Sarfraz Khan07XQCM6093

The Performance of IPOs after the expiry of lock-up periods in India
The Performance of IPOs after the expiry of
lock-up periods in India
Submitted in partial fulfillment of the requirements for the award

of MBA Degree of Bangalore University
by
Sarfraz Ahmed Khan
REG.NO. – 07XQCM6093
2007- 2009
MBA FOURTH SEMESTER
UNDER THE GUIDANCE AND SUPERVISION OF
Prof Dr. NAGESH .S MALAVALLI
M.P BIRLA INSTITUTE OF MANAGEMENT
ASSOCIATE BHARATIYA VIDYA BHAVAN
# 43, Race Course Road
Bangalore-560001
M.P Birla Institute of Management, Bangalore -1-

DECLARATION
I am Sarfraz Ahmed Khan, the student of M. P. Birla Institute of

Management hereby declaring that the project titled “the performance of IPOs
after the expiry of lock-up periods in India” is an original work carried out by
me as a partial fulfillment for the requirement of MBA Degree of Bangalore
University. This project has not been previously submitted for award of any
degree or diploma of Bangalore University or any other University.
Place: Bangalore
Date: 12 may 2009 Sarfraz Ahmed Khan

PRINCIPAL’S CERTIFICATE
This to certify that this report titled “The Performance of IPOs

after the expiry of lock-up periods in India ” has been prepared by Sarfraz
Ahmed Khan bearing the registration no. 07XQCM6093 under the guidance
and supervision of Dr. N.S.MALAVALLI ,MPBIM, Bangalore.
Place: Bangalore Principal
Date: 12 May 2009 (Dr.N.S.Malavalli)

GUIDE’S CERTIFICATE
This is to certify that the Research Report entitled “The Performance

of IPOs after the expiry of lock-up periods in India ”, done by Sarfraz Ahmed
Khan bearing Registration No.07XQCM6093 is a bonafide work done carried
under my guidance during the academic year 2007-09 in a partial fulfillment of the
requirement for the award of MBA degree by Bangalore University. To the best of
my knowledge this report has not formed the basis for the award of any other
degree.
Place: Bangalore Prof. Dr. Nagesh Malvalli
Date: 12 May 2009 (Internal guide)

ACKNOWLEDGEMENT
I would like to express my indebtedness Prof. Nagesh Malvalli, Project guide &
Principal, M. P. Birla Institute of Management., for his valuable guidance at every
stage for the completion of this project work.
I would also like to thank Prof. S. Santhanam, M.P.Birla Institute of

Management, Bangalore who helped me to analysis data with his expertise
knowledge in statistics.
And further I would like to thank all the faculty members of MPBIM who
have helped me in completing my project. I have gained a lot of knowledge
throughout the course of carrying out this project.
I would like to sincerely thank my parents and all my friends who have
helped me in completing this project by providing me with the psychological and
academic support.
Place: Bangalore
Date: 12 May 2009 Sarfraz Ahmed Khan

EXECUTIVE SUMMARY
When a company goes for a public issue, to raise capital for its
business. The total issue subscribed is subject to be distribution as a minimum
amount is held by the promoters, financers, employees of the company. Merchant
bankers discover a price, lead underwriters apply a restriction on the insiders not
to sell their shares in secondary market till a certain lock-in period. What happens
after the expiration of the lock-in period ? Does the share price or the share value
remain the same, or will the retail investors benefit from it after the lock-in
period.?
The main purpose of this research is to investigate the

aftermarket performances of the Indian (IPOs) in order to find out that how safe
they are for investors to hold their money in it . In this dissertation, I will study the
after market performances of Indian IPOs over three years after listing as well
as use some corporate characteristics and the study focuses on the IPOs that
were issued and performed between 2000 and 2005 on and performed over a
specified period and after the scheduled lock-up period (post-issue) of 3 years as
per SEBI Guidelines.

Table of contents
Chapter Particulars Page no.
I Introduction 1
Introduction to IPOs 2
Trends in IPO 11
SEBI and IPO 26
II Literature survey 39
IPO lock-ups stop Insider selling 40
IPO lock-in agreements in U.K 45
IPO lock-up period : Implications of 45

Market efficiency and downward sloping
III Problem Statement 46
Research Objectives 48
Research Methodology 49
Area of enquiry 52
Research Limitations 54
IV Data analysis and inferences 55
V Research and Findings 71

Suggestions and Recommendations 77
Bibliography
List of tables, charts and graphs
Table Particulars Page no.

1 IPOs at here different 56,57
time periods
2 IPO prices in on and 63-66
after lock-in periods
showing difference in
price as well as
percentage decrease
Graphs Particular Page no.

1 IPO offerings from 13
1991 to 2005
2 IPOs issued on NSE 16
from 2000 to 2007
3 IPO performance in 58-62
three different time
periods
4 Price variation of the 67-70
prices on and after
expiry of lock-in
period

Chapter – I
Introduction

Introduction to IPOs
When a business entity needs money the general course of action that it
follows is that it goes to the bank. However banks may not be ready to provide
huge finance for a long time especially if the returns are not fixed. The best way to
raise money is through offer of shares. The securities which the companies issue
for the first time to the public and other financial institutions either after
incorporation or on conversion from private to public company is called “INITIAL
PUBLIC OFFER” or “IPO”. Raising equity gives boost to economical
development of the country.
Raising money through IPO is a very complex process. It requires

analysis and implementation of various commercial laws applicable to IPO-
Prospectus. These laws are Companies Act, Income Tax Act, FEMA, Securities
Contract Act and SEBI Guidelines on “Disclosure and Investor Protection”. It is
also necessary to implement circulars from time to time by SEBI. The introduction
of SEBI attracted the Foreign Institutional Investors to invest money in stock
market in India. It has also helped Indian Companies to offer securities in most
scientific method to Indian and Foreign investors.
Initial Public Offerings (IPOs) are the public offering or flotation

when a company issues common stock or shares to the public for the first time in
the country’s capital markets. It is done through various methods like book
building, method of fixed price or a mixture of both.
IPOs have been an important source of corporate financing for a

long time. The empirical evidence on the pricing and performance of IPOs
provides a puzzle to those who otherwise believe in efficient financial markets.
The puzzle of IPOs pricing both in short and long runs has become a leading
example of pervasive market inefficiency. The IPO uncertainties that bother the
M.P Birla Institute of Management, Bangalore - 10 -

researchers are the positive mean initial return also known as underpricing, the hot
issue market and the long run underperformance.
FINANCIAL MARKETS AND THE IPOs
The Financial Market is an amorphous set of players who come together to trade
in financial assets.
Financial Markets in any economic system that acts as a conduit between the
organizations who need funds and the investors who wish to invest their money
into profitable opportunity. Thus, it helps institutions and organizations that need
money to have an access to it and on the other hand, it helps the public in general
to earn savings.
Thus they perform the crucial function of bringing
together the entries who are either financially scarce or who are financially slush.
This helps generally in a smoother economic functioning in the sense that
economic resources go to the actual productive purposes. In modern economic
systems Stock Exchanges are the epicenter of the financial activities in any
economy as this is the place where actual trading in securities takes place.
Modern day Stock Exchanges are most of the centers to trade in the
existing financial assets. In this respect, they have come a long way in the sense
that these days, they act as a platform to launch new securities as well as act as
most authentic and real time indicator of the general economic sentiment.
The zone of activities in the capital market is dependent partly
on the savings and investment in the economy and partly on the performance of
the industry and economy in general. In other words capital market constitutes the

channel through which the capital resources generated in the society and made
available for economic development of the nation.
As such, Financial Markets are functionally classified as having two parts, namely,
1. The Primary Market

2. The Secondary Market
Primary Market comprises of the new securities which are offered to the public by
new companies. It is the mechanism through which the resources of the
community are mobilized and invested in various types of industrial securities.
Whenever a new company wants to enter the market it has to first enter the
primary market.
Secondary Market comprises of further issues which are floated by the

existing companies to enhance their liquidity position. Once the new issues are
floated and subscribed by the public then these are traded in the secondary market.
It provides easy liquidity, transferability and continuous price formation of
securities to enable investors to buy and sell them with ease. The volume of
activity in the Secondary Market is much higher compared to the Primary Market

PRIMARY MARKET
GENESIS AND GROWTH
When a business entity needs money the general course of action that it follows is
that it goes to the bank. However banks may not be ready to provide huge finance
for a long time especially if the returns are not fixed. The best way to raise money
is through offer of shares and for this: primary market is the solution
The Primary Market deals with the new securities which were previously not
tradable to the public. The main function is to facilitate the transfer of resources
from savers to entrepreneurs seeking to establish or to expand and diversify
existing events. The mobilization of funds through the Primary Market is adopted
by the state government and corporate sector. In other words the Primary Market
is an integral part of the capital market of a country and together with the
securities market. The development of security as well as the scope for higher
productive capacity and social welfare depends upon the efficiency of the Primary
Market.
What is an IPO ?
The securities which the companies issue for the first time to the public either after
incorporation or on conversion from private to public company is called the
“INITIAL PUBLIC OFFER” or the “IPO”.

