A Research Study Of Ipo.pdf

A RESEARCH STUDY TO FIND OUT PERCPTION OF INVESTOR TOWARDS IPO IN INDIAN

A PROJECT SUBMITTED TO UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE DEGREE OF MASTER IN COMMERCE PART II (SEM-III) UNDER THE FACULTY OF COMMERCE

BY AHIRE YOGESH CHANDRAKAKNT RANJANA ROLL NO: 38

UNDER THE GUIDANCE OF DR AMIT PRAJAPATI

THE GOKHALE EDUCATION SOCIETY’S DR. T.K.TOPE ARTS & COMMERCE NIGHT SENIOR COLLEGE SIR DR. M. S. GOSAVI INSTITUTE OF POST GRADUATE STUDIES & RESEARCH

NOVEMBER, 2018

I

DECLARATION BY LEARNER

I the undersigned AHIRE YOGESH CHANDRAKANT hereby declare that the work embodied in this project work titled “A RESEARCH STUDY TO FIND OUT PERCEPTION OF INVESTOR TOWARDS IPO IN INDIAN” forms my own contribution to the research work carried out under the guidance of Dr. Amit Prajapati 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.

Name and Signature of the learner

Ahire Yogesh Chandrakant Ranjana

Certified by Name and signature of the Guiding Teacher Dr. Amit Prajapati The Gokhale Education Society’s Dr. T.K.Tope Arts & Commerce Night Senior College Sir Dr. M. S. Gosavi Institute of Post Graduate Studies & Research II

Certificate This is to certify that AHIRE YOGESH CHANDRAKANT 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 PROJECT MANAGEMENT and her/his project is entitled “A RESEARCH STUDY TO FIND OUT PERCEPTION OF INVESTOR TOWARDS IPO IN INDIAN” 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.

Principal

M.Com Coordinator

V. B. Rokade

Prof. Pankaj Pandagale

Internal guide Dr. Amit Prajapati

External examiner

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 Sr. No.

PARTICULAR

PAGE NO.

4.1

Age Group of Respondent

46

4.2

Gender Group of Respondent

47

4.3

Education Group of Respondent

48

4.4

Occupation Group of Respondent

49

4.5

Investor group In IPO

50

4.6

Reason for not invest In IPO

51

4.7

Advice to new investor

52

4.8

Investors in IPO

53

4.9

Purpose of Investment

54

4.10

Percentage gained on IPO listing

55

4.11

Group of Respondent for IPO

56

4.12

Respondent gained from IPO

57

4.13

Investors perception towards Procedure of IPO

58

4.14

Difficulties faced by Investors

59

V

LIST OF CHART Sr. No.

PARTICULAR

PAGE NO.

4.1

Age Group of Respondent

46

4.2

Gender Group of Respondent

47

4.3

Education Group of Respondent

48

4.4

Occupation Group of Respondent

49

4.5

Investor group In IPO

50

4.6

Reason for not invest In IPO

51

4.7

Advice to new investor

52

4.8

Investors in IPO

53

4.9

Purpose of Investment

54

4.10

Percentage gained on IPO listing

55

4.11

Group of Respondent for IPO

56

4.12

Respondent gained from IPO

57

4.13

Investors perception towards Procedure of IPO

58

4.14

Difficulties faced by Investors

59

VI

INDEX SR. NO.

PARTICULARS

PAGE NO.

