Professional Documents
Culture Documents
Mcom Project Sem III
Mcom Project Sem III
BY
ANIKET GANGADHAR
KONKI
I
DECLARATION BY LEARNER
I the undersigned ANIKET GANGADHAR KONKI hereby declare that the work
embodied in this project work titled “A RESEARCH STUDY TO FIND OUT
EMERGING TREND, MERIT AND DEMERITS OF IPO IN INDIAN CAPITAL
MARKET” forms my own
contribution to the research work carried out under the guidance of Prof. Sameer
Velankar is a result of my own research work and has not been previously submitted to
any other University for any other Degree/Diploma to this or any other University.
Wherever reference has been made to previous works of others, it has been clearly
indicated as such and included in the bibliography.
I, here by further declare that all information of this document has been obtained and
presented in accordance with academic rules and ethical conduct.
Certified by
II
Certificate
This is to certify that MR. ANIKET GANGADHAR KONKI has worked and duly
completed her/his Project Work for the degree of master in Commerce under the faculty
of Commerce in the subject of and her/his project is entitled “A
RESEARCH STUDY TO FIND OUT EMERGING TREND, MERIT AND DEMERITS
OF IPO IN INDIAN CAPITAL MARKET” under my supervision. I further certify that
the entire work has been done by the learner under my guidance and that no part of it has
been submitted previously for any Degree or Diploma of any University.
It is her/his own work and facts reported by her/his personal findings and investigation.
Date of submission:
III
Acknowledgement
(Model structure of the acknowledgement)
To list who all have helped me is difficult because they are so numerous and the depth is
so enormous.
I would like to acknowledge the following as being idealistic channels and fresh
dimensions in the completion of this project.
I take this opportunity to thank the University Of Mumbai for giving me chance to do this
project.
I would like to thank my Principal, Prof. V.B.Rokade for providing the necessary
facilities required for completion of this project.
I would also like to express my sincere gratitude towards my project guide Dr. Amit
Prajapati whose guidance and care made the project successful.
I would like to thank my College Library, for having provided various reference books
and magazines related to my project.
Lastly, I would like to thank each and every person who directly helped me in the
completion of the project especially my Parents and Peers who supported me throughout
my project.
IV
LIST OF TABLE
PAGE
Sr. No. PARTICULAR
NO.
V
LIST OF CHART
PAGE
Sr. No. PARTICULAR
NO.
VI
INDEX
SR. NO. PARTICULARS PAGE NO.
TITLE PAGE I
DECLARATION II
CERTIFICATE III
ACKNOWLEDGEMENT IV
LIST OF TABLES V
LIST OF CHARTS VI
1.1 INTRODUCTION 2
1.2 HISTORY 3
1.4 PROCEDURE 6
VII
1.9 HOW DOES IPO WORK IN INDIA 17
2.1 INTRODUCTION 21
2.4 CONCLUSION 36
2.5 REFERENCE 37
VIII
3.7 HYPOTHESIS OF THE STUDY 45
BIBLIOGRAPHY 70
APPENDIX 74
IX
1
A RESEARCH STUDY TO FIND OUT EMERGING TREND,
MERITAND DEMERITS OF IPO IN INDIAN CAPITAL MARKET
1.1 INTRODUCTION
1.2
1.4 PROCEDURE
1.5
1
1
A RESEARCH STUDY TO FIND OUT EMERGING TREND,
MERITAND DEMERITS OF IPO IN INDIAN CAPITAL MARKET
1.1 INTRODUCTION
Initial public offering (IPO) or stock market launch is a type of public offering in
which shares of a company usually are sold to institutional investors that in turn, sell to the
general public, on a securities exchange, for the first time. Through this process, a privately
held company transforms into a public company. Initial public offerings are mostly used
by companies to raise the expansion of capital, possibly to monetize the investments of
early private investors, and to become publicly traded enterprises. A company selling
shares is never required to repay the capital to its public investors. After the IPO, when
shares trade freely in the open market, money passes between public investors. Although
IPO offers many advantages, there are also significant disadvantages, chief among these
are the costs associated with the process and the requirement to disclose certain
information that could prove helpful to competitors. The IPO process is colloquially
known as going public.
Details of the proposed offering are disclosed to potential purchasers in the form of a
lengthy document known as a prospectus. Most companies undertake an IPO with the
assistance of an investment banking firm acting in the capacity of an underwriter.
Underwriters provide several services, including help with correctly assessing the value of
shares (share price) and establishing a public market for shares (initial sale). Alternative
methods such as the Dutch auction have also been explored. In terms of size and public
participation, the two most notable examples of this method is the Google IPO and Snap
2
chat’s parent company Snap Inc. China has recently emerged as a major IPO market, with
several of the largest IPOs taking place in that country.
1.2 HISTORY
The earliest form of a company which issued public shares was the case of
the publican during the Roman Republic. Like modern joint-stock companies,
the publicans were legal bodies independent of their members whose ownership was
divided into shares, or parts. There is evidence that these shares were sold to public
investors and traded in a type of over-the-counter market in the Forum, near the Temple of
Castor and Pollux. The shares fluctuated in value, encouraging the activity of speculators,
or questers. Mere evidence remains of the prices for which parts were sold, the nature of
initial public offerings, or a description of stock market behavior. Publican lost favor with
the fall of the Republic and the rise of the Empire.
In the early modern period, the Dutch were financial innovators who helped lay the
foundations of modern financial system. The first modern IPO occurred in March 1602
when the Dutch East India Company offered shares of the company to the public in order
to raise capital. The Dutch East India Company (VOC) became the first company in
history to issue bonds and shares of stock to the general public. In other words, the VOC
was officially the first publicly traded company, because it was the first company to be
ever actually listed on an official stock exchange. While the Italian city-states produced the
first transferable government bonds, they did not develop the other ingredient necessary to
produce a fully-fledged capital market: corporate shareholders. As Edward String
ham (2015) notes, "companies with transferable shares date back to classical Rome, but
these were usually not enduring endeavors and no considerable secondary market existed.