GROWTH OF IPOs IN INDIA
HISTORY OF PRIMARY MARKET
Indian capital market was initiated with establishing the Bombay stock exchange
in the year 1875.at that time the main function of stock exchange was to provide
place for trading in the stocks. Now the exchange has completed more than 25
years. It has undergone several changes.
Initially the IPO was called ‘New Issue’ and the issues in the Primary Market were
controlled by CCI (Controller of capital issue). It was working as a department of
MOF (ministry of finance). There were very few issues every year. CCI was
highly conservative and hardly allowed any premium issues. Also, the regulatory
framework was inadequate to control several issues relating to Primary Market.
Therefore, in the year 1992 it was abolished.
There was no awareness of new issues among the investing public. In fact,
during 1950s-1960s, the investment in stock market was considered to be
gambling. It was prerogative to highly elite business community to participate in
new issues. More than 99% of Indian population never participated in any issue
during CCI regime.
There was tremendous growth in capital market in U.S.A. and
Western Europe. In these markets they had established Security Exchange
Commission (SEC). It is most powerful autonomous body. The Government of
India realized the importance of a similar body in India for healthy and fast growth
of Capital Market. Thus Security Exchange Board of India (SEBI) was

established with headquarters in Mumbai in 1992.SEBI is the most powerful body

in India.
SEBI has come up with the guidelines for disclosures and

investors protection. SEBI has framed rules for various intermediaries like
Merchant Bankers, Underwriters, Brokers, Bankers, Registrars and Transfer
Agents, Depositories, Stock Exchanges etc. These rules are on the line of similar
rules in western world. This has attracted foreign institutional and individual
investors to invest money in India. This has resulted in exponential growth of
Capital Market in this last decade.
POPULARISING THE NEW ISSUE.
Late Mr Dhirubhai Ambani can be considered as ‘Bhishmapita’ of

new issues, though initially he also had to struggle to get subscribers but he always
used innovative ides for marketing IPOs. It is said that investor never lost money
in his pricing methods. There are several incidences of the common man
participated in his issues, got allotment, sold shares and created fabulous wealth
for themselves. As on 31-12-2003, Reliance Group has more than 3.5 million
shareholders.
The first public offer of securities by a company
after its inception is known as Initial Public Offer (IPO). Going public (or
participating in an “initial public offer” or IPO) is a process by which a business
owned by one or several individuals is converted in to a business owned by many.
It involves the offer of part ownership of the company to the public through the
sale of equity securities (stock). IPO dilutes the ownership stake and diffuses
corporate control as it provides ownership to investors in the form of equity
shares. It can be used as exit strategy and finance strategy.
As a financing strategy, its main purpose is to raise funds for the company.

When used as an exit strategy, existing investors can offload equity holdings to the
public.
REASONS FOR GOING PUBLIC
• To raise funds for financing capital expenditure needs like

expansion, diversification etc.
• To finance increased working capital requirement as well as debt

financing
• As an exit route for existing investors
.ADVANTAGES OF GOING PUBLIC
• Stock holder Diversification As a company grows and becomes more valuable,

its founders often have most of its wealth tied up in the company. By selling some
of their stock in a public offer, the founders can diversify their holdings and
thereby reduce somewhat the risk of their personal portfolios.
• Easier to raise new capital
If a privately held company wants to raise capital a sale of a new stock, it must
either go to its existing shareholders or shop around for other investors. This can
often be a difficult and sometimes impossible process. By going public it becomes
easier to find new investors for the business.
• Enhances liquidity
The stock of a closely held firm is not liquid. If one of the holders wants to sell
some of his shares, it is hard to find potential buyers-especially if the sum
involved is large. Even if a buyer is located there is no establishes price at which
to complete the transaction. These problems are easily overcome in a publicly

owned company
• Establishes value for the firm
This can be very useful in attracting key employees with stock options because the
underlying stock have a market value and a market for them to be traded that
allows for liquidity for them.
• Image
The reputation and visibility of the company increases. It helps to increase

company and personal prestige.
• Other advantages
Additional incentive for employees in the form of the companies stocks.
This also helps to attract potential employees.

It commands better valuation of the company
Better situated for making acquisitions
DISADVANTAGES OF GOING PUBLIC
Costs of Reporting
A publicly owned company must file quarterly reports with the Securities and
exchange Board of India. These reports can be costly especially for small firms.

Disclosure
Management may not like the idea or reporting operating data, because such data
will then be available to competitors.
Self dealings
The owner’s managers of closely held companies have many opportunities for
self-transactions, although legal they may not want to disclose to the public.
Inactive market low price
If a firm is very small and its and its shares are not traded frequently, then its stock
will not really be liquid and the market price may not be truly representative of the
stocks value.
Control
Owning less than 50% of the shares could lead to a loss of control in the
management.
Other disadvantages
The profit earned by the company should be shared with its investors in the form
of dividend
An IPO is a costly affair. Around 15-20% of the amount realized is spent on
raising the same.
A substantial amount of time and effort has to be invest

TRENDS IN IPO
PRIMARY REASONS FOR A COMPANY GOING PUBLIC.
Most people label a public offer as a marketing event, which it typically is. For the
majority of firms going public, they need additional capital to execute long-range
business models, increase brand name, to finance possible acquisitions or to take
up new projects. By converting to corporate status, a company can always dip
back into the market and offer additional shares through a rights issue.
PERFORMANCE IN 90s
Let us have a look at the general development of the Primary Markets in the
nineties. There have been many regulatory changes in the regulation of primary
market in order to save investors from fraudulent companies. The most path
breaking development in the primary market regulation has been the abolition of
CCI (Controller of capital issues). The aim was to give the freedom to the
companies to decide on the pricing of the issue and this was supposed to bring
about a self-managing culture in the financial system. But the move was
hopelessly misused in the years of 1994-1995 and many companies came up with
issues at sky-high prices and the investors lost heavily. That phase took a heavy
toll on the investor’s sentiment and the result was the amount of money raised
through IPO route.

1993-96: SUNRISE, SUNSET.
With controls over pricing gone, companies rushed to tap the Primary Market and
they did so, with remarkable ease thanks to overly optimistic merchant bankers
and gullible investors. Around Rs20000 crores were raised through 4053 issues
during this period. Some of the prominent money mobilizes were the so called
‘sunrise sectors’-polyester, textiles, finance, aquaculture. The euphoria spilled
over to the Secondary Market. But reality soon set in. Issuers soon failed to meet
projections, many disappeared or sank. Result: the small investor deserted both
markets-till the next boom!
1998-2000: ICE ON A HOT STREAK
As the great Indian software story played itself out, software stocks led a bull
charge on the bourses. The Primary Market caught up, and issues from the
software markets flooded the market. With big IPOs from companies in the ICE
(Information Technology, Communication and Entertainment) sectors, the average
issue price shot up from Rs.5 crore in 1994-96 to Rs.30 crore. But gradually, hype
took over and valuations reached absurd levels. Both markets tanked.

2001-2002-ALMOST CLOSED
There were hardly any IPOs and those who ventured, got a lukewarm response. A
depressed Secondary Market had ensured that the doors for the Primary Market
remained closed for the entire FY 2001-2002.There were hardly any IPOs in FY
2001-2002.
2002: QUALITY ON OFFER.
The Primary Market boom promises to be different. To start with, the cream of
corporate India is queuing up, which ensures quality. In this fragile market, issue
pricing remains to be conservative, which could potentially mean listing gains.
This could rekindle the interest of small investors in stocks and draw them back
into the capital market. The taste of gains from the primary issues is expected to
have a spillover effect on the secondary market, where valuations today are very

attractive.
2003: IPO- IMPROVED PERFORMANCE OVERALL !
Even as the secondary market moved into top gear in 2003 the primary
market too scripted its own revival story, buoyed largely by the Maruti IPO which
was oversubscribed six and a half times. In 2003 almost all primary issues did well
on domestic bourses after listing, prompting retail investors to flock to IPO’s. All
IPO’s, including Indraprastha Gas and TV Today Network which was
oversubscribed 51 times showed the growing appetite for primary issues.
Divi Labs hit the market in February followed by Maruti. Initially, the
Maruti share price was considered steep at Rs125 per share for a Rs5 paid-up
share. By the end of the year, the stock had climbed to over Rs355. Close on the
heels of Maruti, came the Uco Bank IPO, which attracted about 1mn applicants.
The primary issue of Indian Overseas Bank attracted about 4.5mn applicants and
Vijaya Bank over Rs40bn in subscriptions. The last one to get a huge response
was Indraprastha Gas, which reportedly garnered about Rs30bn. TV Today’s
public offer was expected to draw in excess of Rs30bn. In overseas listings, the
only notable IPOs were Infosys Technology's secondary ADR offer and the dull
debut of Sterlite Group company Vedanta on the London Stock Exchange.
It was really Maruti Udyog that took the lead with its new issue
in June. The issue was heavily over-subscribed and by the middle of December
the share value appreciated 186 per cent. The near trebling of the investment in
less than 6 months inspired the retail investor who is now back again in the market
scouting for good scrips.
After the phenomenal success of Maruti issue, a number of

companies have approached the capital market and a lot more are waiting for
SEBI approval. SEBI has taken enough care to force companies to make relevant
disclosures for the investor to judge the quality of new issues. Besides, the
companies themselves have been careful not to over-price the shares. On the
contrary, some of the companies have deliberately under-priced them to let the
issue get over-subscribed and to let the investor share some of the capital gain
after listing. With the care taken by SEBI and the companies it is unlikely that the
experience of 1995 will be repeated.
In the financial year just ended, 23 companies tapped
the primary market and managed to garner less than Rs200 billion .The latest
development in the primary market has been the Indian players thirst for money
satiating offshore.