TITLE PAGE

I

DECLARATION

II

CERTIFICATE

III

ACKNOWLEDGEMENT

IV

LIST OF TABLES

V

LIST OF CHARTS

VI

A RESEARCH STUDY TO FIND OUT EMERGING TREND OF IPO IN INDIA

1

1.1

INTRODUCTION

2

1.2

HISTORY

3

1.3

GENERAL TERMS INVOLVED IN IPO

4

1.4

FACTORS TO BE CONSIDERED BEFORE APPLYING FOR AN IPO

5

1.5

ADVANTAGES

5

1.6

PROCEDURE

7

CH.1

1.7 1.8

FACTORS TO BE CONSIDERED BEFORE APPLYING FOR AN IPO RECENT IPO’s IN INDIA

VII

13 14

1.9

HOW DOES IPO WORK IN INDIA

15

1.10

APPLYING FOR AN IPO IN INDIA

16

1.11

RECENT IPO’s IN INDIA

16

CH.2

REVIEW OF THE LITERATURE

17

2.1

INTRODUCTION

18

2.2

INDIAN SCENARIO

18

2.3

GLOBAL ASPECTS

29

2.4

CONCLUSION

35

2.5

REFERENCE

36

RESEARCH METHODOLOGY

37

3.1

SCOPE OF THE STUDY

38

3.2

DATA TYPES & SOURCES

39

CH.3

3.3

3.4

POPULATION, SAMPLING FRAME & SAMPLE SIZE STUDY AREA, SAMPLE TYPE – SAMPLING PROCEDURE

41

42

3.5

DATA COLLECTION TECHNIQUES

42

3.6

OBJECTIVES OF THE STUDY

43

VIII

3.7

HYPOTHESIS OF THE STUDY

44

DATA ANALYSIS, INTERPRETATION AND PRESENTATION

45

4.1

METHOD OF DATA PRESENTATION AND ANALYSIS

46

4.2

PROFILE OF RESPONDANTS

46

4.3

ANALYSIS OF QUESTIONNAIRE

46

FINDING, SUGGESTION AND CONCLUSION

60

5.1

FINDING OF THE STUDY

61

5.2

SUGGESTION OF THE STUDY

63

5.3

CONCLUSION OF THE STUDY

64

BIBLIOGRAPHY

66

APPENDIX

70

CH.4

CH.5

IX

1 A RESEARCH STUDY TO FIND OUT EMERGING TREND, MERITAND DEMERITS OF IPO IN INDIAN

1.1

INTRODUCTION

1.2

HISTORY

1.3

GENERAL TERMS INVOLVED IN IPO

1.4

FACTORS TO BE CONSIDERED BEFORE APPLYING FOR AN IPO

1.5

ADVANTAGES

1.6

PROCEDURE

1.7

APPLYING FOR AN IPO IN INDIA

1.8

RECENT IPO’s IN INDIA

1.9

OBJECTIVE OF STUDY

1.10 HYPOTHESIS OF STUDY 1.11 LIMITATION OF SYUDY 1.12 CONCLUSION

1

1 A RESEARCH STUDY TO FIND OUT EMERGING TREND, MERIT OF IPO

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 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.

5) Green shoe option: It is referred to as an over-allotment option. It is a provision contained in an underwriting agreement whereby the underwriter gets the right to sell investors more shares than originally planned by the issuer in case the demand for a security issue proves higher than expected.

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. 4

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.

1.4 FACTORS TO BE CONSIDERED BEFORE APPLYING FOR AN IPO There are certain factors which need to be taken into consideration before applying for Initial Public Offerings in India: 1)

Historical record of the firm providing the Initial Public Offerings.

2)

Promoters, their reliability and past records.

3)

Products offered by the firm and their potential going forward.

4)

Whether the firm has entered into a collaboration with technological firm.

5)

Project value and various techniques of sponsoring the plan.

6)

Productivity estimates of the project.

7)

Risk aspects engaged in the execution of the plan.

1.5 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 5

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.

Once a company is listed, it is able to issue additional common shares in a number of different ways, one of which is the follow-on offering. This method provides capital for various corporate purposes through the issuance of equity (see stock dilution) without incurring any debt. This ability to quickly raise potentially large amounts of capital from the marketplace is a key reason many companies seek to go public.

An IPO accords several benefits to the previously private company:

1 Enlarging and diversifying equity base 2 Enabling cheaper access to capital 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.

1.5.2 Some 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 6

 Owner diversification

 Restrictions on management

 Executive compensation

 Loss of personal benefits

 Increase company and personal prestige

 Trading restrictions

1.6 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.

1.6.1 ADVANCE PLANNING Planning is crucial to a successful IPO. One book suggests the following 7 advance planning steps: 1. develop an impressive management and professional team. 2. grow the company's business with an eye to the public marketplace. 3. obtain audited financial statements using IPO-accepted accounting principles. 4. clean up the company's act. 5. establish antitakeover defenses. 6. develop good corporate governance. 7. Create insider bail-out opportunities and take advantage of IPO windows.

1.6.2 RETENTION OF UNDERWRITERS IPO is done through the process called underwriting. Underwriting is the process of raising money through debt or equity.

The first step towards doing an IPO is to appoint an investment banker. Although, 7

theoretically a company can sell its shares on its own, but on realistic terms, investment bank is the prime requisite. The underwriters are the middlemen between the company and the public. There is a deal negotiated between the two. E.g. of underwriters: Goldman Sachs, Credit Suisse and Morgan Stanley to mention a few. The different factors that are considered with the investment bankers include: 

The amount of money the company will raise



The type of securities to be issued



Other negotiating details in the underwriting agreement

The deal could be a firm commitment where the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public, or best efforts agreement, where the underwriter sells securities for the company but doesn’t guarantee the amount raised. Also to off shoulder the risk in the offering, there is a syndicate of underwriters that is formed led by one and the others in the syndicate sell a part of the issue.

1.6.3 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.

1.6.4 ALLOCATION AND PRICING The sale (allocation and pricing) of shares in an IPO may take several forms. Common 8

methods include: 

Best efforts contract



Firm commitment contract



All-or-none contract



Bought deal

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.

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 9

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.

5.

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.

1.6.5 PRICING A company planning an IPO typically appoints a lead manager, known as a book runner, to help it arrive at an appropriate price at which the shares should be issued. There 10

are two primary ways in which the price of an IPO can be determined. Either the company, with the help of its lead managers, fixes a price ("fixed price method"), or the price can be determined through analysis of confidential investor demand data compiled by the book runner ("book building").

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. 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.

The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of trading. If so, the stock may lose its marketability and hence even more of its value. This could result in losses for investors, many of whom being the most favored clients of the underwriters. Perhaps the best known example of this is the Facebook IPO in 2012.

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 11

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.

1.6.6 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.

12

1.6.7 DELIVERY OF SHARES

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.

1.6.8 STAG PROFIT (FLIPPING) "Stag profit" is a situation in the stock market before and immediately after a company's Initial public offering (or any new issue of shares). A "stag" is a party or individual who subscribes to the new issue expecting the price of the stock to rise immediately upon the start of trading. Thus, stag profit is the financial gain accumulated by the party or individual resulting from the value of the shares rising. This term is more popular in the United Kingdom than in the United States. In the US, such investors are usually called flippers, because they get shares in the offering and then immediately turn around "flipping" or selling them on the first day of trading.

1.7

APPLYING FOR AN IPO IN INDIA

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.

