impact on underpricing.
While the first four are positively related, the last variable is negatively related with
underpricing. As far as medium and long run performance is considered Age, Listing Delay,
Reciprocal of IPO price, Lead Manager, Oversubscription, Dummy in year 2005, Financial
service Industry have been found significant either at the end of first, second or third year.