INITIAL PUBLIC OUTBURST
Riding high on the market bull, companies are preparing to lap up investor’s
money through Initial Public Offer’s (IPO’s). The fundamentally good economy
makes us very positive about the initial public offer market. Nearly 600 companies
wish to raise over Rs50,000 Crore, for a variety of reasons—public sector units for
capital (Power Finance Corporation and National Thermal Power Corporation),
residual sale (CMC and IBP), divestment (ONGC and Gas Authority of India Ltd),
banks for capital (Central Bank of India and Punjab & Sind Bank), for market
valuations (Tata Consultancy Services), for venture capital exit (UTV and Secure
Meters), and for expansion (Biocon and NDTV).
Among these Biocon the first Indian Biotech company to come with an
IPO was oversubscribed by 33% and raised as much as Rs.315 Crore. Other mega
issues included TCS which was oversubscribed 5.46 times and raised Rs.417
Crore. The much awaited government companies ONGC was oversubscribed by 6
times and raised a whooping capital of Rs.1069.49 Crore another government
company which was a huge success was IPCL which too was oversubscribed by
1.18 times raising a capital of Rs.1010.45 Crore. The media company NDTV was
oversubscribed 3 times its size.Other IPO’s to hit the market this year were Shah
Petroleum (31.78 Crore) Crew Bos Products (12.25 Crore) Texmaco (15.49 Crore)
Vishal Export Overseas (27 Crore).
A slew of IPO’s have been lined up in the coming months from the
public as well as the private sector. The IPO’s are estimated to raise Rs25,000-
30,000 Crore. The sentiment for IPO’s has been bolstered after the government
came out with fair pricing of its stake sale in IPCL.
Among the companies slated to come out with IPO’s include: SET India,
Shoppers Stop, Central Bank of India, NTPC and Hutchinson Max Telecom.

PRICING OF ISSUE
Controller Of Capital Issue
During the Controller of Capital Issue (CCI) regime the issues were priced by the
company and approved by CCI. Generally the CCI was very conservative and
hardly allowed premium issues.
Arrival of SEBI
After the Arrival of SEBI free market policy is followed for pricing of issue.
Merchant Bankers are responsible for justifying the premium. The company was
allowed to give future profit projections. A company can issue shares to applicants
in the firm allotment category at higher price than the price at which securities are
offered to public. Further, an eligible company is free to make public/rights issue
in any denomination determined by it in accordance with the Companies Act,
1956 and SEBI norms.
During the booming period stock market
issues got oversubscribed beyond imagination. Number of companies came in
with stiff premium and faced investor resistance. This resulted in cautious
approach by the merchant bankers and underwriters for taking up underwriting of
the future issues.
Deciding Premium by Bid System
Since year 2000 SEBI has changed pricing formula. The promoters cannot give
future projections and merchant banker alone cannot decide the pricing of IPO.
At present, 50%of the IPO is reserved for the wholesale investors and 50% is for
the small investor. The Lead-Manager starts road show in consultation with
Institutional Investors. Then they call for bid at recommended prices. Once, bids
are received pricing is open for discussion. The mean bid price is accepted and

allocation is done. The lead manager has to ensure full subscription of the full
quota. Then the price is declared in the newspapers. The retail investor has to
follow this price and submit application with cheque or demand draft. This part of
the issue should also be fully subscribed. If the issue is not underwritten and
subscription received is less than 90% then the IPO is considered as fail and
whatever fund has been received has to refunded. The company loses money it has
spent on IPO.
Thus pricing is most important and difficult aspects of IPO.
However in the present scenario most of the issues are priced by the book building
method. Accurate pricing is essential for the success of IPO.
BOOK BULIDING
The basic motto of Book Building is that “the market knows the best”. Ever since
SEBI allowed companies with no profitability record to come up with IPO via
Book Building route, there has been a good rush of such issues.
What is Book Building?
Book Building is basically a capital issuance process used in Initial Public Offer
(IPO), which aids price and demand discovery. Its a process used for marketing a
public offer of equity shares of a company and is a common practice in most
developed countries. Book Building is so-called because the collection of bids
from investors is entered in a "book". These bids are based on an indicative price
range. The issue price is fixed after the bid closing date.
Persons Involved in the Book-Building Process

The principal intermediaries involved in the Book Building process are the
company; Book Running Lead Managers (BRLM) and syndicate members who
are intermediaries registered with SEBI and are eligible to act as underwriters.
Syndicate members are appointed by the BRLM.
How is the book built?
A company that is planning an initial public offer appoints a category-I Merchant

Banker as a book runner. Initially, the company issues a draft prospectus which
does not mention the price, but gives other details about the company with regards
to issue size, past history and future plans among other mandatory disclosures.
After the draft prospectus is filed with the SEBI, a particular period is fixed as the
bid period and the details of the issue are advertised. The book runner builds an
order book, that is, collates the bids from various investors, which shows the
demand for the shares of the company at various prices. For instance, a bidder may
quote that he wants 50,000 shares at Rs.500 while another may bid for 25,000
shares at Rs.600. Prospective investors can revise their bids at anytime during the
bid period that is, the quantity of shares or the bid price or any of the bid options.
Basis of Deciding the Final Price
On closure of the book, the quantum of shares ordered and the respective prices
offered are known. The price discovery is a function of demand at various prices,
and involves negotiations between those involved in the issue. The book runner
and the company conclude the pricing and decide the allocation to each syndicate
member.

Payment for the shares
The bidder has to pay the maximum bid price at the time of bidding based on the
highest bidding option of the bidder. The bidder has the option to make different
bids like quoting a lower price for higher number of shares or a higher price for
lower number of shares. The syndicate member may waive the payment of bid
price at the time of bidding. In such cases, the issue price may be paid later to the
syndicate member within four days of confirmation of allocation. Where a bidder
has been allocated lesser number of shares than he or she had bid for, the excess
amount paid on bidding, if any will be refunded to such bidder.
Advantage of the Book Building process versus the Normal IPO marketing
process
Unlike in Book Building, IPO’s are usually marketed at a fixed price. Here the
demand cannot be anticipated by the merchant banker and only after the issue is
over the response is known. In book building, the demand for the share is known
before the issue closes. The issue may be deferred if the demand is less.
This process allows for price and demand discovery. Also, the cost of the public
issue is reduced and so is the time taken to complete the entire process.
Features Fixed Price Process Book Building Process
Pricing :
Price at which the Security is offered/allotted is known in advance to the

investor. Price at which the Security will be offered/allotted is not known in
advance to the investor. Only an indicative price range is known.

Demand :
Demand for the securities offered is known only after the closure of the issue.
Demand for the securities offered can be known everyday as the book is built.
Payment :
Payment if made at the times of subscription wherein refund is given after

allocation payment only after allocation.
Guidelines for Issues to be made through 100% Book Building

Route
SEBI had issued guidelines in October 1997 for book building which were
applicable for 100% of the issue size and for issues above Rs.100 Crore. The
guidelines were revised subsequently to reduce the limit to issues of Rs.25 crore to
encourage the use of this facility. However, no issuer used this facility. SEBI
modified the framework for Book
Building further in October 1999 to make it more attractive. The modified
framework does not replace the existing guidelines. The issuer would have option
to issue securities using book building facility under the existing framework:
1. The present requirement of graphical display of demand at bidding terminals to
syndicate members as well as the investors has been made optional.
2. The 15% reservation for individual investors bidding for up to 10 marketable
lots may be merged with the 10% fixed price offer.
3. Allotment for the book built portions shall be made in demat form only.
4. The issuer may be allowed to disclose either the issue size or the number of
securities to be offered to the public.
5. Additional disclosure with respect to the scheme for making up the deficit in the
sources of financing and the pattern of deployment of excess funds shall be made

in the offer document.
Is the process followed in India different from abroad?
Unlike international markets, India has a large number of retail investors who
actively participate in IPO’s. Internationally, the most active investors are the
Mutual Funds and Other Institutional Investors. So the entire issue is book built.
But in India, 25 per cent of the issue has to be offered to the general public. Here
there are two options to the company. According to the first option, 25 per cent of
the issue has to be sold at a fixed price and 75 per cent is through Book Building.
The other option is to split the 25 per cent on offer to the public (small investors)
into a fixed price portion of 10 per cent and a reservation in the book built portion
amounting to 15 per cent of the issue size. The rest of the book built portion is
open to any investor.
COST OF PUBLIC ISSUE.
The cost of public issue is normally between 8 and 12 percent depending on the
size of the issue and on the level of marketing efforts. The important expenses
incurred for a public issue are as follows:
• Underwriting expenses:
The underwriting commission is fixed at 2.5 % of the nominal value (including

premium, if any) of the equity capital being issued to public.
Brokerage applicable to all types of public issues of industrial securities are fixed
at 1.5% whether the issue is underwritten or not. The managing brokers (if any)

can be paid a maximum remuneration of 0.5% of the nominal value of the capital
being issued to public.
• Fees to the Managers to the Issues:
The aggregate amount payable as fees to the managers to the issue was previously
subject to certain limits. Presently, however, there is no restriction on the fee
payable to the managers of the issue.
• Fees for Registrars to the Issue:
The compensation to he registrars, typically based on a piece rate system, depends

on the number of applications received, number of allotters, and the number of
unsuccessful applicants.
This is the concerned fee payable to concerned stock exchange where

the securities are listed. It consists of two components: initial listing fees and
annual listing fees.
BRIEF NOTE ON INTERMEDIARIES

The process of IPO is highly complex and its success is extremely important for
the company. In this process it is important that all the intermediaries should work
cohesively and within a framework of law. Any serious error by any intermediary
can affect the IPO.