13

RECENT IPO’S IN INDIA

1.8

Listing Date Mar 27, 2018 Jul 02, 2018 Aug 06, 2018 Apr 04, 2018 Apr 09, 2018 Jul 02, 2018 Apr 02, 2018 Jan 30, 2018 Jul 06, 2018 Apr 02, 2018

Company Name

Bandhan Bank Limited RITES Limited HDFC Asset Management Company Limited Mishra Dhatu Nigam Limited Lemon Tree Hotels Limited Fine Organic Industries Limited Sandhar Technologies Limited Amber Enterprises India Limited Varroc Engineering Limited Karda Construction Ltd

Issue Price (Rs) 375

Current Price at BSE (Rs) 685.55

Current Price at NSE (Rs) 685.05

Gain / Loss (%) 82.81

185

313.25

313.25

69.32

1100

1760.65

1763.6

60.06

90

143.95

144.3

59.94

56

78.75

79

40.63

783

895.9

898.45

14.42

332

376.05

375.4

13.27

859

932.45

934.8

8.55

967

1009.9

1012.1

4.44

180

181.8

181

1

A fair number of the upcoming IPOs plan to raise at leastRs.1, 000 crore or more. For example, InterGlobe Aviation Ltd (Indigo Airlines), Coffee Day Enterprises (Cafe Coffee Day), Syngene International Ltd (Subsidiary of Biocon) and Matrix Cellular Services Ltd are some of the names that can lure investors with the charm of a differentiated business. Examples: Some of the key IPOs that were the talk of the town in the recent past include:



Inox Wind: The shares were priced at about $5.2 apiece. It startedtradingat the Indian bourses at around $6.45 a piece, 35% jump over offer-price a bumper listing.



Snowman Logistics: The stock had debuted at a premium of 68% to the IPO price. 14



VRL Logistics: With the strong demand from all categories of investors, and the positive sentiment in the markets, the IPO was oversubscribed 74 times and the shares listed at a premium of 40% to the offer price of Rs 205.

On the other hand, a classic example of the changes in market sentiment overnight affecting the IPO is Reliance Power IPO. The IPO had indicated huge demand when the IPO was introduced. However, after the closure of the IPO, global financial crisis started creeping in, and the applications worth Rs800,000crore that were riding on the Reliance Power IPO, had the investors to wait for an excruciating three weeks for the company to list and redeem their money. As market sentiment had undergone a sea change in the interim, shares of the company also tanked on listing.

1.9 OBJECTIVE OF STUDY There are several parties of IPO such as sponsor, the trustees, the custodians and investors as beneficiaries. To gain an overview of the current performance trends of the Indian Capital Markets industry and investors’ preference, the present thesis is intended to evaluate the performance of IPO and its impact of diversification of portfolio on risk and risk potential of IPO, in particular.

1. To present the trends in the growth of Indian mutual funds.

2. To appraise the performance of selected schemes on the basis of performance measures.

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.

15

1.10 HYPOTHESIS OF STUDY The presemt study is based on following Hypotheses: Hypothesis Ho: Most of the investor take IPO as a profitable sources of investments for long term. Hypothesis H1: Most of the investor do not take IPO as a profitable sources of investments for long term.

1.11 CONCLUSION 1. An initial public offering (IPO) is the first sale of stock issued by a company to the public. 2. Private companies typically have a small number of closely knit shareholders. 3. Public companies can have thousands of different shareholders. 4. Going public raises cash and provides many benefits for a company. 5. Getting in on a hot IPO is very difficult, if not impossible. 6. An IPO company is difficult to analyze in the market because there isn't a lot of historical info. 7.

In IPO tracking stocks to be the same as a normal IPO, as you are essentially a secondclass shareholder.

16

2

REVIEW OF THE LITERATURE

2.1

INTRODUCTION

2.2

INDIAN SCENARIO

2.3

GLOBAL ASPECTS

2.4

CONCLUSION

2.5

REFERENCE

17

2

REVIEW OF THE LITERATURE

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

2.2 INDIAN SCENARIO 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 marketadjusted 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

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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 19

percent if weighted by size of the issue. The commonest delay between issue date and

20

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 21

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 decisionmaking. No significant differences were found in first day returns between the two groups of companies. There were, however, significant differences between the two 22

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,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 23

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

24

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 IPOs owned by them. The study examined the short-run and long-run under pricing 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 first day under pricing increase of Malaysian IPOs by 61 percent during the period after the regulatory economic policy was instituted. Fur there more, the study found that this high under pricing persists even for the long run, in contrast to the long run performance of IPOs in the United 25

States.

Guntur Anjana Raju and Rudresh R. Kunde (2009) found that a public company issuing IPOs have seen dramatic listing gains on their first day of trading. Of the 110 IPOs floated between January 2006 and April 2007, 104 recorded listing gains. In 70 of them, the listing day gain exceeded 20 percent of the issue price. IPOs had given good returns for the short term as well as the long term and could be considered to be a good investment avenue for wealth creation. In the year 2007, as well, taking advantage of the strength in the secondary market, many high profile companies lined up to raise money from the market. The average returns provided on listing during the period January 2005 to March 31, 2007, was 33 percent, with these returns being realized immediately, within approximately 40 days of the issue being floated. These attractive returns coupled with the short returns realization period are making IPOs a rewarding investment option.

