1 A STUDY ON ‘SHORT TERM & LONG TERM PERFORMANCE OF IPO (INITIAL PUBLIC OFFER) ’ (Conducted on behalf of ‘India Advantage Securities .Pvt. Ltd.Majura Gate, Surat.) (From 6 th January, 2011 to 6 th March, 2011) A Project Report submitted in partial fulfillment of the requirements For the award of the degree of BACHELOR OF BUSINESS ADMINISTRATION TO VEER NARMAD SOUTH GUJARAT UNIVERSITY, SURAT Submitted By: DESAI PRADIP T.Y.B.B.A. (SEM –VI) Roll No: 112 Under the guidance of Ms. SWATI MEHTA Submitted To: Principal I/c
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1
A
STUDY
ON
‘SHORT TERM & LONG TERM PERFORMANCE OF IPO
(INITIAL PUBLIC OFFER) ’
(Conducted on behalf of ‘India Advantage Securities .Pvt. Ltd.Majura Gate, Surat.)(From 6th January, 2011 to 6th March, 2011)
A Project Report submitted in partial fulfillment of the requirements
For the award of the degree of
BACHELOR OF BUSINESS ADMINISTRATION
TO
VEER NARMAD SOUTH GUJARAT UNIVERSITY, SURAT
Submitted By:
DESAI PRADIP
T.Y.B.B.A. (SEM –VI) Roll No: 112
Under the guidance of
Ms. SWATI MEHTA
Submitted To:
Principal I/c
PROF. V. B. SHAH INSTITUTE OF MANAGEMENT,
R. V. PATEL COLLEGE OF COMMERCE,
V.L.SHAH COLLEGE OF COMMERCE,
R.K.SHAH WOMEN’S ARTS COLLEGE,
AMROLI (SURAT)
March 2011
2
DECLARATION
I, Desai Pradip, hereby declare that the project report entitled “SHORT
TERM & LONG TERM PERFORMANCE OF IPO(INITIAL PUBLIC
OFFER)” under the guidance of Ms. SWATI MEHTA submitted in partial
fulfillment of the requirements for the award of the degree of Bachelor of
Business Administration to Veer Narmad South Gujarat University, Surat is
my original work – research study – carried out during 6th January, 2011 to 6th
March, 2011 and not submitted for the award of any other
degree/diploma/fellowship or other similar titles or prizes to any other
institution/organization or university by any other person.
SignaturePlace: Amroli, Surat
Date:
(Desai Pradip) (T.Y.B.B.A., Roll No: 112)
3
PROF. V. B. SHAH INSTITUTE OF ANAGEMENT,
R. V. PATEL COLLEGE OF COMMERCE,
V.L.SHAH COLLEGE OF COMMERCE,
R.K.SHAH WOMEN’S ARTS COLLEGE,AMROLI (SURAT).
CERTIFICATE OF THE FACULTY GUIDE
This is to certify that the Project Report entitled “SHORT TERM & LONG TERM PERFORMANCE OF IPO (INITIAL PUBLIC OFFER)” (Conducted on behalf of ‘India Advantage Securities .Pvt. Ltd.Majura Gate,. Surat’) submitted in partial fulfillment of the requirements for the award of the degree of BACHLOR OF BUSINESS ADMINISTRATION to VEER NARMAD SOUTH GUJARAT UNIVERSITY, SURAT is a record of bonafide research work carried out by Pradip. p. Desai under my supervision and guidance.
Signature Signature
Ms. SWATI MEHTA Mr. MAHENDRAV.SONI
(Project Guide) Principal I/C
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ACKNOWLEDGEMENT
I wish to express my thanks to the officers and all the staff
members of The ‘India Advantage Securities .Pvt. Ltd.Majura Gate, Surat’for their
valuable assistance and excellent co-operation in preparation of this project report.
I wish to place on record the co-operation given me by Mr.Anil
Patel (Director of The India Advantage Securities .Pvt. Ltd.Majura Gate Surat) for
making capable of teaching new things, which are helpful in our practical life that
is going on project at different places.
I would like to thanks Mr. MAHENDRA.V.SONI, The
Principal I/c Prof. V.B. Shah Institute of Management & R.V. Patel College of
Commerce, Amroli for making available all facilities in fulfilling the requirement
for my project report.
The project would have been possible throughout the
experience, guidance and supervision of Ms. Swati Mehta has potentially and
critically gone through the subject matter. Her constructive criticism helped me lot
in presenting the project in concrete form.
Finally, I would like to thank to all these people who are
directly or indirectly contributed to my project work.