The following are the important intermediaries involved in the process-
MERCHANT BANKERS
Eligibility criteria-SEBI issues an authorization letter to the finance companies,

which are eligible to work as merchant bankers. The eligibility criteria depend on
network and infrastructure of the company. The company should not be engaged
in activities that are banned for merchant bankers by SEBI. SEBI issues
authorization letter valid for 3 years and the company has to pay necessary fees.
Such merchant banker can be appointed as lead manager for IPO.
Functions- Merchant banker can work as lead manager co lead manager

investment banker underwriter etc.
Responsibility-lead managers are fully responsible for the
content and correctness of the prospectus. They must ensure the commencement to
the completion of the IPO. Certain guidelines are laid down in section 30 of the
SEBI act 1992 on the maximum limits of the intermediaries associated with the
issue.
Size of the Issue No of Lead Managers
50 cr. is 2
50-100 cr. Is 3
100-200 cr. Is 4
200-400 cr. Is 5

SEBI AND IPO
ELIGIBILITY NORMS :
FOR UNLISTED COMPANIES
- It should have a pre issue network of a minimum amount of Rs1 crore in 3 out of
the preceding 5 financial years. In addition the company should compulsorily
need the minimum network level during the two immediately preceding years.
- It should have a track record¬ distributable profits as given in section 205 of
companies act 1956 for at least 3 years in the preceding 5 years period.
- The issue size (i.e. Offer +¬ Form allotment + Promoters contribution through
the offer document) should not exceed an amount equal to 5 times its pre issue
worth.
FOR LISTED COMPANIES
- It should have a track record distributable profits as given in Section 205 of

Companies Act 1956 for at least 3 years in the preceding 5 years period.
- It should have a pre issue network of a minimum amount of Rs1 crore in

3 out of the preceding 5 financial years with the minimum net worth to be
met during the immediately preceding 2 years.

- SEBI NORMS
SEBI has come up with Investor Protection and Disclosure Norms for
raising funds through IPO. These rules are amended from time to time to
meet with the requirement of changing market conditions.
Disclosure Norms.
• Risk Factor-
The Company/Merchant Banker must specify the major risk factor in the front
page of the offer document.
• General Risk.-
Attention of the investor must be drawn on these risk factors.

• Issuers Responsibility-
It is the absolute responsibility of the issuer company about the true and correct
information in the prospectus. Merchant Banker is also responsible for giving true
and correct information regarding all the documents such as material contracts,
capital structure, appointment of intermediaries and other matters.
• Listing Arrangement-
It must clearly state that once the issue is subscribed where the shares will be
listed for trading.
• Disclosure Clause-

It is compulsory to mention this clause to distinctly inform the investors that

though the prospectus is submitted and approved by SEBI it is not responsible for
the financial soundness of the IPO.
• Merchant Bankers Responsibility-
Disclaimer Clause the Lead Manager has to certify that disclosures made in the
prospectus are generally adequate and are in conformity with the SEBI Guidelines.
• Capital Structure-
The company must give complete information about the Authorised capital,
Subscribed Capital with top ten shareholders holding pattern, Promoters interest
and their subscription pattern etc. Also about the reservation in the present issue
for Promoters, FII`s, Collaborators, NRI`s etc. Then the net public offer must be
stated very clearly.
• Auditors Report-
The Auditors have to clearly mention about the past performances, Cost of Project,
Means of Finance, Receipt of Funds and its usage prior to the IPO. Auditor must
also give the tax-benefit note for the company and investors.
INVESTOR PROTECTION NORMS.

• Pricing of Issue-
The pricing of all the allocations for the present issue must follow the
bid system. The reservation must be disclosed for different categories of investors
and their pricing must be specified clearly.
• Minimum Subscription-
If the company does not receive minimum subscription of 90% of

subscription in each category of offer and if the issue is not underwritten or the
underwriters are unable to meet their obligation, then fund so collected must be
refunded back to all applicants.
• Basis of Allotment-
In case of full subscription of the issue, the allotment must be made with the
full consultation of the concerned stock exchange and the company must be
impartial in allotting the shares.
• Allotment/Refund-
Once the allotment is finalized, the refund of the excess money must be made
within the specified time limits otherwise the company must pay interest on
delayed refund orders.
• Dematerialization of Shares-
As per the provisions of the Depositories Act, 1996, And SEBI Rules,
now all IPO will be in Demat form only.
• Listing of Shares-
It is mandatory on the part of the promoters that once the IPO is fully
subscribed, and then the underlying shares must be listed on the stock exchange.

This provides market and exit routes to the investors.
. The SEBI has provided rules for every possible situation.
SEBI GUIDELINES
IPO of Small Companies
Public issue of less than five crores has to be through OTCEI (Over the
Counter Exchange of India) and separate guidelines apply for floating and listing
of these issues.
Public Offer of Small Unlisted Companies (Post-Issue Paid-Up Capital upto

Rs.5 crores)
Public issues of small ventures which are in operation for not more than two
years and whose paid up capital after the issue is greater than 3 crores but less than
5 crores the following guidelines apply.
1. Securities can be listed where listing of securities is screen based.
2. If the paid up capital is less than 3 crores then they can be listed on the Over
The Counter Exchange of India (OTCEI)
3. Appointment of market makers mandatory on all the stock exchanges where

securities are proposed to be listed.

Size of the Public Issue :
Issue of shares to general public cannot be less than 25%of the total
issue. Incase of IT, Media and Telecommunication sectors, this stipulation is
reduced subject to the conditions that :
1. Offer to the public is not less than 10% of the securities issued.
2. A minimum number of 20 lakh securities is offered to the public
3. Size of the net offer to the public is not less than Rs.30 crores.
Promoters Contribution :
1. Promoters should bring in their contribution including premium fully before the
issue
2. Minimum promoter’s contribution is 20-25% of the public issue.
3. Minimum lock in period for promoter’s contribution is five years.
4. Minimum lock in period for firm allotment is three years.
5. The post-issue capital is subject to a lock-in period of 3 years
Collection Centers for Receiving Applications:
1. There should be at least 30 mandatory collection centers, which should include

invariably the places where stock exchanges have been established.

2. For issues not exceeding Rs.10 crores the collection centers shall be situated at:-
• The 4 metropolitan centres. Mumbai, Delhi, Calcutta and Chennai
• All such centres where stock exchanges are located in the region in which the
registered office of the company is situated.
Regarding allotments of shares
1. Net Offer the general public has to be atleast 25% of the total issue size for
listing on a stock exchange
2. It is mandatory for a company to get its shares listed at the regional stock
exchange where the registered office of the issuer is located.
3. In an issue of more than 25 crores the issuer is allowed to place the whole issue
by book-building.
4. Minimum of 50% of the Net Offer to the public has to be reserved for the
investors applying for less than 1000 shares.
5. There should be atleast 5 investors for every 1 lakh equity offered.

6. Quoting of PAN or GIR No. in application for the allotment of securities is

compulsory where monetary value of investment is Rs.50000/- or above.
7. Indian development financial institutions and Mutual Fund can be allotted

securities upto 75% of the issue amount.
8. A venture capital fund shall not be entitled to get its securities listed on any
stock exchange till the expiry of 3 years from the date of issuance of securities.
9. Allotment to categories of FIIs and NRIs/OCBs is upto maximum of 24%,

which can be further extended to 30% by an application to the RBI-supported by a
resolution passed in the General Meeting.
Timeframes for Issue and Post-Issue Formalities
1. The minimum period for which the public issue is to be kept open is 3 working

days and the maximum for which it can be kept open is 10 working days. The
minimum period for right issue is 15 working days and the maximum is 60
working days.
2. A public issue is effected if the issue is able to procure 90% of the total issue
size within 60 days from the date of the earliest closure of the public issue.
3. In case of oversubscription the company may have he right to retain the excess
application money and allot shares more than the proposed issue, which is referred
to as “green-shoe” option
4. Allotment has to be made within 30 days of the closure of the Public issue and
42 days in case of Rights issue
5. All the listing formalities of a Public Issue have to be completed within 70 days
from the date of closure of the subscription list.
Dispatch of Refund Orders.
1. Refund orders have to be dispatched within 30 days of the closure of the issue.