P. Ishwara (2009) analyzed 107 companies which entered capital market through IPOs in the financial year 2007-08 and found that the private companies are dominated in the new issues. Out of 107 issues, 86 companies gained in listing their shares in BSE and NSE and rest of the companies reported negative return to the investors. As far as the listing gains are concerned individual stock like Global Broad Caste News Ltd gained above 88.0 per cent return in the financial 2007-08. At the same time some stocks listed below offer price and incurred nearly 19.0 per cent loss for example Orbit Corporation. During the peak market (Bullish) conditions i.e. when BSE SENSEX Indices 20,728 and NSE 6206.80 on 15th January 2008, out of 107 companies, most of the companies i.e. 80 companies share are traded for high prices and reported handful return to the investors. In the peak market, many individual stocks like Orbit Corporation, Evernon Systems Ltd, MIC Electronics gave high rate of returns to the investors. In the bearish trend (declining) when BSE SENSEX 16,783.87 and NSE 5049 on 22nd April 2008, some of the individual stocks like Evernon System India Ltd gave 380.71 per cent returns and maximum loss incurred companies like House and pearl fashions Ltd (i.e. -70.44 percent). The study showed that, Market forces and Individual companies’ performance 26

reflect stock performance.

Soumya Guha Deb (2009) examined the underpricing in Indian IPOs during the period from 2001 to 2009. Using a sample of 187 IPOs, the results indicated evidence of underpricing on the average in Indian IPOs during this period. It is also observed that the mispricing adjusts very quickly and no excess returns are available to investors in the aftermarket in the short run which is consistent with the notion of efficient market hypothesis. A strong positive relationship was found between underpricing and ex-ante as well as ex-post measures of uncertainty. The level of activity in the issues measured by the daily trading volume is also found to have strong correlation with underpricing.

Alok Pande and R Vaidyanathan (2009) looked at the pricing of IPOs in the NSE, in particular, it sought to empirically explain the first day underpricing in terms of the demand generated during the book building of an issue, the listing delay between the closure of the book building and the first day listing of the issue, and the money spent on the marketing of the IPOs by the firms. It also sought to understand any emerging pattern in Indian IPO market with reference to the previous studies. Moreover, it sought to find the Post-IPO returns for one month in the NSE. The results suggests that the demand generated for an issue during book building and the listing delay positively impact the first day underpricing, whereas the effect of money spent on the marketing of the IPO is insignificant. It was also found that in consonance with the extant literature, the Post-IPO performance in one month after the listing for the firms under study is negative.

G Sabarínathan (2010) found some interesting changes in the characteristics of the companies that made IPOs during the period 1993-94 to 2008-09. The changes in characteristics are in terms of the size of the issue, size of the issuer as measured by the post issue paid capital, the stage of evolution of the issuer, the pricing of the issue, fraction of shareholding of the issuer that has been offered for public ownership, the Industry/business that the issuer is engaged in and the exchanges on which the shares were listed. Over the years the market has been receiving fewer issues, but of increasing 27

size from larger firms with an established track record. Issuers seem to be offering a smaller fraction for public ownership at the IPO and have been listing on fewer exchanges. Fewer issues were priced at par during the later part of the period of analysis than the initial years. The sector-wise analysis of issuances points to fundamental changes in the Indian industrial economy such as the emergence of new sectors such as media, banking and information technology. The listing pattern across SEs pointed to significant changes in the marketplace for securities trading and suggests a strong preference for large national SEs.

Seshadev Sahoo and Prabina Rajib (2010) evaluated the price performance of IPOs with respect to short-run underpricing and long-run underperformance for 92 Indian IPOs issued during the period 2002-2006 up to a period of 36 months including the listing day. The result indicated that on an average the Indian IPOs are underpriced to the tune of 46.55 per cent on the listing day (listing day return vis-à-vis issue price) compared to the market index. The long-run performance of IPOs up to a period of 36 months measured by using the two most promising evaluation techniques, i.e., wealth relative (WR) and buy-and-hold abnormal rate of return (BHAR), both being adjusted with market index, CNX-Nifty. Further, it was found that the underperformance is most pronounced during the initial year of trading, i.e., up to 12 months from the listing date followed by over– performance. To get possible explanations for long-run underperformance for Indian IPOs, factors like underpricing rate (listing day return), offer size, leverage at IPO date, ex-ante uncertainty, timing of issue, age of IPO firm, rate of subscription, promoter groups retention, and price-to-book value (as proxy for growth) were considered. Evidence found, that initial day return, offer size, leverage at IPO date, ex-ante uncertainty,

and

timing of

issue

are

statistically significant

in

influencing

underperformance. However, there was no evidence favorable to the age of the IPO firm, rate of subscription, promoter group’s retention, and price-to-book value impact on the long-run underperformance. The empirical results suggest that the investors who invest in IPOs through direct subscription earn a positive marketadjusted return throughout the

28

period of study. But investors who bought shares on the IPO listing day earned negative returns up to 12 months from the listing date and expect to earn positive market-adjusted return thereafter.

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 29

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.