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PREFACE
In this period fast developing and changing world. I am proud for a study of
B.B.A. full time course offered by South Gujarat University at Prof. V.B. Shah
Institute of Management, Amroli.
Finance is most important parts of economics activities. Today the financial
management is branch of business administration. The firm or management can
accept or reject proposal on the basis of financial statement. So I am selecting the
specialized subject of Finance.
Today, financial markets is more dynamic with changing the environment
and changing in to SEBI rules, regulation and structures and depend to the capital
market & securities market to SEBI. Hence with a view to knowing more about
investment practice and to get practical knowledge of what we learn in the college
and class, I have decided to do my project work at of ‘India Advantage
Securities .Pvt. Ltd..Majura Gate, Surat.’
Here, In My Project I am analyzing 25IPO company From Different Sector like IT,
BANKING, CHEMICAL, AUTOMOBILE, CEMENT, etc. with collection of IPO
price of last three years, And also analyze the model like CAAR (Cumulative
Abnormal Adjusted Return), MAAR (Market Adjusted Abnormal Return), And By
analyzing all this data I am find that IPOS Different sector is continuously growing
in last Three years.
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CHAPTER NO: TOPICT
PAGE NO:
1 INTRODUCTION OF INDIA ADVANTAGE SECURITIES LTD. 7 - 9 VISION 10 PHILOSOPHY 10 COMPANY PRODUCT 10 - 122 RESEARCH METHODOLOGY 13 - 153 INTRODUCTION ABOUT CAPITAL MARKET 16 MEANING OF CAPITAL MARKET 17 STRUCTURE AND SIZE OF CAPITAL MARKET 18 PRIMARY MARKET & SECONDARY MARKET 194 INTRODUCTION OF IPO 20 - 23 WHAT IS AN IPO? 24 - 25 WHY MAY A COMPANY NEED AN IPO? 26 WHAT ARE THE TWO SIDE OF IPO COIN? 27 WHO CAN" TOSS THE IPO COIN" 28 PREPARING FOR IPO REGULATORY 29 PROCESS OF IPO 30 - 31 IDEAL PROCESS OF IPO 32 THE PROCEDURE FOR THE ISSUE OF AN IPO 33 - 34 DOCUMENT OF IPO 35 IPO MARKET IN INDIA 365 GENERAL ANALYSIS 37
LIST OF IPO 38 CLOSING PRICE OF IPO 39
CALCULATION METHOD FOR SHORT TERT &
LONG TERM PERFORMANCE OF IPO 40 - 41 SHORT TERM PERFORMANCE OF IPO 42 - 43 LONG TERM PERFORMANCE OF IPO 44 - 57
6 CONCLUSION 58 - 597 BIBLIOGRAPHY 60 - 61
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CHAPTER 1:
INTRODUCTION
OF
COMPANY
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INTRODUCTION OF COMPANY :
India Advantage Securities Pvt. Ltd. is a member of The Bombay Stock Exchange Ltd. (BSE) as well as the National Stock Exchange (NSE). The institutional desk was established in 2009 with a vision to provide quality research and execution services to institutional as well as corporate clients. IASL has significant net worth as well as expertise in managing large transactions in the cash and derivatives market. Our expertise lies in Futures and Options where we are the market leaders in Delta / Gamma Neutral arbitrage in the Indian markets IASL services Financial Institutions, Mutual funds and Foreign Institutional Investors. The quality, commitment and experience of our Institutional Sales Team is an essential element of our ability to meet and surpass our clients expectations. We are confident and committed to devise and conceptualize various investment and trading themes with respect to dynamic market conditions in Indian equities and derivatives domain. Our team remains committed to provide highest standards of Research, execution and client satisfaction.
An arm of the flagship company India Advantage Securities Limited, we at the India Advantage group are dedicated to deliver expert financial services that best suit your futuristic needs. Our fundamental areas of functioning include Shares, Stocks (Capital Market and Futures & Options), and Commodities, E-Broking, Internet Institutional Equities, Research, Currency Derivatives, NRI Desk, PCG, IPO’s and Depository services. We are a one-stop specialized solution to all your financial requirements.
India Advantage was established to perform these core functions three decades ago. Prior to this, it operated as M/s Mehta Investments, founded by Mr. Pravin Mehta, Chartered Accountant in 1990. It is under the able guidance of Mr. Mehta, the Chairman and Managing Director, that India Advantage is today reaching new heights in financial consultancy. India Advantage was founded with a vision of creating a “ONE-STOP-INVESTMENT SOLUTION PROVIDER TO ALL INVESTORS”. Strong team of qualified and experienced professionals is
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the key success of our organization. With latest IT infrastructure set-up we provide hassle free connectivity and fastest trading platform. It is backed up by focused professionals. We have catered number of clients by giving end to end wealth solutions. We are based on the principles of highest standards of excellence, ethics, efficiency and professionalism.