2. Refunds of excess application money i.e. non-allotted shares have to be made

within 30 days of the closure of the issue.
Other Regulations:
1. Underwriting is not mandatory but 90% subscription is mandatory for each

issue of capital to public unless it is disinvestment where it is not
applicable.
2. If the issue is undersubscribed then the collected amount should be

returned back
3. If the issue size is more than Rs500 crores, voluntary disclosures should
be made regarding the deployment of funds and an adequate monitoring
mechanism put in place to ensure compliance.
4. There should not be any outstanding warrants for financial instruments of

any other nature, at the time of the IPO.
5. In the event of the initial public offer being at a premium and if the rights
under warrants or other instruments have been exercised within 12 months
prior to such offer, the resultant shares will be not taken into account for
reckoning the minimum promoters contribution further, the same will also be
subject to lock-in.

6. Code of advertisement as specified by SEBI should be adhered to.
7. Draft prospectus submitted to SEBI should also be submitted

simultaneously to all stock exchanges where it is proposed to be listed.
Restrictions on Allotments
1. Firm allotments to mutual funds, FII and employees are not subject to any
lock-in period.
2. Within 12 months of the public issue no bonus issue should be made.
3. Maximum percentage of shares, which can be distributes to employees cannot

be more than 5% and maximum shares to be allotted to each employee cannot be
more than 200.
With a view channelize greater flow of funds to infrastructure

companies, SEBI granted a number of relaxations to infrastructure companies.
These included:
Exemption from the requirement of making a minimum public offer of 25 percent
of securities and also from the requirement of 5 shareholders per Rs.1 lakh of
offer made.
Exemption from the minimum subscription of 90 per cent provided

disclosure is made about the alternate source of funding considered by the

company, in the event of under-subscription in the public issue.
Permission to freely price the offer in the domestic market
provided the promoter companies along with equipment supplier sand other
strategic investors subscribe to 50 percent of the equity at the same price as the
price offered to the public or at a price higher than that offered to the public.
Permission to keep the issues open for 21 days to enable the companies to
mobilize funds.
Exemption from requirement to create and maintain a debenture
redemption reserve in case of debenture issues as provided in the SEBI Disclosure
& Investor Protection Guidelines
These concessions are available to them if these are appraised by a
Development Financial Institution, Infrastructure Development Finance
Corporation or Infrastructure Leasing and Financing Services Ltd. and there is a
minimum financial participation by them. The minimum participation of the
appraising agency, initially fixed at 10% of project cost, was reduced to 5%.
Further, the minimum participation can be met by any of the appraising agencies,
jointly or severally, irrespective of whether they appraise the project or not.
Eligibility norms for public issues/offers for sale by companies in

the IT Sector
Eligibility norms were modified to provide that a company in the IT Sector going
for IPO/offer for sale shall have track record of distributable profits as per Section
205 of the Companies Act in three out of five years in the IT business/from out of
IT activities.

It can also access the market through the alternative route of appraisal and
financing by a bank or financial institution.
The same conditions would apply also to a listed company which has
changed its name to reflect activities in IT sector.
CHAPTER II

LITERATURE
SURVEY
1.) IPO Lock-Ups Stop Insider Selling
By Doug McIntyre
When companies "go public", the number of shares offered in the initial public
offering (IPO) is typically a relatively small portion of the overall ownership. The
balance of the shares is held by insiders, which include management, founders and

venture capitalists (VC) who funded the company while it was private.
The exact number of shares that is offered in each IPO will differ from company
to company. For example, in 2004, Google offered 7% of its shares to the public,
while Vonage offered 20% of its shares to the public during its 2006 IPO.
Insider’s locked up
Although the number of shares offered will differ from one IPO to another, nearly
all IPOs have some sort of lock-up period. A lock-up period is a warning placed
on insiders and pre-IPO holders that prevents them from selling their shares for a
set period of time after the company has gone public. A typical lock-up period is
four to six months.
There is no federal law or Securities and Exchange
Commission requirement that forces insiders or pre-IPO shareholders to be
"locked up", but the investment banks underwriting the IPO almost always request
it so that insiders do not flood the market with shares right after the company's
initial public offering. The lock-up in the prospectus (Form 424B4) is a contract
between the insiders and the purchasers of the IPO, so it is highly unlikely that it
would be violated.
This information is disclosed in the S-1 when the IPO

documents are filed with the SEC. The best sources for lock-up information are
the SEC website and several paid services including Edgar Online. The lock-up
period will be stipulated in the prospectus, called the S-1, but it is very important
that investors watch each revision of this document, called S-1As, because there
could be a change in the lock-up terms.

The Reason for Lock-ups
As a company goes public, underwriters want to be able to see what outside

investors believe the new entity is worth based on information like that found on
the balance sheet, the income statement (profits and losses) and executive
overviews of the business (business risks).
If inside investors are allowed to sell immediately at the time of the
IPO, it may well obscure the price that the markets put on the company by putting
selling pressure on the shares on the first day of trading.
The Positives of Insider Sales

The end of the lock-up period is as important as an earnings report or other
big event at a public company. There are several factors that investors should
watch for to determine whether post lock-up selling is a warning sign.
First, determine how long inside investors have had shares. Some
founders may have been with companies for several years, so the sales of their
shares may be the only way that they have to make significant money from their
work. Both the S-1 and proxy show terms of service for officers.
Another factor to consider is whether a venture capitalist
has one of its partners on the company's board of directors. If so, the VC firm may
be less likely to sell because of a concern that the board member could have inside
information about the company's activities. This also holds true for officers. Quite
often a lock-up period will end, but insiders cannot sell stock because they have
information on earnings or have access to other critical data that the public
shareholders do not.
Insiders are probably more likely to sell if a stock has gone up sharply since the
IPO. There is no hard data on this, but shareholders in a company with a falling

share price post-IPO do not want to add to investor concerns by selling shares.
Remember, insider selling after a lock-up period is not necessarily bad.

As said above, often company management has worked for a number of years to
build the business, and its entire net worth is tied up in the value of the firm. There
is also the fact that venture capitalists may have had money in the company for
several years as well. If insiders begin to sell a very large portion of their holdings,
it should be viewed with concern, but not worried over. It would be difficult to
view this as a vote of confidence, but it shouldn't cause too much alarm either.
Factors to Determine the Impact of Ending Lock-ups

According to a study entitled, "The IPO Lock-Up Period:
Implications for Market Efficiency And Downward Sloping Demand Curves"
(New York University, 2000), at the end approximately 1,000 lock-ups in a
sample analyzed by the Stern Business School at New York University, trading
volumes of public companies permanently rose about 30% after lock-ups expired,
while price dropped 1% to 3%.
One of the most critical factors in IPO lock-up selling is the average daily
trading volume of the shares after the day of the IPO. If trading volume is very
low compared to the number of shares in the lock-up, the price may well have
more trouble holding up because there are few buyers in the market. An outside
shareholder has much more to be concerned about if a company has 20 million
shares in a lock-up and average daily volume of 10,000 shares than if the
company's volume is a million shares a day.
Another sign of concern about lock-up selling is the short

position in the stock right before the lock-up ends. Are short sellers betting that the
stock will drop sharply as the lock-up period ends? The major exchanges all

publish short data once a month and owners of IPO shares should watch these as
lock-up periods end.
Conclusion
It is difficult to view sales by insiders as a positive move. On the other hand,

founders and venture capitalists who have built a company can hardly be forced to
hold shares indefinitely. Investors have to keep a checklist that includes the
percent of all shares that are locked up, average trading volume of the IPO
company in the months between the offering and the expiration of the lock-up,
board membership of insider shareholders that may limit their ability to sell, and
the overall financial performance of the company and its stock. Even with insiders
selling, shares in companies like Google have done very well.
2.) IPO Lock-in Agreements in the UK
Susanne Espenlaub

University of Manchester - Division of Accounting and Finance
Marc Goergen
Cardiff University - Cardiff Business School; European Corporate Governance
Institute (ECGI)
Arif Khurshed
University of Manchester - School of Accounting Finance
Journal of Business Finance & Accounting, Vol. 28, No. 9-10,

November/December 2001
When a company offers shares in an initial public offering (IPO),
existing owners often enter into lock-in agreements prohibiting them from selling
shares for a specified period after the IPO. There is some recent U.S. evidence of
predictable share-price movements at the time of expiry of these lock-in periods.
Using a sample of 188 firms, 83 classified as high-tech and 105 others, that went
public on the London Stock Exchange (LSE) during 1992-1998, we focus on the
characteristics of lock-in agreements in the UK and on the behavior of stocks
returns around the lock-in expiry date. We find that the lock-in contracts of LSE-
listed firms are much more complex, varied and diverse than U.S. contracts, which
usually standardize the lock-in period at 180 days after the IPO. We also find
evidence of negative abnormal stock returns at and around lock-in expiry of
similar magnitude to those reported in U.S. studies. However, these abnormal
returns are typically not statistically significant. While the deterioration in stock
returns immediately around the expiry date appears to be much more particularly
pronounced for high-tech stocks than for others, the differences in performance are
not statistically significant

3.) The IPO Lock-Up Period: Implications for Market Efficiency And
Downward Sloping Demand Curves
Eli Ofek
Matthew Richardson
After an initial public offering, most existing shareholders are subject

to a lock-up period in which they cannot sell their shares for a prespecifed time. At
the end of the lock-up, there is a permanent and large shift in the supply of shares.
The lock-up expiration is a particularly interesting event to study because it is
(i) completely known and observable, and (ii) potentially meaningful

economically given the existing literature on supply shocks. This paper
investigates volume and price patterns around this period, and documents several
interesting results. Specifically, even though the event is totally anticipated, there
is a 1% - 3% drop in the stock price, and a 40% increase in volume, when the
lock-up ends. Various explanations are considered and rejected, suggesting a new
anomalous fact against market efficiency. However, convincing evidence is
provided which shows that this inefficiency is not exploitable, i.e., arbitrage is not
violated. This aside, the evidence points to a downward sloping demand curve for
shares, with the most likely explanation pointing to a permanent, long-run effect.