Allen and Faulhaber’s (1989) empirical evidence suggested the existence of `hotissue' markets for initial public offerings: in certain periods and in certain industries, new issues are underpriced and rationing occurred. This research paper develops a model consistent with this observation, which assumes the firm itself best knows its prospects. In certain circumstances, firms with the most favorable prospects find it optimal to signal their type by underpricing their initial issue of shares, and investors know that only the best can recoup the cost of this signal from subsequent issues. Grinblatt and Hwang (1989) developed a signaling model with two signals, two attributes, and a continuum of signal levels and attribute types to explain new issue underpricing. Both the fraction of the new issue retained by the issuer and its offering price convey to investors the unobservable "intrinsic" value of the firm and the variance of its cash flows. Many of the model's comparative statics results are novel, empirically testable, and consistent with the existing empirical evidence on new issues. In particular, the degree of underpricing, which can be inferred from observable variables, is positively related to the firm's post- issue share price. This research paper concentrated on asymmetric information prevailing in the IPO market. It assumed that a firm possesses the most valuable information about the prospects of a new project, and that the issuers explicitly consider the possibilities of future equity issues when deciding IPO prices. Signaling theory argued that high-quality firms signal the true value of their shares by offering them at a discount, and then retain some of the shares of the new issues in their personal portfolio. Underpricing created a good impression in investors’ minds, which helped the firm to sell the subsequent seasoned equity offerings (SEOs) at attractive prices. Low-quality firms deterred from mimicking the high-quality firms, because they were less likely to reap the benefits of IPO underpricing by selling their seasoned issues at higher prices. Thus, signaling models suggested by the authors that greatly underpriced issues are more likely to reissue or come back with SEOs. Jegadeesh et al. (1989) empirically examined the implications of 30

signaling theory, using firm, commitment IPOs in the United States over 1980–86. But they found only a weak association between IPO underpricing and subsequent SEOs, which questioned signaling theory’s explanatory power. This research paper investigated the long-term performance of firms that issued seasoned equity relative to a variety of enchmarks and found that these firms significantly underperform all of the chosen benchmarks over the five years following the equity issues. Across SEOs, similar levels of underperformance is found for both small and large firms, and both growth firms and value firms. The paper also indicated that factor-model benchmarks are misspecified. Hence inferences on SEO underperformance based on such benchmarks are misleading. The SEOs underperform their benchmarks by twice as much within earnings announcement windows as they do outside these windows.

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 197584 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 31

long run compared to their smaller and younger counterparts. These arguments highlighted investor uncertainty as a prime factor in IPO underpricing.

Douglas A Hensler et al (1997) estimated an accelerated failure time (AFT) model to investigate the effects of several characteristics suggested as indicators of firm survival for initial public offerings (IPOs). The results indicated that the survival time for IPOs increases with size, age of the firm at the offering, the initial return, IPO activity level in the market, and the percentage of insider ownership, while the survival time decreases with increases in the general market level at the time of offering and the number of risk characteristics. Additionally, the survival time is negatively affected if the IPO is in the computer and data, wholesale, restaurant, or airline industries and positively if the IPO is in the optical or drug industries.

Lawrence M Benveniste and Walid Y Busava (1997) compared two mechanism for selling IPOs, the fixed price method and American Book Building. They found that the book building generated higher expected proceeds but exposed the issuer to greater uncertainty, and that it provided the option to sell additional shares that were not underpriced on the margin.

Barnal and Obadullah (1998) analysed the 433 IPOs and also found the initial returns to be higher.

Ritter and Welch (2002) focused on three areas of research on IPOs. These were (1) reasons for going public, (2) the pricing and allocation of shares, and (3) long-run performance and found that that market conditions are the most important factor in the decision to go public. The stage of the firm in its life cycle seemed to be the second important factor. The theories based on asymmetric information were unlikely to explain average first-day returns of 65 percent. Underwriters did not bundle multiple offerings together, which would have lowered the average uncertainty and the need for underpricing in the context of information models.

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Ritter (2003) cited behavioral finance to explain severe underpricing of IPOs, noting that if an IPO were underpriced, pre issue stockholders were worse off because their wealth had been diluted. The entrepreneur, on the other hand, received the good news that he or she was suddenly and unexpectedly wealthy because of a higher than expected IPO price. Integrating the wealth increase and dilution, the issuer could be better off on balance. Underwriters take advantage of this mental accounting and severely underpriced many IPO deals. Onur Arugaslan et. al. (2004) examined the arguments for “why monitoring considerations create incentives for managers to underprice their firms’ IPOs” using a sample of U.S. IPOs. They found that the determinants of initial returns, institutional shareholdings, and post-IPO likelihood of acquisition were not consistent with these arguments. They concluded that monitoring considerations are not important determinants of IPO underpricing.

Francois Derrien (2005) explored the impact of investor sentiment on IPO pricing. Using a model in which the aftermarket price of IPO shares depends on the information about the intrinsic value of the company and investor sentiment, it was found that the IPOs can be overpriced and still exhibit positive initial return. A sample of French offerings with a fraction of the shares reserved for individual investors supported the predictions of the model. Individual investors’ demand was found to be positively related with market conditions. Moreover, large individual investors’ demand leads to high IPO prices, large initial returns, and poor long-run performance

Lee and Wahal (2004) studied all IPOs from 1980 to 2000. An analogy to the certification role of external agencies is that of the role of credit rating agencies. A credit rating agency gives its opinion on the credit risk involved in investing in a firm or a security. In the recent global meltdown, the role of such agencies has come under scanner. Even earlier, the credit rating agencies continued to rank Enron as a good credit risk company till 4 days before the company declared bankruptcy (Securities and 33