In the United States, the first IPO was the public offering of Bank of North
America around 1783.
3
1.3 ADVANTAGES AND DISADVANTAGES
1.3.1 ADVANTAGES
When a company lists its securities on a public exchange, the money paid by the
investing public for then newly issued shares goes directly to the company (primary
offering) as well as to any early private investors who opt to sell all or a portion of their
holdings (secondary offerings) as part of the larger IPO. An IPO, therefore, allows a
company to tap into a wide pool of potential investors to provide itself with capital for
future growth, repayment of debt, or working capital. A company selling common shares is
never required to repay the capital to its public investors. Those investors must endure the
unpredictable nature of the open market to price and trade their shares. After the IPO,
when shares trade freely in the open market, money passes between public investors. For
early private investors who choose to sell shares as part of the IPO process, the IPO
represents an opportunity to monetize their investment. After the IPO, once shares trade in
the open market, investors holding large blocks of shares can either sell those shares
piecemeal in the open market, or sell a large block of shares directly to the public, at a
fixed price, through a secondary market offering. This type of offering is not dilutive, since
no new shares are being created.
4
3 Increasing exposure, prestige, and public image
4 Attracting and retaining better management and employees through liquid equity
participation
5 Facilitating acquisitions (potentially in return for shares of stock)
6 Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans,
etc.
1.3.2 DISADVANTAGES
i. Significant legal, accounting and marketing costs, many of which are ongoing
ii. Requirement to disclose financial and business information
iii. Meaningful time, effort and attention required of management
iv. Risk that required funding will not be raised
v. Public dissemination of information which may be useful to competitors, suppliers
and customers.
vi. Loss of control and stronger agency problems due to new shareholders
vii. Increased risk of litigation, including private securities class actions and
shareholder derivative actions.
5
Advantages and Disadvantages of coming up with an IPO:
Advantages Disadvantages
Stronger capital base Short-term growth pressure
Increases other financing prospects Disclosure and confidentiality
Better situated for making acquisitions Costs – initial and ongoing
Owner diversification Restrictions on management
Executive compensation Loss of personal benefits
Increase company and personal prestige Trading restrictions
1.4 PROCEDURE
IPO procedures are governed by different laws in different countries. In the United
States, IPOs are regulated by the United States Securities and Exchange Commission under
the Securities Act of 1933. In the United Kingdom, the UK Listing Authority reviews and
approves prospectuses and operates the listing regime.
Planning is crucial to a successful IPO. One book suggests the following 7 advance
planning steps:
6
7
1.4.2 FILING WITH THE SEBI
Once the deal is agreed upon, the investment bank puts together a registration
statement to be filed with the SEBI. This document contains information about the offering
as well as company information such as financial statements, management background,
any legal problems, where the money is to be used etc. The SEBI then requires acooling
off period, in which they investigate and make sure all material information has been
disclosed. Once the SEBI approves the offering, a date (the effective date) is set when the
stock will be offered to the public.
The sale (allocation and pricing) of shares in an IPO may take several forms. Common
methods include:
1. Public offerings are sold to both institutional investors and retail clients of the
underwriters. A licensed securities salesperson (Registered Representative in the
USA and Canada) selling shares of a public offering to his clients is paid a portion
of the selling concession (the fee paid by the issuer to the underwriter) rather than
by his client. In some situations, when the IPO is not a "hot" issue
(undersubscribed), and where the salesperson is the client's advisor, it is possible
that the financial incentives of the advisor and client may not be aligned.
8
2. The issuer usually allows the underwriters an option to increase the size of the
offering by up to 15% under certain circumstance known as the greenshoe or
overallotment option. This option is always exercised when the offering is
considered a "hot" issue, by virtue of being oversubscribed.
3. In the USA, clients are given a preliminary prospectus, known as a red herring
prospectus, during the initial quiet period. The red herring prospectus is so named
because of a bold red warning statement printed on its front cover. The warning
states that the offering information is incomplete, and may be changed. The actual
wording can vary, although most roughly follow the format exhibited on
the Facebook IPO red herring. During the quiet period, the shares cannot be
offered for sale. Brokers can, however, take indications of interest from their
clients. At the time of the stock launch, after the Registration Statement has become
effective, indications of interest can be converted to buy orders, at the discretion of
the buyer. Sales can only be made through a final prospectus cleared by the
Securities and Exchange Commission.
4. The Final step in preparing and filing the final IPO prospectus is for the issuer to
retain one of the major financial "printers", who print (and today, also
electronically file with the SEC) the registration statement on Form S-1. Typically,
preparation of the final prospectus is actually performed at the printer, where in one
of their multiple conference rooms the issuer, issuer's counsel (attorneys),
underwriter's counsel (attorneys), the lead underwriter(s), and the issuer's
accountants/auditors make final edits and proofreading, concluding with the filing
of the final prospectus by the financial printer with the Securities and Exchange
Commission.
9
Before legal actions initiated by New York Attorney General Eliot Spitzer, which later
became known as the Global Settlement enforcement agreement, some large investment
firmshad initiated favorable research coverage of companies in an effort to aid corporate
finance departments and retail divisions engaged in the marketing of new issues. The
central issue in that enforcement agreement had been judged in court previously. It
involved the conflict of interest between the investment banking and analysis departments
of ten of the largest investment firms in the United States. The investment firms involved
in the settlement had all engaged in actions and practices that had allowed the
inappropriate influence of their research analysts by their investment bankers seeking
lucrative fees. A typical violation addressed by the settlement was the case
of CSFB and Salomon Smith Barney, which were alleged to have engaged in inappropriate
spinning of "hot" IPOs and issued fraudulent research reports in violation of various
sections within the Securities Exchange Act of 1934.