CHAPTER -III
PROBLEM
STATEMENT :

The problem statement for the purpose of our project revolves around the fact that
though the IPOs have generated increasing returns in the short run , either due to
the bull run, oversubscription or efficient price discoveries in, why have they not
sustained he same returns in he after market period. The after market period is the
period a 3 month to 9 month after the expiry of lock-in period .As IPO issues are
subject to a minimum lock-up period agreement any where in the world markets.
There is a similar binding on the Indian companies for a promoter lock-in period
of 3 years for the post-issue for the companies getting listed. The period in which
the insiders are restricted from selling the shares in the secondary market.
The problem statement :
“ Do IPOs really underperform after the expiry of

lock-in periods “
RESEARCH OBJECTIVES :

The main objectives of this project are :
• To analyze how safe is it for the retail investors to hold their investment in
IPOs.
• To study the effect on prices of IPOs before and after the lock-up periods.
• To know what extent is the impact on the post-issue lock-up period on the
share prices.
RESEARCH METHODOLOGY

The study is quantitative, exploratory and analytical.
The study consists of companies which have raised capital and have been listed
between 2000 and 2005 ,
The research methodology for this is that the IPOs listed and performed over a
period have performed and their performance after the expiry of post-issue
lockin period that is 3 years after the day of listing as per SEBI guidelines for
Promoters.
The lock-in period for companies listed before

September 2006 was 3 years from the date of allotment . As a result only those
companies which have been listed between 2000 and 2005 and performed 3 years
till the date of expiration of lockin period as well as the closing price of the next
quarter of the respective companies is recorded and considered for the research.
i) The study is quantitative
The sample size and the data selected for this purpose
is a size of 60 IPOs selected carefully and considering the objective of the
project.
The share prices considered are the closing prices of all the respective
dates : I,e
Prior and after the date of listing :
Prior and after the lockup period of the shares
Prior and after the first quarter i,e 3 months after the expiry of the lock-in period
of the respective shares(post-issue).

ii) The research is exploratory
Enough data searching is done on the historical prices of the share prices
.
Their trends and performances on or after the lock-in perod is examined. Though
the parameters set to choose a company was done in a way that
the companies are not delisted during the time period selected for research.
there is sound fundamentals (such as P/E multiples.)
the companies has evolved well while raising for the IPOs and fulfilled all the
requirements, legal norms of SEBI. DIP regulations 2000
The companies which have gone public for the are listing for the first time.
iii) The research is analytical because

The data collected is been subject to statistical interpretation since :
The sample of stocks have been compared for two to three different time periods i
And considering the “ lock-in period “ factor constant the variations are
evaluated.
The individual pairs of data are correlated with each other and the correlation
coefficient is calculated using Ms-excel.
The analysis is put to a test of significance .
Two tailed test of Pearsons r correlation
At 5 % level of significance, hence the hypothesis is proved

AREA OF ENQUIRY
The study has been restricted to the companies which raised

capital during the period under study because a new regulatory regime became
functional from 1992 onwards with Securities and Exchange Board of India
(SEBI) replacing the Controller Of Capital Issues (CCI).
Of all the IPOs the companies have been selected on the

following criteria:
• The initial public offering is of common stock.
• The IPO is from post-SEBI period and offered under free pricing era
• The IPOs listed are either book- built or fixed price or a combination of
both.
• The stocks have performed well on the market over a period
• The stocks which have been delisted or the IPOs which have been raised
with be as a result of merger are not included for this purpose.

Sample:
The sample of the study consists of about 60 Indian companies

which have been listed between 2000 and 2005 and performed till the
promoter’s post-issue lock up period of 3 years from the as per SEBI guidelines.
And the performance of those
Share price at the end of the 1st quarter respectively.
Data collection :
The source of data is secondary data from Capitaline

database.
The available historical prices of the relevant shares after listing are available.
RESEARCH LIMITATIONS :

The limitations of this research are:
i.) The share prices are based on data collected from Capitaline Database and
any error may reflect in the study.
ii) There is a limitation of time available for this study.
iii) There a few stocks as banks which have yielded positive returns
irrespective of the lock-up period factor. Those IPOs cannot be considered to be
following this inference.
iv) The sample size selected for this purpose is before 2006, keeping the
lock-up period of shares constant, no other factors are really considered.
Therefore the study is free from other factors such as liquidity, etc

CHAPTER IV
DATA ANALYSIS
AND
INFERENCES

1.) Table showing prices of IPOs at three different periods

:
price on price 3
expiry of months
day of after
lock-in lockin
NO. Company list year list price period pd
Moschip Semiconductor
1 Technology Ltd 2000 18 49.6 36.8
2 Adlabs Films Ltd 122 129.85 99.1
3 Aztecsoft Ltd 99 29.78 18.7
4 Axis IT&T Ltd 75 18.25 9.9
5 Balaji Telefilms Ltd 171 73.55 55.05
6 Opto Circuits (India) Ltd 392 74.55 47.85
7 D-Link (India) Ltd 2001 220 203.2 124.1
8 Mid-Day Multimedia Ltd 55 33.8 33.2
9 Andhra Bank 9.5 45.5 46
10 Canara Bank 2002 43 228.55 261
11 Allahabad Bank 12.05 47.1 74.5
12 Union Bank of India 17 131.05 122
13 Punjab National Bank 40.1 375 379.5
14 Bharti Airtel Ltd 55 218.15 242.85
15 T.V. Today Network Ltd 2003 210 98.4 123.45
16 Indraprastha Gas Ltd 120 115.2 99.95
17 Vijaya Bank 32.9 53.2 38
18 B A G Films & Media Ltd 16 9.19 8.92
19 Indian Overseas Bank 28.1 115.85 110.7
20 UCO Bank 17.9 23.15 21.2
21 Maruti Suzuki India Ltd 158.4 805.35 819.7
22 Divi's Laboratories Ltd 161.1 176.25 1303.6
23 Impex Ferro Tech Ltd 2004 17.4 20.75 14.5
24 Bharati Shipyard Ltd 130 769 541.65
Deccan Chronicle Holdings
25 Ltd 192 211.65 70.05
26 S.A.L Steel Ltd 23.5 20.7 17.05
27 Spanco Ltd 47.1 201.2 161.25
28 NTPC Ltd 70 236.8 197
Indiabulls Financial
29 Services Ltd 25 598.45 414.2
30 Sah Petroleums Ltd 35 23.15 21.2

31 Crew B.O.S. Products Ltd 39 15.88 14.9

Tata Consultancy Services
32 Ltd 1050 1025.65 1072.05
33 New Delhi Television Ltd 100 415.5 462.8
34 Ramkrishna Forgings Ltd 30 147.25 40.2
35 Dishman Pharmaceuticals 301 243.15 370.85
36 Biocon Ltd 400 244.08 235.78
37 PTC India Ltd 31.1 59.6 64
38 Petronet LNG Ltd 16.5 42.2 56.2
39 GAIL (India) Ltd 205 180 205
Dredging Corporation of
40 India 455 493.65 493.25
41 Bank of Maharashtra 35 38.75 50.05
42 CMC Ltd 530 1221.8 1002.67
43 Four Soft Ltd 20.1 60.85 48.15
Patni Computer Systems
44 Ltd 305 431.4 469.9
45 IDFC LTD 2005 69.55 108.4 70.8
46 SPL Industries Ltd 90 13.39 14.1
47 Nectar Lifescience Ltd 29.8 30.76 31.79
48 YES Bank Ltd 65 116.6 140.55
49 Provogue (India) Ltd 255 906 680
50 India Infoline Ltd 87.15 877.45 731.2
51 Allsec Technologies Ltd 110.55 66 41.45
52 Allahabad Bank 82 76.6 63.7
53 Fame India Ltd 53.9 61.05 40
54 Gokaldas Exports Ltd 566 206.95 161
55 3i Infotech Ltd 105.15 117.7 68.7
Jaiprakash Hydro-Power
56 Ltd 36.8 66.55 42.6
57 IVRCL Infrastructures 435 335.9 239.65
58 Gateway Distriparks Ltd 112.05 98.55 88.65
59 Jet Airways (India) Ltd 1305 599.45 400.45
60 Indoco Remedies 396 308.2 280.5