Exchange Commission, 2003). To summarize, so far, international evidence recognizes that asymmetric information among issuers and investors is the prime factor explaining IPO underpricing. Some studies argued that promoters use underpricing to signal their better quality and, subsequently, raise large amounts of funds from the market. Rooted as they are in theory, many of these explanations are likely to be true for emerging economies as well as developed ones. However, there could be institutional features specific to developing countries, such as underdeveloped capital markets, the existence of business groups, and IPO regulations, especially regarding small and young firms, that might impinge on both the causes and the extent of underpricing in emerging countries. In India, the earlier research efforts on IPOs were mainly focused on to study their initial returns and on their underpricing. In this research study the efforts will be done to investigate the patterns of the short term (listing day) returns and long term (post listing) returns with respect to Indian stock market using event study approach. The other exogenous variables such as subscription, age, issue size, promoters holding etc will be considered to understand the behavior of IPOs in short and long term. The IPOs came in Indian stock market will be divided with respect to different feature of the companies such as age, issue size, industry and IPO grading etc. The world renowned anomalies of underpricing in short term and underperformance in long run will also be tested in Indian context.

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.

Empirical evidence on IPOs shows that initial underpricing is observed in all 34

countries but the level of underpricing varies from country to country over time. According to Gajewski and Gresse (2006) and Ljungqvist (2005), this is a result of the different legal frameworks, the different periods of examination, the different characteristics of the various sectors and the different IPO mechanisms (underpricing is lower when using the auctions or the fixed-price offering instead of the book building method). Empirical studies on particular sectors of the economy report that most of the studies focus on high-tech IPOs. Their findings indicate that most new technology companies are underpriced. Empirical evidence on underpricing in other sectors of the economy is less clear, as there are very few empirical studies in worldwide literature, fact that reveals the need for future IPO empirical research in specific sectors of the economy.

2.5 REFERENCES



Arwah Arjun Madan (2003), „Investments in IPOs in the Indian Capital Market‟,Bimaquest-Vol. 3, No. 1, Page 24-34



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.

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

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.

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3

RESEARCH METHODOLOGY

3.1

SCOPE OF THE STUDY

3.2

DATA TYPES & SOURCES

3.3

POPULATION, SAMPLING FRAME & SAMPLE SIZE

3.4

STUDY AREA, SAMPLE TYPE – SAMPLING PROCEDURE

3.5

DATA COLLECTION TECHNIQUES

3.6

OBJECTIVES OF THE STUDY

3.7

HYPOTHESIS OF THE STUDY

37

3

RESEARCH METHODOLOGY

3.1

SCOPE OF THE STUDY This study covers a time period of ten years from 2008-2018, for the purpose of

Secondary data. The research study involves exploration of which attribute of Emerging Trend of IPO in India has more intense effect on the investor decision and which attributes of IPOs are relatively significant or insignificant for investors, and also to determine how much level of each attributes is most or least preferred. Similarly, the primary data pertaining to the opinions, views & perceptions of the Investors were collected through a Questionnaire during July, 2018 & August, 2018 from the study area. Mumbai City of the Maharashtra State was purposively selected for the study as the researcher is from the same City.

3.1.1 STATISTICAL TOOLS ADOPTED: The data was interpreted & analyzed with the help of tables, percentages, graphs & chart presentation.

3.1.2 SAMPLING TECHNIQUE: The technique used for this Project is based on a QUESTIONNAIRE which consists of about 15 general questions. This questionnaire aims to provide the data which is of most important in nature to enable a comprehensive analysis of impact attributes of Investor Towards IPO in India. The questions consist of statements, the intensities of which are from the respondents to extract the opinion of respondents. These questions

38

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.

3.2 DATA TYPES & SOURCES Both quantitative & qualitative data will be used. Primary data will be collected through observation, structured questionnaires & semi-structured interviews using checklist & the responses of the leading questions. Secondary data will be obtained from external sources like Newspapers, journal, magazines, Internet, Website etc. which will be included to gather more information for International comparisons.

3.2.1 MEANING OF PRIMARY DATA & ITS IMPORTANCE Primary data is information that you collect specifically for the purpose of your research project. An advantage of primary data is that it is specifically tailored to your research needs. A disadvantage is that it is expensive to obtain.

Primary data are information collected by a researcher specifically for a research assignment. In other words, primary data are information that a company must gather because no one has compiled and published the information in a forum accessible to the public. Companies generally take the time and allocate the resources required to gather primary data only when a question, issue or problem presents itself that is sufficiently

39

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.

Advantages of primary data are as follows: 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.

3.2.1 MEANING OF SECONDARY DATA & ITS IMPORTANCE Secondary data are the data collected by a party not related to the research study but collected these data for some other purpose and at different time in the past. If the researcher uses these data then these become secondary data for the current users. These may be available in written, typed or in electronic forms. A variety of secondary information sources is available to the researcher gathering data on an industry, potential product applications and the market place. Secondary data is also used to gain initial insight into the research problem. Secondary data is classified in terms of its source – either internal or external. Internal, or in-house data, is secondary information acquired within the organization where research is being carried out. External secondary data is obtained from outside sources. There are various advantages and disadvantages of using secondary data. 40

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 POPULATION, SAMPLING FRAME & SAMPLE SIZE

3.3.1 POPULATION: This is the set of maximum Investors [Male & female] to which the findings are to be generalized.

3.3.2 SAMPLING FRAME: In order, to perform non probability sampling, a sampling frame is constructed based on the study area. The list of Corporates, households, etc. is generated from the selected areas & randomly.