1.4.4 PRICING
Historically, many IPOs have been underpriced. The effect of underpricing an IPO
is to generate additional interest in the stock when it first becomes publicly
traded. Flipping, or quickly selling shares for a profit, can lead to significant gains for
investors who were allocated shares of the IPO at the offering price.
10
However, underpricing an IPO results in lost potential capital for the issuer. One
extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 1990s
internet era. Underwritten by Bear Stearns on 13 November 1998, the IPO was priced at $9
per share. The share price quickly increased 1000% on the opening day of trading, to a
high of $97. Selling pressure from institutional flipping eventually drove the stock back
down, and it closed the day at $63. Although the company did raise about $30 million from
the offering, it is estimated that with the level of demand for the offering and the volume of
trading that took place they might have left upwards of $200 million on the table.
Underwriters, therefore, take many factors into consideration when pricing an IPO,
and attempt to reach an offering price that is low enough to stimulate interest in the stock,
but high enough to raise an adequate amount of capital for the company. When pricing an
IPO, underwriters use a variety of key performance indicators and non-GAAP
measures.[29] The process of determining an optimal price usually involves
the underwriters ("syndicate") arranging share purchase commitments from leading
institutional investors.
Some researchers (Friesen & Swift, 2009) believe that the underpricing of IPOs is
less a deliberate act on the part of issuers and/or underwriters, and more the result of an
over-reaction on the part of investors (Friesen & Swift, 2009). One potential method for
determining underpricing is through the use of IPO underpricing algorithms.
11
1.4.5 QUIET PERIOD
Under American securities law, there are two time windows commonly referred to
as "quiet periods" during an IPO's history. The first and the one linked above is the period
of time following the filing of the company's S-1 but before SEC staff declare the
registration statement effective. During this time, issuers, company insiders, analysts, and
other parties are legally restricted in their ability to discuss or promote the upcoming IPO
(U.S. Securities and Exchange Commission, 2005).
The other "quiet period" refers to a period of 10 calendar days following an IPO's
first day of public trading. During this time, insiders and any underwriters involved in the
IPO are restricted from issuing any earnings forecasts or research reports for the company.
When the quiet period is over, generally the underwriters will initiate research coverage on
the firm. A three-day waiting period exists for any member that has acted as a manager or
co-manager in a secondary offering.
Not all IPOs are eligible for delivery settlement through the DTC system, which
would then either require the physical delivery of the stock certificates to the clearing agent
bank's custodian, or a delivery versus payment (DVP) arrangement with the selling group
brokerage firm.
12
13
1.5 LARGEST IPOs
14
1.6 LARGEST IPO MARKETS
Alibaba, the e-commerce giant had filed for an initial public offering in the United
States, which achieved the biggest market debut in history. Alibaba had proposed an initial
range of $60 to $66 a share, butdemand for the stock raised the top estimate to $68, which
is what the company eventually settled on. There were six investment banks leading the
company through the IPO process: Credit Suisse, Deutsche Back, Goldman Sachs,
JPMorgan Chase, Morgan Stanley and Citi. The words from the Chairman before the IPO
were, "Lying behind the massive allure of the capital market, there is unparalleled
ruthlessness and pressure. In this market, only a small number of outstanding enterprises
can maintain a gallop.
There are certain factors which need to be taken into consideration before
applying for Initial Public Offerings in India:
4) Whether the firm has entered into a collaboration with technological firm
15
1.8 GENERAL TERMS INVOLVED IN IPO
1) Primary market: It is the market in which investors have the first opportunity to buy a
newly issued security as in an IPO.
2) Prospectus: A formal legal document describing the details of the company is created
for a proposed IPO, also making the investors aware of the risks of an investment. It is
also known as the offer document.
3) Book building: It is the process by which an attempt is made to determine the price at
which the securities are to be offered based on the demand from investors.
4) Over Subscription: A situation in which the demand for shares offered in an IPO
exceeds the number of shares issued.
6) Price band: Price band refers to the band within which the investors can bid. The
spread between the floor and the cap of the price band is not be more than 20% i.e. the
cap should not be more than 120% of the floor price. This is decided by the company
and its merchant bankers. There is no cap or regulatory approval needed for
determining the price of an IPO.
7) Listing: Shares offered in IPOs are required to be listed on stock exchanges for the
purpose of trading. Listing means that the shares have been listed on the stock
exchange and are available for trading in the secondary market.
16
8) Flipping: Flipping’s reselling a hot IPO stock in the first few days to earn quick profit.
The reason behind this is that companies want long-term investors who hold their
stock, not traders.
The IPO process starts when the company lodges a registration declaration in
accordance with SEBI. The entire listing declaration is then studied by the SEBI. This is
followed by the prelude brochure proposed by the sponsor and then an authorized catalog
prior to the share offering. The value and time of the IPO are then determined.
When a firm proposes a public issue or IPO, it offers forms for submission to be
filled by the shareholders. Public shares can be bought for a limited period only. The
submission form should be duly filled up and submitted by cash, cheque or DD prior to the
closing date, in accordance with the guidelines mentioned in the form.