Bar Graphs showing performances in three different

time periods of all the years :
IPOs of 2000
share price in (Rs)
450
400
350
300
250 share price on day of
200
150 listing
100
50
0
share price on the day
Axis IT&T Ltd
Balaji Telefilms
Aztecsoft Ltd
Semiconductor
Opto Circuits
Adlabs Films
(India) Ltd
of expiry of lock-up
Moschip
period
Ltd
Ltd
share price at the end of

following quarter
1 2 3 4 5 6
companies

IPOs in 2001 and 2002
share price in (Rs.) 400

350
300
250 share price on the day
200 of listing
150
100
50
(India) Ltd
National
Allahabad
Airtel Ltd
Andhra
Multimedia
Canara
Union Bank
Punjab
Bank
Bank
Mid-Day
Bharti
D-Link
of India
Bank
period
the following quarter
7 8 9 10 11 12 13 14
companies
IPOs of 2003
share price (Rs)
1400
1200
1000
600 of listing
400
200
0
share price on the day
Overseas
Indraprastha
Suzuki India
Network Ltd
B A G Films
UCO Bank
Laboratories
Vijaya Bank
& Media Ltd

T.V. Today
Indian
Gas Ltd
Maruti
Divi's
period
following quarter
15 16 17 18 19 20 21 22
companies

IPOs of 2004
share price (Rs.) 1200

1000
800
share price on list date
600
400
200
Tata
Impex Ferro
NTPC Ltd
Indiabulls
Sah
Deccan
Spanco Ltd
Bharati
S.A.L Steel
New Delhi
Crew B.O.S.
of expiry of lock-in
period
following quarter
23 24 25 26 27 28 29 30 31 32 33
companies
IPOs of 2004 (continued)

sh are p rices (R s.)
600
500
400
300 share prices on the day
200
100 of listing
0
G A IL (India) Ltd
P T C India Ltd
C orporation of
F orgings Ltd
B ioc on Ltd
P harm ac eutic als
P etronet LN G
R am k ris hna
share prices on the day

D redging
D is hm an
Ltd
period
share prices at the end
of the following quarter
34 35 36 37 38 39 40
companies

IPOs of 2004( continued)
share price (Rs)

1400
1200
1000
600 of listing
400
200
0
Four Soft Ltd
Systems Ltd
Maharashtra
CMC Ltd
Computer
Bank of
Patni
period
41 42 43 44
Companies
IPOs of 2005
share price (Rs)
1000
800
600 share prices on the date
400 of listing
200
0
India Infoline
IDFC LTD
Industries Ltd
(India) Ltd
Fame India
Lifescience
Technologies
Provogue
Allahabad
YES Bank
Nectar
Bank
Allsec
Ltd
Ltd
SPL
Ltd
period
the following quarter
45 46 47 48 49 50 51 52 53
companies

share price ( Rs) IPOs of 2005 ( continued)
1400
1200
1000
600
400 of listing
200
0
3i Infotech Ltd
Infrastructures
Hydro-P ower
Jet A irways
Exports Ltd
Distriparks Ltd
Rem edies
(India) Ltd
Jaiprakash
Gokaldas
Indoco
Gateway
IV RCL of expiray of lock-up
period
54 55 56 57 58 59 60
companies
The data above indicates how the prices of the respective IPOs have been varying
in different time periods.
One can see how the price varies signicantly after the expiration of the lock-up
period of the IPOs.

The first table it can be seen that IPO listed price and its performance over a time
period of 3 years shows positive return. It could be a factor of sound fundamentals,
increasing demand , P/E multiples , timing of IPO such as in 2004 it was the boom
time for IPOs.
But the question of those shares being rewarding after the expiration of the lock-
up period would be seen in the effect seen after in which the insiders and
promoters can sell their securities in the secondary market.
2.) Comparison of share prices between the expiration of

lock-up period and the closing price in the next quarter
price 3
price on months
expiration after
day of lock- lockin diff in
Company up period pd difference %
Moschip Semiconductor
1
Technology Ltd 49.6 36.8 -12.8 -25.8065
2
Adlabs Films Ltd 129.85 99.1 -30.75 -23.6812
3
Aztecsoft Ltd 29.78 18.7 -11.08 -37.2062
4
Axis IT&T Ltd 18.25 9.9 -8.35 -45.7534
5
Balaji Telefilms Ltd 73.55 55.05 -18.5 -25.153
6
Opto Circuits (India) Ltd 74.55 47.85 -26.7 -35.8149

7
D-Link (India) Ltd 203.2 124.1 -79.1 -38.9272
8
Mid-Day Multimedia Ltd 33.8 33.2 -0.6 -1.77515
9
Andhra Bank 45.5 46 0.5 1.098901
10
Canara Bank 228.55 261 32.45 14.19821
11
Allahabad Bank 47.1 74.5 27.4 58.1741
12
Union Bank of India 131.05 122 -9.05 -6.90576
13
Punjab National Bank 375 379.5 4.5 1.2
14
Bharti Airtel Ltd 218.15 242.85 24.7 11.32248
15
T.V. Today Network Ltd 98.4 123.45 25.05 25.45732
16
Indraprastha Gas Ltd 115.2 99.95 -15.25 -13.2378
17
Vijaya Bank 53.2 38 -15.2 -28.5714
18
B A G Films & Media Ltd 9.19 8.92 -0.27 -2.93798
19
Indian Overseas Bank 115.85 110.7 -5.15 -4.4454
20
UCO Bank 23.15 21.2 -1.95 -8.42333
21
Maruti Suzuki India Ltd 805.35 819.7 14.35 1.781834
22
Divi's Laboratories Ltd 176.25 1303.6 1127.35 639.6312
23
Impex Ferro Tech Ltd 20.75 14.5 -6.25 -30.1205
24
Bharati Shipyard Ltd 769 541.65 -227.35 -29.5644
25
Deccan Chronicle Holdings Ltd 211.65 70.05 -141.6 -66.9029

26
S.A.L Steel Ltd 20.7 17.05 -3.65 -17.6329
27
Spanco Ltd 201.2 161.25 -39.95 -19.8559
28
NTPC Ltd 236.8 197 -39.8 -16.8074
Indiabulls Financial Services
29
Ltd 598.45 414.2 -184.25 -30.7879
30
Sah Petroleums Ltd 23.15 21.2 -1.95 -8.42333
31
Crew B.O.S. Products Ltd 15.88 14.9 -0.98 -6.17128
32
Tata Consultancy Services Ltd 1025.65 1072.05 46.4 4.52396
33
New Delhi Television Ltd 415.5 462.8 47.3 11.38387
34
Ramkrishna Forgings Ltd 147.25 40.2 -107.05 -72.6995
35
Dishman Pharmaceuticals 243.15 370.85 127.7 52.51902
36
Biocon Ltd 244.08 235.78 -8.3 -3.40052
37
PTC India Ltd 59.6 64 4.4 7.38255
38
Petronet LNG Ltd 42.2 56.2 14 33.17536
39
GAIL (India) Ltd 180 205 25 13.88889
Dredging Corporation of India
40
Ltd 493.65 493.25 -0.4 -0.08103
41
Bank of Maharashtra 38.75 50.05 11.3 29.16129
42
CMC Ltd 1221.8 1002.67 -219.13 -17.935
43
Four Soft Ltd 60.85 48.15 -12.7 -20.871
44
Patni Computer Systems Ltd 431.4 469.9 38.5 8.924432

45
IDFC LTD 108.4 70.8 -37.6 -34.6863
46
SPL Industries Ltd 13.39 14.1 0.71 5.302465
47
Nectar Lifescience Ltd 30.76 31.79 1.03 3.348505
48
YES Bank Ltd 116.6 140.55 23.95 20.54031
49
Provogue (India) Ltd 906 680 -226 -24.9448
50
India Infoline Ltd 877.45 731.2 -146.25 -16.6676
51
Allsec Technologies Ltd 66 41.45 -24.55 -37.197
52
Allahabad Bank 76.6 63.7 -12.9 -16.8407
53
Fame India Ltd 61.05 40 -21.05 -34.4799
54
Gokaldas Exports Ltd 206.95 161 -45.95 -22.2034
55
3i Infotech Ltd 117.7 68.7 -49 -41.6313
56
Jaiprakash Hydro-Power Ltd 66.55 42.6 -23.95 -35.988
IVRCL Infrastructures &
57
Projects Ltd 335.9 239.65 -96.25 -28.6544
58
Gateway Distriparks Ltd 98.55 88.65 -9.9 -10.0457
59
Jet Airways (India) Ltd 599.45 400.45 -199 -33.1971
60
Indoco Remedies 308.2 280.5 -27.7 -8.98767

Graph showing price variation of the pairs of stocks for

different time periods
Price variation
140
120
share price (Rs)
share prices on the

100
expiry date of lock-up
80 period
60 share prices at the end
40 of the following quarter
20
0
0 2 4 6 8
companies in 2000
Price variation
400
350
share price (Rs)
300
share prices on the expiry
250
date of lock-up period
200
share prices at the end of the
150
following quarter
100
50
0
0 2 4 6 8 10
Companies listed in 2001 to 2002

Price variation
1400
1200
share price (Rs)
share prices on the
1000
800 period
200
0
0 5 10
Companies listed in 2003
Price variation
1200
1000
share price (Rs)
share prices on the

800 expiry date of lock-up
period
600
200
0
0 5 10 15

Price variation
1400
1200
share price (Rs)
share prices on the

1000
800 period
400
200
0
0 5 10 15
Companies listed in 2004 contd
Price variation
1000
800
share price (Rs)
share prices on the

600 period
200
0
0 5 10 15

Price variation
700
600
share price (Rs)
share prices on the

500
400 period
200
100
0
0 2 4 6 8
Companies listed in 2005 contd
The second table shows how an average decline of 9.2 rupees per share if the
sample was to be considered as a whole . Over all it has been a downward curve
for the stocks performance. The average difference in stock prices for different
time periods can be seen and it is negative.