3.3.3 SAMPLE SIZE: Sample size of 50 respondents is selected for the study to make the study meaningful and relevant.

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3.4 STUDY AREA, SAMPLE TYPE – SAMPLING PROCEDURE:

3.4.1 STUDY AREA: The topic of ‘Emerging Trend of IPO in India’ is generally known by all masses, but 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.

3.4.2 SAMPLE TYPE & SAMPLING PROCEDURE: The sample type & procedure opted for this study is by prepared by circulating Questionnaire via social media WhatsApp within the Mumbai city. The data collected is mainly based age wise, gender wise, educational background, minimal knowledge about Emerging Trend of IPO in India.

3.5 DATA COLLECTION TECHNIQUES: For the collection of data regarding the conceptual framework, performance of the Emerging Trend of IPO in India and the preference of Emerging Trend of IPO in India The data has been collected through Primary and Secondary Sources as follows: 1.) Documentation – This involves collecting information & data from existing surveys, reports & documents. 2.) Structured Questionnaires – This will be used to collect information from Investors & households. Questionnaires will be developed to obtain survey & statistical data that allows an understanding with respect to the review of people investing in IPO in India & their decisions.

42

3.) Observation & Analysis – The observation during the fieldwork will be used mainly to review the issues beyond those covered in the structured & semistructured questionnaires. The data will be analyzed in the form of graphs, charts table format, etc. according to the age-groups, gender wise.

3.6 OBJECTIVES OF THE STUDY There are several parties of IPO such as sponsor, the trustees, the custodians and investors as beneficiaries. To gain an overview of the current performance trends of the Indian Capital Markets industry and investors’ preference, the present thesis is intended to evaluate the performance of IPO and its impact of diversification of portfolio on risk and risk potential of IPO, in particular. It is felt necessary to understand the preferences of IPOs with respect to the risk tolerance, return expectation, tenure of investment and investment influencing factors etc. in relation to age, qualification, gender, marital status and income levels. The objectives of the study are:

1. To present the trends in the growth of Indian IPOs.

2. To appraise the performance of selected schemes on the basis of performance measures.

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.

5. To find the relationship of age, qualification, gender, marital status and income with the preferences of IPOs.

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6. To know whether there is any association between the selected variables and investors perception of IPOs.

7. To suggest suitable measures for strengthening of the IPOs in India.

3.7 HYPOTHESIS OF THE STUDY The main purpose of this study is to find out how these IPO provide opportunities to Investors as well as Companies. To be able to fulfill the purpose of this research we find it appropriate to test the perception of investors towards IPO. This led into generating the following hypotheses to test accordingly: Hypothesis 1: IPO‟s is a risky investment. Hypothesis 2: The retail investors‟ greatest worry is too much price volatility, price manipulation and corporate fraud which shaken confidence of the investors.

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4

DATA ANALYSIS, INTERPRETATION AND PRESENTATION

4.1 METHOD OF DATA PRESENTATION AND ANALYSIS 4.2 PROFILE OF RESPONDANTS 4.3 ANALYSIS OF QUESTIONNAIRE

45

4.1 METHOD OF DATA PRESENTATION AND ANALYSIS

Here, I m using table and chart to understand very clearly. which help me to analyse the profile of respondents. The table and chart are as follows:

Table No. 4.1 Age Group of Respondent

Category

Response

%

21-30

39

81.6

31-40

4

8.2

Above 40

7

10.2

50

100

Source: Field Work

Chart No. 4.1 Age Group of Respondent 46

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

Table No. 4.2 Gender Group of Respondent

Category

Response

%

Female

15

30.6

Male

35

69.4

50

Source: Field Work

Chart No. 4.2 Gender Group of Respondent

47

100

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.

Table No. 4.3 Education Group of Respondent

Category Secondary School or less

Response 1

% 2.0

Diploma/Certificate

3

6.1

Bachelor’s Degree/PG Diploma

39

77.6

Master’s Degree/ACCA/APA

7

14.3

50

100

Source: Field Work

Chart No. 4.3 Education Group of Respondent 48

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.

Table No. 4.4 Occupation Group of Respondent

Category

Response 24

% 49

Employed

22

44.9

Part Time Work

2

4.10

Retired

2

2

50

100

Student

Source: Field Work

Chart No. 4.4 Occupation Group of Respondent 49

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.

Table No. 4.5 Investor group In IPO

Category

Response

%

Yes

26

51

No

24

49

50

100

Source: Field Work

Chart No. 4.5 Investor group In IPO 50

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.

Table No. 4.6 Reason for not invest In IPO

Category

Response

%

Lace of Awareness & knowledge

13

58.6

Due to Risk Factor & Scam

7

27.6

Take more time in getting returns

4

13.8

24

100

Source: Field Work

Chart No. 4.6 Reason for not invest In IPO 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 51

scam which are associated with IPO. Also delay in getting returns is also one of the factors.

Table No. 4.7 New IPO Liisting

Category

Response

%

Through Newspaper

5

15.4

Through Broker

17

65.4

Through Friend

4

19.2

26

100

Source: Field Work

Chart No. 4.7 NEW IPO LIISTING From the above table 4.7shows that, when the investors were asked to, How do you come to know about the new IPO listing we found that maximum number of the people invest through broker in an IPO that is 65.4% and followed by people who invest through news 52

paper in an IPO that is 19.2%. There were very few people who invest in IPO through friend 15.4%.