17
18
19
2
2.1 INTRODUCTION
2.4 CONCLUSION
2.5 REFERENCE
20
2
2.1 INTRODUCTION
In India, IPOs seems to be low-hanging fruits for the investors. If investors were
to get allocations in IPOs and sell these shares on the listing day, then on an average they
would be able to get returns higher than the market. However the risk of blocking one’s
money in IPOs and getting no allocations is associated with investments in IPOs. The
behavior and the determinants of IPO returns on the listing day as well as in long term
period has been researched extensively in almost all the major stock exchanges of the
world. Here the literature reviews of the previous researches done on the returns behavior
of IPOs all over the world including Indian stock market are mentioned below
Reena Aggarwal (1993) found the initial one-day returns to be 78.5 percent, 16.7
percent, and 2.8 percent for Brazil, Chile, and Mexico. The long-run mean market-
adjusted returns were found to be -47.0 percent in Brazil after three years. The three-year
mean excess return was -23.7 percent for Chile and the one-year mean excess return was
-19.6 percent for Mexico. They indicated long-run underperformance. For Brazil, there
seems to be a negative relationship between the initial returns and the long-run returns,
suggesting the overpricing of IPOs on the first trading day. These findings for the Latin
American markets were similar to the U.S. and UK pattern of long-run
underperformance. Based on the international evidence, it appears that these long-run
21
patterns were not just sample or country-specific. This phenomenon, in fact, existed in
nearly all markets except the U.S. and UK.
Kasim Alli (1994) analyzed the underpricing of IPOs of financial institutions and found
that in general, IPOs of financial institutions are significantly less underpriced than those
of non- financial institutions. These results are consistent with previous empirical studies
on the testing of information asymmetry hypothesis that the less ex ante uncertainty about
the value of the new issues, the smaller the average underpricing. These results hold even
after controlling for differences in underwriters' reputation, aftermarket volatility, and
years since establishment. However, results also show that the difference in the
underpricing between S&L conversion and nonfinancial firm IPOs disappears once the
differences in underwriters' reputation, aftermarket volatility, and years since
establishment have been controlled for. This suggested that the difference in the
underpricing between the non- financial institutions and the financial institutions was
primarily due to the underpricing of the non-S&L conversion IPOs. Furthermore, results
generally indicated that the level of ex ante uncertainty was lower for financial
institutions than for non- financial firms. Judging by the size of the average underpricing
of the non-S&L conversion financial institution sample (3.84 percent), the ex ante
uncertainty associated with the financial institutions (represented by the non-S&L
conversions) seemed to be bigger than those of equity carve-outs (1.7 percent) or
leveraged buyouts (2.04 percent). The results from this study were more consistent with
the information asymmetry hypothesis than the insurance-against- legal- liability
hypothesis. The lower level of underpricing for non-S&L conversion financial
institutions was also consistent with the regulation hypothesis that the regulations
imposed on depository financial institutions helped reduce ex ante uncertainty.
Narsinhan and Raman (1995) Analyzed the performance of 103 IPOs and found that
the initial returns from the IPOs are higher. Shah (1995) carried out a study on IPOs for
the period January 1991 to April 1995 of 2056 IPOs and reported that underpricing on an
average was 105.6 percent above the offer price on equally weighted basis and 113.75
percent if weighted by size of the issue. The commonest delay between issue date and
22
listing date is 11 weeks, and it is highly variable. This delay is strongly associated with
issue size, where bigger issues tend to have shorter delays. The listing delay had
diminished over the years. Because the listing delay is variable, it is incorrect to use
simple averages in expressing IPO underpricing; this would be clubbing together returns
obtained over different lengths of time. Because this delay is long, it is necessary to
measure returns on IPOs in excess of returns on the market index. Hence the focus is on
the weekly returns on IPOs in excess of weekly returns on the market index. It is found
that the average IPO underpricing comes to 3.8 percent per week by this metric. Very
small as well as very large issues had higher initial returns than the issues of medium
size.
Madhusoodan and Thripalraju (1997) conducted a study on data set of 1992 IPOs
covering time period 1992-1995 and found that winner’s curse explanation does not hold
good. The insurance against legal liability explanation is also not valid as it is not allowed
in India. This research paper analyzed the Indian IPO market for the shortterm as well as
long-term underpricing. They also examined the impact of the issue size on the extent of
underpricing in these offerings and the performance of the merchant bankers in pricing
these issues. The study indicated that the underpricing in the Indian IPOs in the short-run
was higher than the experiences of other countries. In the long-run too, Indian offerings
have given high returns compared to negative returns reported from other countries. The
study also revealed that none of the merchant bankers showed any better pricing
capabilities.
Raghuram Rajan and Henri Servaes (1997) examined data on analyst following for a
sample of initial public offerings completed between 1975 and 1987. They did this to
observe three well-documented IPO anomalies. They found that higher underpricing
leads to increased analyst following. Analysts are overoptimistic about the earnings
potential and long term growth prospects of recent IPOs. More firms complete IPOs
when analysts are particularly optimistic about the growth prospects of recent IPOs. In
the long run, IPOs have better stock performance when analysts ascribe low growth
23
potential rather than high growth potential. These results suggested that the anomalies
may be partially driven by over optimism.
Pandey and Arun Kumar (2001) explored the impact of signal on underpricing. Based
on cross sectional data of 1243 IPOs in Indian Market during 1993-1995, they found that
realized excess initial returns on IPOs were high on approx 68 percent. They also
reported that smaller sized issues tend to have higher initial returns as compared to large
issues.
Krishamurti and Kumar (2002) described the environment for making initial public
offerings (IPOs) in India and the process itself; and discussed the applicability of various
research explanations for underpricing to the Indian Market. It suggested that it will be
greater for new firms and issues managed by reputable merchant bankers. The research
paper analyzed 1992-1994 data on 386 IPOs to assess their performance and found that
the issues with high risk and/or smaller offer prices are more underpriced; and that
returns are strongly correlated with subscription levels.
Jaitley (2004) studied the extent of underpricing shortly following the deregulation of
new issue market and found that first day return was on an average 72 percent. This study
investigated the pricing of new issues in the Indian equity market during the period
shortly following the deregulation of the market for new issues and evaluated the
importance of book value and market value estimates in determining issue prices as well
as prices on the first day of trading. The study also used variables that may reduce
uncertainty (age to proxy for awareness of the company) and information asymmetry (the
extent of the promoter’s contribution to the new issue) in order to test whether
uncertainty and information asymmetry have an impact on pricing of new issues. The
result indicated that pricing of new issues appears to be consistent with rational decision-
making. No significant differences were found in first day returns between the two
groups of companies. There were, however, significant differences between the two
groups with respect to relative size of the issue and the difference between the forecasted
and current book value. This indicated that the CCI price might be used as a benchmark,
24
which is, then adjusted upwards or downwards to place greater emphasis on expected
performance.