Chapter V
RESEARCH
AND
FINDINGS

Research findings
To examine the performance of Indian IPO’s performance after

lock in periods.
The Correlation coefficient of the data with respect to two

different periods in analysed. That is the share prices of the 60 IPOs on the date of
the expiry of the promoter’s 3 year of lock-up period (post-issue) is correlated
with their share prices exactly a quarter (i,e) 3 months after the lock-up period
(post-issue).
The correlation coefficient is positive (0.83013), which shows that the price of
one share declines with the other , considering the constant factor of the ’ post-
issue lock-in period ‘ which applies to the entire population.
The 60 pairs of stocks are compared to show the significance of correlation

coefficient
For the purpose of which the test of significance is done for the Pearson’s r
Two tailed test for Pearson’s r correlation
The sample of stocks is 60 i.e. N=60
The pairs of prices of the 60 stocks are considered for correlation coeffecient
Here the degrees of freedom is (N-2)
N is the sample of stocks and 2 is the sample as two parameters are

considered 60 - 2= 58

Two tail test of Pearson’s r correlation
Ho = there is a decrease in share prices before and after lock-in period
H1 = there is no decrease in share prices before and after lock in period
t = r * sq.root of N-2 ‘ r ‘ is correlation coefficient
sq.root 1-r sq N = no. of samples
t= .83013 * sq root of 58
sq rt 1- .83013 sqrt Degree of freedom = 58( N-2)
t = .83013 * 7.615
sq.rt 1 -.6891 (.3109)
t= 6.3214
.5575
t = 11.33 cal value
p = .0017 I,e tab value
Cal value is more than Tab value , hence , H o accepted
Hence it is concluded that there is decrease in the stock prices after the expiry
of the lock-in period.

Conclusions :
From the above inferences drawn after the calculations based on

the research criteria. It should be safe to conclude that the shares listed as IPOs
may give profitable returns in the initial phases or the specified time period of up
to two to three years of listing , the factor associated with the expiration of the
lock-up period irrespective of when was the issue was listed in the span of the 5
year period considered for this project. But after the lock-up period expires, before
which it is restricted by the lead underwriters to sell the shares in secondary
market in order to realize their profits.
The effect of which influences the listed price on the stock

exchanges except for the few stocks such as for the banks, IT, where the returns
are high despite such factors, the shares tend to under perform after the stipulated
period of time and no longer be profitable for the retail investors. It has been an
evidence worldwide not just India that after lock-in periods the managers or the
insiders do not overprice the IPOs but wait for the lock-up periods to realize
profits.
The IPOs which have been selected for the purpose of this
research are assumed to have strong fundamentals, have fared well despite the
factor of lock-up period , the ones which have under performed heavily are the
stocks which have been effected by the lock-up period .

This of course is different from what happened in the cases of FIIs, i,e the Foreign
venture capitalists withdraw their money, soon after their lock-in period.the whole
scenario of the stock markets changed when Sensex was down
It goes to show that the IPOs which have sound

fundamenmtals, Will continue to augur profitable returns despite such factors.
Stocks of the Pharma sector were not effected in the phase. Several IPOs were
priced and received good response form the investors initially which resulted in
making profits. The IPO of Biocon , Jetairways which yielded abnormal returns
initial periods too declined after the three year periods. But the current market
performance cannot be considered to deduce , since they have been affected due
to the meltdown.
Whatever of the time periods , the promoters would want to

realize their profits irrespective of their lock-up periods , same goes to the Venture
Capitalists (VCs) and Foreign VCs., but in case of promoter the purpose is to
invest in the secondary market. It is safer , as of today since SEBI with
recommendations from the Ministry of finance has enforced for the lock-in period
to be increased to 5 years , and 3 years for the VCs.
Despite all the factors the performance of the IPOs after lock-in
period will be looked in and it is better for the investor to hold his money till that
period and sell the shares to avoid the risk of loss.

Suggestions :
Based on the findings and conclusions it now to suggest that :
• For the IPO investors to hold the shares till the period of lock-in time, and
sell the shares in other profitable , prospective securities.The timing of the
investment should be carefully considered, both for investing and
withdrawing the amount irrespective of the market trends as there is no
measure for fixed returns in the stocks.
• The selection of IPO to be invested should be such that it should be studied

carefully studied f it was not oversubscribed unduly, as the investor is well
informed thanks to the SEBI norms.
• Keeping a check on day-to–day prices of the listed prices also look for the
fundamentals of an IPO before investing so that it should be a safe and
rewarding investment. Considering IPO grading as a tool for IPO
performances

Recommendations :
IPO grading should considered as a tool for profitable future
performance:
The study of IPO grading should be made a tool for predicting the
performance of an IPO. IT is a grade assigned by the Credit Rating Agency (CRA)
registered with SEBI with respect to the DIP Guidelines. It is based on
fundamentals alone and takes into consideration . It was introduced in 2007 and
was made mandatory for companies listed after 1st May 2007 to obtain a grade
It is an unbiased opinion from the CRA towards which consideres
The financial position, industry prospects,company prospects, management

quality. Corporate governance practices, risks and prospects..
All above aspects are considered and the IPO grades from a score of 1-5. It is of
course available in the prospectus.
CRA s registerd with SEBI are
CARE , ICRA,CRISIL,FITCH.
This privilege was not available with investors in the time selected for
this project.
Now that the investor is more educated because of the Investor Protection Norms
through , thanks to SEBI it would be more rewarding for the IPO investors to have
an independent opinion and invest in order to gain maximum returns.
So that the investor could avoid losses or atleast minimize the risk asscociated
with the IPO performances.

Bibliography:
Books :
i.) IPO Markets ,PERSPECTIVES AND EXPERIENCES
edited By Vandana Shajan
Published By ICFAI University press
Journals:
i) Icfai journal of finance
Magazines :
i) Businessworld
Websites :
www.capitaline.com
www.bseindia.com
www.nseindia.com
www.ipoindia.com

Sarfraz Khan07XQCM6093

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The Performance of IPOs after the expiry of lock-up periods in India

The Performance of IPOs after the expiry of

lock-up periods in India

Submitted in partial fulfillment of the requirements for the award

Sarfraz Ahmed Khan

MBA FOURTH SEMESTER

UNDER THE GUIDANCE AND SUPERVISION OF

Prof Dr. NAGESH .S MALAVALLI

M.P BIRLA INSTITUTE OF MANAGEMENT

ASSOCIATE BHARATIYA VIDYA BHAVAN

# 43, Race Course Road

M.P Birla Institute of Management, Bangalore -1-

I am Sarfraz Ahmed Khan, the student of M. P. Birla Institute of

Date: 12 may 2009 Sarfraz Ahmed Khan

M.P Birla Institute of Management, Bangalore -2-

This to certify that this report titled “The Performance of IPOs

Place: Bangalore Principal

Date: 12 May 2009 (Dr.N.S.Malavalli)

M.P Birla Institute of Management, Bangalore -3-

This is to certify that the Research Report entitled “The Performance

Place: Bangalore Prof. Dr. Nagesh Malvalli

Date: 12 May 2009 (Internal guide)

M.P Birla Institute of Management, Bangalore -4-

I would also like to thank Prof. S. Santhanam, M.P.Birla Institute of

Date: 12 May 2009 Sarfraz Ahmed Khan

M.P Birla Institute of Management, Bangalore -5-

The main purpose of this research is to investigate the

M.P Birla Institute of Management, Bangalore -6-

Chapter Particulars Page no.

SEBI and IPO 26

IPO lock-ups stop Insider selling 40

IPO lock-in agreements in U.K 45

IPO lock-up period : Implications of 45

III Problem Statement 46

IV Data analysis and inferences 55

V Research and Findings 71

M.P Birla Institute of Management, Bangalore -7-

Suggestions and Recommendations 77

List of tables, charts and graphs

Table Particulars Page no.

Graphs Particular Page no.

M.P Birla Institute of Management, Bangalore -8-

M.P Birla Institute of Management, Bangalore -9-

Raising money through IPO is a very complex process. It requires

Initial Public Offerings (IPOs) are the public offering or flotation

IPOs have been an important source of corporate financing for a

M.P Birla Institute of Management, Bangalore - 10 -

FINANCIAL MARKETS AND THE IPOs

M.P Birla Institute of Management, Bangalore - 11 -

1. The Primary Market

Secondary Market comprises of further issues which are floated by the

M.P Birla Institute of Management, Bangalore - 12 -

GENESIS AND GROWTH

“INITIAL PUBLIC OFFER” or the “IPO”.

M.P Birla Institute of Management, Bangalore - 13 -

GROWTH OF IPOs IN INDIA

HISTORY OF PRIMARY MARKET

M.P Birla Institute of Management, Bangalore - 14 -

established with headquarters in Mumbai in 1992.SEBI is the most powerful body

SEBI has come up with the guidelines for disclosures and

POPULARISING THE NEW ISSUE.

Late Mr Dhirubhai Ambani can be considered as ‘Bhishmapita’ of