Table No. 4.8 Investors in IPO Category

Response

%

Below 10,000

0

0

Above 10,000 - 50,000

15

57.7

Above 50,000 - 1,00,000

11

42.3

26

100

Source: Field Work

Chart No 4.8 How much do you invest in IPO From the above table 4.8 shows that, when the investors were asked to how much they invest in an IPO, we found that the people are not invest in below 10,000 in an IPO and followed by maximum people who invest more than Rs 10,000 in an IPO that is 57.7%. 42.3% people who invest in IPO for an amount more than Rs 50,000 and Rs 1, 00,000. 53

Table No. 4.9 Percentage gained on IPO listing

Category

Response

%

Below 10%

4

21.1

Up to 10%

5

21.1

10% - 15%

12

31.6

15% and Above

5

26.3

26

100

Source: Field Work

Chart No. 4.9 Percentage gained on IPO listing

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 21.1% of sample size. And there are also people who received 10% to 15% returns that are 31.6% of sample size and very few people received above 15% returns and that are 26.3% of sample as well. As 54

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.

Table No. 4.10 Investors perception towards Procedure of IPO Category

Response

%

Easy

13

50

Complicated

13

50

26

100

Source: Field Work

Chart No. 4.10 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 50% of the respondents are of the opinion that the IPO listing procedure is complicated. Where 50% of the people feel that it is easy. The overall opinion of the respondents is that the IPO procedure is complicated and easy.

55

Table No. 4.11 Difficulties faced by Investors Category

Response

%

Refund Problem

4

30.8

Delay in crating allotted shares to your DEMAT Account

13

46.2

No Clarity in allotment

3

23.1

24

100

Source: Field Work

Chart No. 4.11 Difficulties faced by Investors From the above table 4.14 mainly talks about the problems faced by the investors after applying for IPOs. We can see that 46.2% of the respondents have faced problem Delay in crediting allotted of shares where as 30.8% of the people have the problem with Refund and 23.1% faced problem of No clarity in allotment after applying for IPOs.

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Table No. 4.12 Group of Respondent for IPO Category

Response

%

Satisfied

15

57.9

Highly satisfied

11

42.1

26

100

Source: Field Work

Chart No. 4.12 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 satisfied 57.9% of sample size, some respondents are highly satsfied 42.1% of sample size.

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Table No. 4.13 Purpose of Investment Category

Response

%

Listing Gain

15

52.6

Long Term Gain

11

47.4

26

100

Source: Field Work

Chart No. 4.13 Purpose of Investment

Table 4.9 talks that the respondents invest in an IPO for the purpose of obtaining the listing gains that is 52.6% and the long term gains that is 47.4%. 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.

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Table No. 4.14 Advice to new investor

Category

Response

%

Go by only Promoters

9

34.6

Go by only Premium

6

23.1

Go by only Sector Performance

16

42.3

26

100

Source: Field Work

Chart No. 4.14Advice to new investor

Table 4.14 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.

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5 FINDING, SUGGESTION AND CONCLUSION

5.1

FINDING OF THE STUDY

5.2

SUGGESTION OF THE STUDY

5.3

CONCLUSION OF THE STUDY

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5 FINDING, SUGGESTION AND CONCLUSION

5.1 FINDING OF THE STUDY

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

4. Occupation Group of Respondent we can see that the maximum numbers of respondents were employed followed by student, retired and Part time workers.

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.

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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. 62

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.

5.2 SUGGESTION OF THE STUDY

1. There is below age 20 having 12% of sample size; the investor should educate the students in IPO.

2. Needs to be educating more female respondents to invest in IPO.

3. Secondary school or less having 12% of respondents therefore we must educate the students in investing 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.

7. As per sample size of respondents we can suggest to go by only premium.

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. 63

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.

13. Needs to be easy set Procedure of IPO.

14. There are 34% of sample size of respondents are facing refund problem, therefore needs to create simple procedure of IPO.

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.

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

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.

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APPENDIX

Questionnaire Primary Data

NameAge-

Gender-

Email-

Q.1 Age o Below 20 o 21-30 o 31-40 o Above 40

Q.2 Education Background o Secondary School or less o Diploma/Certificate o Bachelor’s Degree/PG Diploma o Master’s Degree/ACCA/APA

70

Q.3 Occupation o Student o Employed o Part Time Work o Retired

Q.4 Do you invest in IPO?

o Yes o No Q.5 Reason for not investing in IPO o Lace of Awareness & knowledge o Due to Risk Factor & Scam o Take more time in getting returns Q.6 How do you come to know about the new IPO LISTING? o Through Broker o Through Television o Through Friend o Through Newspaper

Q.7 What is your advice to new investor in IPO? o Go by only Promoters o Go by only Premium o Go by only Sector Performance

Q.8 How much do you invest in IPO per year? o Below 10,000 IX

o Above 10,000 - 50,000 o Above 50,000 - 1,00,000 Q.9 What is the purpose of IPO investment from Investor’s perceptive? Listing Gain Long Term Gain

Q.10 How much percentage have you gained on IPO listing? o Below 10% o Up to 10% o 10% - 15% o 15% and Above

Q.11 Is it better to invest in IPO? o Yes o No o May be

Q.12 How do you feel about the procedure of IPO’s? o Easy o Complicated o Difficult o Lightly

Q.13 What difficulties do you face after applying IPO’s? o Refund Problem o Delay in crating allotted shares to your DEMAT Account IX

o 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

IX