Marisetty and Subrahmanyam (2005) documented the effect of group affiliation on the
2713 IPOs made in India during three regulatory regimes during the period 1990-2004.
The study found that, the average under pricing of group companies was higher than that
of standalone companies. In particular, they reported that under pricing was higher for
companies affiliated to private foreign (multinational) and private Indian groups.
Pandey (2005) examined the difference in under pricing of IPOs caused by difference in
allocation mechanism. On a sample of 84 Indian IPOs (20 book-build and 64 fixed price
from the period 1999-2000, he found the initial returns were higher on fixed offer pricing.
It may be noted that fixed price method was used for allocating of IPOs until 1999 when
book building was allowed. Now both book building and fixed offer price method are
available. This provides opportunity to compare both mechanisms
under similar market conditions.
Ghosh (2005) carried out a study to find out the factors explaining IPO under pricing
using 1842 companies that got listed on Bombay Stock Exchange from 1993-2001. His
study supported the signaling theory. Contrary to the international experience, he
reported that under pricing was less during the high volume (hot) period as compared
to the slump period in the Indian stock market.Alexander Ljungqvist and William J.
Wilhelm, JR. (2005) derived a behavioral measure of the IPO decision- maker’s
satisfaction with the underwriter’s performance based on Loughran and Ritter (2002) and
assess its ability to explain the decisionmaker’s choice among underwriters in subsequent
securities offerings. Controlling for other known factors, it was found that the IPO firms
were less likely to switch underwriters when behavioral measure indicated they were
satisfied with the IPO underwriter’s performance. Underwriters also extracted higher fees
for subsequent transactions involving satisfied decision- makers. Although the results
suggested that the behavioral model has explanatory power, they do not speak directly to
25
whether deviations from expected utility maximization determine patterns in IPO initial
returns.
Ravi Lonkani and Michael Firth (2005) studied IPO prospectus in Thailand and found
that this type of direct disclosure is especially important in a developing economy such as
Thailand where financial intermediaries and information vendors are relatively sparse,
and where investors are rarely professionals. It was also found that the managers'
earnings forecasts were much more accurate than extrapolations of historical earnings.
The forecast accuracy is related to underpricing, and it has a directional, but not
statistical, association with one-year stock returns and one-year wealth relatives.
Ansari V. Ahmed (2006) studied the IPO underpricing in India during the period of
2005 and found that the average first-day return (underpricing) was 40.9 percent which is
quite substantial. He also found that during the period 84 percent of the IPOs were
underpriced and 16 percent were overpriced.
Dev Prasad, George S. Vozikis, and Mohamed Ariff (2006) examined the impact of
government initial public offering (IPO) regulation intending on promoting public policy.
The study examines the results of the implementation of a Malaysian government policy
in 1976, which mandated that at least 30 percent of any new shares on an IPO offer be
sold to the indigenous Bumiputera population or to mutual funds owned by them. The
study examined the short-run and long-run underpricing of Malaysian IPOs and found
that Malaysian IPOs are highly underpriced compared to IPOs in developing countries,
creating a market microstructure effect. It also confirmed that the Malaysian
government’s regulatory intervention in spite of noble public policy intentions appeared
to be the significant factor for the emergence of an average firstday underpricing increase
of Malaysian IPOs by 61 percent during the period after the regulatory economic policy
was instituted. Fur thermore, the study found that this high underpricing persists even for
the long run, in contrast to the longrun performance of IPOs in the United States.
26
2.3 GLOBAL ASPECTS
Ritter (1984) analyzed the “hot issue” market of 1980, the 15-month period starting from
January 1980 and extending through March 1981 during which the average initial return
on unseasoned new issues of common stock was 48.4 percent. This average initial return
compares with an average of 16.3 percent during the “cold issue” market comprising the
rest of the 1977-82 periods. An equilibrium explanation for this difference in average
initial returns is investigated but is found to be insufficient. Instead, this hot issue market
is found to be associated almost exclusively with natural resource issue. For firms in
another industry, a hot issue market is barely perceptible. This research paper
documented tremendous disparities between the initial returns from natural resource
issues vis-à-vis non natural resource issues in the United States during 1977–82,
underlining the role of industry classification in IPO underpricing.
Rock and Kelvin (1986) demonstrated that retail uninformed investors might suffer from
a winner’s curse problem. They might get all the allocations that they have asked for in
IPOs, which are going to earn very low returns on the day of listing, but may be rationed
out in IPOs, which will give very high returns on the day of listing, because of the high
demand that such issues will generate. Thus, retail uninformed investors might not be
able to utilize the underpricing inherent in IPOs to their advantage. Besides this,
uninformed investors might not be able to fully comprehend the risk factors which are
outlined in the offer documents of the IPOs. To this extent, the rating mechanisms
introduced in the Indian IPO markets would prove to be useful for the retail investors.
Rock (1986) proposed the “Winner Curse hypothesis” to reasonably explain an IPO’s
positive initial return. The hypothesis implies that more uncertain issues should have
higher initial returns. Issuers and their investment bankers attempt to reduce information
asymmetry and initial returns by disseminating information about the IPO firm. Investors,
on the other hand, try to judge the growth potential of a company going public from the
available information, which includes age, size, information about promoters, and
industry classification.
27
Ritter (1991) found that the underpricing of initial public offerings (IPOs) that have been
widely documented appeared to be a short-run phenomenon. Issuing firms during 1975-
84 substantially underperformed a sample of matching firms from the closing price on the
first day of public trading to their three- year anniversaries. There was a substantial
variation in the underperformance year-to-year and across industries, with companies that
went public in high-volume years faring the worst. The patterns were consistent with an
IPO market in which (1) investors are periodically overoptimistic about the earning
potential of young growth companies, and (2) firms take advantage of these "windows of
opportunity."
Ritter and Loughran (1995) found that the companies issuing stock during 1970 to
1990 whether an initial public offering or a seasoned equity offering, have been poor
long-run investments for investor. During the five year after the issue, investors had
received average returns of only 5 percent per year for companies going public and only
7 percent per year for companies conducting a seasoned equity offer. Book-tomarket
effects accounted for only a modest portion of the low returns. An investor would have
had to invest 44 percent more money in the issuers than in non- issuers in the same size to
have the same wealth five years after the offering date. The research paper documented
that larger and more established IPOs had given better returns to their investors over the
long run compared to their smaller and younger counterparts. These arguments
highlighted investor uncertainty as a prime factor in IPO underpricing.
28
2.4 CONCLUSION
Many theoretical studies have been conducted regarding the reasons that explain
IPO underpricing and some of these theories have been tested empirically. In general,
most of the theories converge to some factors that affect underpricing. These factors can
be summarized to the following: the information asymmetry between investors, between
issuers and underwriters or between underwriters and institutional investors; the desire to
stand out as high quality investment; the likelihood of future litigation; the desire of the
owners or the managers to achieve ownership dispersion and to retain control; and other
behavioral explanations that make the shares attractive.
29
2.5 REFERENCES
Anand Adhikar (2010) “New Listings” Business Today, Vol.19, No.23, Page 94-95.
Jignesh B. Shah and Smita Varodkar , November (2013) “Capital Market: Trends in
India and abroad – impact of IPO Scam an Indian Capital Market”, published in the
Souvenir, All India Accounting Conference, November (2013)
Jagannadham Thunuguntla (2011) “IPOs: More Misses Than Hits”, Dalal Street
Investment Journal, Vol.26. No. 9, Page. 69.
Madhumita Gosh (2011) “IPOs: More Misses Than Hits”, Dalal Street Investment
Journal, Vol. 26. No. 9, Page 70.
Mahesh Nayak (2010) „Of Primary Concerns‟ Businessworld, Vol. 30, No. 25, 2-8,
Page 30-36.
Prithvi Haldea, (2011) “IPOs: More Misses Than Hits”, Dalal Street Investment
Journal, Vol. 26. No. 9, Page 67.
Sunil Damania (2011) “Primary Issues” Dalal Street Investment Journal, Vol. 2 No.
9, Page No. 3.
30
3
RESEARCH METHODOLOGY
31
3
RESEARCH METHODOLOGY
32
evaluate the intensity of respondent on various parameters with high and low extremes on
the scale.
3.1.3 LIMITATIONS:
The study is limited only within Mumbai City [mainly Central Mumbai] of
Maharashtra State, because of the time & financial constraints the study is restricted to
the sample size up to 50 respondents / investors of different age groups. However, it is
reasonably sufficient number to generalize the information collected. The study could not
cover the legal – investment strategies & aspects on the whole.
33
important or unique that it warrants the expenditure necessary to gather the primary data.
Primary data are original in nature and directly related to the issue or problem and current
data. Primary data are the data which the researcher collects through various methods like
interviews, surveys, questionnaires etc.
1. The primary data are original and relevant to the topic of the research study so
the degree of accuracy is very high.
2. Primary data is that it can be collected from a number of ways like interviews,
telephone surveys, focus groups etc. It can be also collected across the national
borders through emails and posts. It can include a large population and wide
geographical coverage.
3. Moreover, primary data is current and it can better give a realistic view to the
researcher about the topic under consideration.
4. Reliability of primary data is very high because these are collected by the
concerned and reliable party.
34
Advantages of secondary data are following:
1. The primary advantage of secondary data is that it is cheaper and faster to access.
2. Secondly, it provides a way to access the work of the best scholars all over the
world.
3. Thirdly, secondary data gives a frame of mind to the researcher that in which
direction he/she should go for the specific research.
4. Fourthly secondary data save time, efforts and money and add to the value of the
research study.
3.3.1 POPULATION:
This is the set of maximum Investors [Male & female] to which the findings are
to be generalized.
35
3.4 STUDY AREA, SAMPLE TYPE – SAMPLING PROCEDURE:
due to time constraints, the study is bounded throughout the city of Mumbai only. The
reason for selecting this City is because there are a large number of people residing &
who are familiar about it as they may invest on regular basis too.
1.) Documentation – This involves collecting information & data from existing
surveys, reports & documents.
36
3.) Observation & Analysis – The observation during the fieldwork will be used
mainly to review the issues beyond those covered in the structured & semi-
structured questionnaires. The data will be analyzed in the form of graphs, charts
table format, etc. according to the age-groups, gender wise.
3. To evaluate the performance of the select equity growth schemes and compare
it with the benchmark to find out whether there is equality of means (returns).
4. To compare the risk and return of equity and debt funds for a period of 10
years to study the long run performance.
37
6. To know whether there is any association between the selected variables and
investors perception of mutual funds.
Hypothesis 2: The retail investors‟ greatest worry is too much price volatility, price
manipulation and corporate fraud which shaken confidence of the investors.
38
4
39
Table No. 4.1 Age Group of Respondent
Category Response %
Below 20 6 12
21-30 29 58
31-40 9 18
Above 40 6 12
50 100
40
From the above table 4.1 provides the profile of sample like age of the
respondents. The sample was selected of them who are the traders, brokers and individual
investors. The sample size of our project is limited to 50 people only. Most of the
respondents belong to the age group of 21-30, followed by 31-40, and 40 - Above. This
shows that Age group of 21 to 30 are highly invest in IPO
Category Response %
Female 19 38
Male 31 62
50 100
41
Above table 4.2 shows that from the total respondents 62% were males and 38%
were females. We can see that the number of males is more compared to that of the
number of females. This clearly talks about the interests of the male population in
investments.
Category Response %
Secondary School or less 6 12
Diploma/Certificate 12 24
Bachelor’s Degree/PG Diploma 22 44
Master’s Degree/ACCA/APA 10 20
50 100
42
From the table 4.3 shows that the invest education, they were 44% of respondents
are in Bachelor’s degree, followed by 24% diploma/Certificate, and then 20% are in
Master’s degree.
Category Response %
Student 17 34
Employed 24 48
Part Time Work 6 12
Retired 3 6
50 100
43
Chart No. 4.4 Occupation Group of Respondent
From the above table 4.4 we can see that the maximum numbers of respondents
were employed followed by student, retired and Part time workers. This clearly shows us
that the maximum numbers of people who are interested in investment activities are
employed persons; they have the panache for investment activities. They are nearly 48%
of the sample. The interesting factor is that the employed persons are very much
interested in investment activities which are a very good sign.
44
Table No. 4.5 Investor group In IPO
Category Response %
Yes 26 52
No 24 48
50 100
Table 4.5 mainly talks about the respondents‟ interest in investing in Initial Public
Offers. Out of 50 people surveyed it is seen that 48% of the people are investing in IPOs
whereas 52% of the people are not investing in IPO. This shows that IPO does not
considered as a good option for investment by most of the respondents
45
Table No. 4.6 Reason for not invest In IPO
Category Response %
Lace of Awareness & knowledge 27 54
Due to Risk Factor & Scam 15 30
Take more time in getting returns 8 16
50 100
Table 4.6 is clearly shows that 54% of people who don’t invest in IPOs due to
lack of awareness and knowledge. And second most important reason is risk factor and
scam which are associated with IPO. Also delay in getting returns is also one of the
factors.
46
Table No. 4.7 Advice to new investor
Category Response %
Go by only Promoters 15 30
Go by only Premium 19 38
Go by only Sector Performance 16 32
50 100
Table 4.7 mainly talks about the advice to new investors the respondent’s data
shows that 38% respondents are prefer to go by only premium, 32% respondents showed
interest in go by only sector performance and 30% respondents go by only promoters.
47
Table No. 4.8 Investors in IPO
Category Response %
Below 10,000 27 54
Above 10,000 - 50,000 20 40
Above 50,000 - 1,00,000 3 6
50 100
From the above table 4.8 shows that, when the investors were asked to how much
they invest in an IPO, we found that maximum number of the people invest somewhere
below 10,000 in an IPO that is 54% and followed by people who invest more than Rs
10,000 in an IPO that is 40%. There were very few people who invest in IPO for an
amount more than Rs 50,000 and Rs 1, 00,000.
48
Table No. 4.9 Purpose of Investment
Category Response %
Listing Gain 27 54
Long Term Gain 23 46
50 100
Table 4.9 talks that the respondents invest in an IPO for the purpose of obtaining
the listing gains that is 54% and the long term gains that is 46%. This clearly shows us
that more number of people invests in IPO to earn profit at the time of listing and they are
not the long term investors.
49
Table No. 4.10 Percentage gained on IPO listing
Category Response %
Below 10% 14 28
Up to 10% 18 36
10% - 15% 12 24
15% and Above 6 12
50 100
50
From the above table 4.10 mainly talks about the returns that the investors have
received by investing in an IPO. We can see that most of the investors have received Up
to 10% of returns that is 36% of sample size. And there are also people who received 10
% to 15% returns that are 24% of sample size and very few people received above 15%
returns and that are 12% of sample as well. As figure shows there few people haven’t got
the returns on their investment that is 24% of sample size. Hence we can say that IPO
would be the good option for investment which gives you around 10% to 15% returns on
your investment.
51
Chart No. 4.11 Group of Respondent for IPO
From the above table 4.11 as we asked question to respondents that is it better
invest in IPO? The maximum number of respondent’s are says yes 52% of sample size,
there are few respondents said no 16% of sample size and 32% of respondent’s have said
may be.
52
Table No. 4.12 Respondent gained from IPO
Category Response %
No Gain 11 22
Up to 10% 22 44
10% to 20% 12 24
Above 20% 5 10
50 100
53
From the above table 4.12 mainly talks about the returns that the investors have
received by investing in an IPO. We can see that most of the investors have received Up
to 10% of returns that is 44% of sample size. And there are also people who received
10% to 20% returns that are 24% of sample size and very few people received above 20%
returns and that are 10% of sample as well. As figure shows there few people haven’t got
the returns on their investment that is 24% of sample size. Hence we can say that IPO
would be the good option for investment which gives you around 10% to 20% returns on
your investment.
Category Response %
Easy 20 40
Complicated 24 48
Difficult 5 10
Lengthy 1 2
50 100
54
Chart No. 4.13 Investors perception towards Procedure of IPO
A respondent feeling about the IPO procedure is discussed in the above table 4.13
it has been observed that 48% of the respondents are of the opinion that the IPO listing
procedure is complicated. 10% of the respondents feel it is difficult where 40% of the
people feel that it is easy and 01% of the people feel that it is lengthy. The overall
opinion of the respondents is that the IPO procedure is complicated and easy.
55
Table No. 4.14 Difficulties faced by Investors
Category Response %
Refund Problem 17 34
Delay in crating allotted shares to your DEMAT Account 17 34
No Clarity in allotment 16 32
50 100
From the above table 4.14 mainly talks about the problems faced by the investors
after applying for IPOs. We can see that 34% of the respondents have faced problem
Delay in crediting allotted of shares where as 34% of the people have the problem with
Refund and 32% faced problem of No clarity in allotment after applying for IPOs.
56
5
57
5
1. Age Group of Respondent shows that Age group of 21 to 30 are highly invest in
capital market and IPO
2. Gender Group of Respondent this clearly talks about the interests of the male
population in investments.
3. Education Group of Respondent shows that the invest education, they were 44%
of respondents are in Bachelor’s degree
5. Table 4.5 mainly talks about the respondents‟ interest in investing in Initial Public
Offers. Out of 50 people surveyed it is seen that 48% of the people are investing
in IPOs whereas 52% of the people are not investing in IPO.
58
6. Table 4.6 is clearly shows that 54% of people who don’t invest in IPOs are due to
lack of awareness and knowledge.
7. Table 4.7 mainly talks about the advice to new investors the respondent’s data
shows that 38% respondents are prefer to go by only premium.
8. We found that maximum number of the people invest somewhere below 10,000 in
an IPO that is 54% and followed by people who invest more than Rs 10,000 in an
IPO that is 40%.
9. Purpose of Investment that more number of people invests in IPO to earn profit at
the time of listing and they are not the long term investors.
10. We can say that IPO would be the good option for investment which gives you
around 10% to 15% returns on your investment.
11. The maximum number of respondent’s are says yes 52% of sample size, there are
few respondent’s said no 16% of sample size.
12. IPO would be the good option for investment which gives you around 10% to
20% returns on your investment.
13. The overall opinion of the respondents is that the IPO procedure is complicated
and easy.
59
14. Delay in crediting allotted of shares where as 34% of the people have the problem
with Refund and 32% faced problem of No clarity in allotment after applying for
IPOs.
1. There is below age 20 having 12% of sample size; the investor should educate the
students in IPO.
4. Retired people having respond only 6%, needs to be educate more to them to
invest in IPO.
5. There are 48% of respondents those not invest in IPO; it needs to be educating
them to invest in IPO.
6. Due to risk factor and scam people are not invest in IPO, therefore the knowledge
needs to be provide to the people who wants to invest in IPO.
8. We found that only 6% of sample size not invest in more than 50,000 to 1,00,000,
hence we needs to suggest to invest more in IPO.
9. There are 46% of sample size are invest in IPO for Long term gain.
60
10. Above 15% and more are gained from IPO listing 12% of our sample size,
however, needs to be educating them how to gain more from IPO.
11. 16% sample size are saying no to invest in IPO. We can suggest investing in IPO.
12. Needs to be educating people that how to gained more from IPO
14. There are 34% of sample size of respondents are facing refund problem, therefore
needs to create simple procedure of IPO
61
5.3 CONCLUSION OF THE STUDY
After making the project, we would like to conclude that IPO is no more risky
investment as SEBI is playing very important role in regulating the risk and
financial aspects of the investors. As per our finding IPOs gives returns up to 10%
to 20% to 88 of total investors hence IPO can be consider good option for
investment.
Therefore, we reject the null hypothesis 1 and conclude that IPO is not a risky
investment with the help of careful research and study and with the help of broker
advice the individual investor can predict what the stock or shares will do on its
initial day of trading up to some extent.
Also this project report has proven that large no of investors have shown
confidence in IPO and prefer to invest in IPO and according to them IPO is one of
the good option for Investment.
62
BIBLOGRAPHY
Abor Joshua (2003), the Role of Investment Banking in Raising Capital in Ghana.
Aggarwal, Deepak (2006), IPO Pricing – Book Building and Efficient Pricing
Methodology,
63
Bain & Co. (2005), Private Equity Market in India Set to More than Triple, Indian
Equity Outlook
Bajpai, G.N. (2003), Banking, Insurance and Financial Sector, Speech Delivered
at 15th All India Conference of Chartered Accountants held at New Delhi on
January 4.
Banerjee, Arindam (2006), Indian Capital Markets- Trends & Reforms, (ed.), The
ICFAI University Press, Hyderabad.
Basu, Indrajit (2005), Boom Time for India’s Primary Share Market, Asia Time
Online.
Beaty R.P. and Ritter J.R. (1986), Investment Banking Reputation and the
Underpricing of Initial Public Offerings, Journal of Financial Economics, Vol. 15,
pp. 213-32.
64
APPENDIX
Questionnaire
Primary Data
Name-
Age- Gender-
Email-
Q.1 Age
( ) Below 20
( ) 21-30
( ) 31-40
( ) Above 40
65
Q.3 Occupation
( ) Student
( ) Employed
( ) Part Time Work
( ) Retired
( ) Yes
( ) No
( ) Go by only Promoters
( ) Go by only Premium
( ) Go by only Sector Performance
( ) Below 10,000
( ) Above 10,000 - 50,000
( ) Above 50,000 - 1,00,000
66
Q.8 What is the purpose of IPO investment from Investor’s perceptive?
( ) Listing Gain
( ) Long Term Gain
( ) Below 10%
( ) Up to 10%
( ) 10% - 15%
( ) 15% and Above
( ) Yes
( ) No
( ) Maybe
( ) No Gain
( ) Up to 10%
( ) 10% to 20%
( ) Above 20%
67
Q.12 How do you feel about the procedure of IPO’s?
( ) Easy
( ) Complicated
( ) Difficult
( ) Lightly
( ) Refund Problem
( ) Delay in crating allotted shares to your DEMAT Account
( ) No Clarity in allotment
Q.14 Are you satisfied with the present system of Book Building wherein a price
band is fixed for an IPO in which free pricing is allowed?
( ) Highly Satisfied
( ) Satisfied
( ) Can’t say
Q.15 how do you come to know about the new IPO LISTING?
( ) Through Broker
( ) Through Television
( ) Through Friend
( ) Through Newspaper
68