The integration of India Advantage Securities Limited and India Advantage Commodities Private Limited has transformed it into a financial power house that provides expert services required for stock broking and investments in Capital / Securities and Commodities market. We are focused on our aim to fulfill the requirements of individual investors and financial institutions across the country.
We channel our energies towards bringing out our best skills to ensure a maximum financial benefit for you. Along with this, we uphold and augment the values of our shareholders. We are a visionary team with a deep understanding of the financial diversity. We are a tram with intense passion for our goal of setting excellent standards of Corporate Governance and meeting the financial needs and demands of society.
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Vision: Protect Investor Interest and Enhance Investment Value.
Philosoph y:
The India Advantage philosophy has a social base with associates and client centric, with a clear focus on providing long-term value addition to all, while maintaining the highest standards of excellence, ethics and professionalism.
Company Products: As a group, our first priority is our clients. We believe in being focused on their needs and providing excellent long term value addition, while taking utmost care to uphold our values of excellence, ethics and professionalism.
Our activities are divided across distinct client groups: Individuals, Corporate and Institutions. Keeping in mind this client-centric approach, we provide our clients brokering assistance in equities and commodities, distribution of mutual funds and IPOs.
Equities: India Advantage Securities Ltd. encourages its clients to deal on both the prominent exchanges of the country – the Bombay Stock Exchange and the National Stock Exchange of India Ltd. Capital Market segments though smaller in volumes than Derivatives, are very vital for the success of the medium and small investors. We advance client dealings on BSE and NSE for equities segment. Dedicated sales and trading teams in our trading desks support these client
Derivatives :
India Advantage Securities Ltd., also provides services for its clients wanting to deal in the Derivatives segment of the NSE. All client dealings on the exchange in all types of Futures and Options (Call and Put), conducted through us are duly supported by a dedicated sales & trading teams in our trading desks
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Commodities:
Commodities have lately forged new possibilities for participation of investors and traders. Commodities hold a wide range of unexplored opportunity to evade business risks, while providing attractive investment and trading prospects for investors as well as traders. Commodities hold great ability to turn into a separate asset class for market-savvy investors, arbitrageurs and speculators. The best part is that they are easily comprehendible for fundamentals of demand and supply. At India Advantage Commodities Pvt. Ltd., we back our clients and provide an efficient platform to trade on both the commodities exchanges, which are the Multi Commodity exchange of India Ltd. (MCX) and the National Commodity & Derivatives Exchange Ltd. (NCDEX)
E-Broking (Internet trading):
It is user-friendly services to customers so that they can manage their stock portfolio. Including, online capabilities linked to an information database to help customers invest, confidently. E-broking services are specially developed for the traders and investors who prefer operating from their home or office, through the internet.
NRI Service:
WHY NRI ACCOUNT WITH INDIA ADVANTAGE SECURITIES LIMITED?
a. Single location for Investments and Demat b. Linked Bank Account with respective banks c. Research Reports for every asset class d. Trading platforms for every need: Trade online on NSE and BSE.e. Real-time portfolio tracking with price alerts f. Secure transactions g. Order & Trade confirmations by e-mail and online portfolio.
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CHAPTER 2:
RESEARCH
METHODOLOGY:
Statement of problem Scope of the study Objective of study Selection of Sample Significance of study Reference period Source of data Tools & techniques Chapter schema:
Limitation of study
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Statement of problem : ‘To measure short term means same day & long term
performance of IPOs.(1 month, 3month, 6month, 12month, 24month, 36month,)’
Scope of the study :
Analysis of 25 IPOs from different years. Measurement of performance with reference to average return with
the same day (1month, 3month, 6month, 12month, 24month, 36month,)’
Project emphasis more in fluctuation of share price after public offering retain then effect of systematic factor.
Objective of study :
Main : To compare performance of ipo in same day of 1day or in
short-run & long –run. To know profit potential of IPOs after long period of time.
Secondary:
To understand the return & risk associated of time. To understand profit potential in IPOs & in secondary
market.
Selection of sample: Project is covered 25IPO from different sectors from the
year2006,2007,2008,
Significance of study : The profit opportunity for investor.
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Reference period: 6th January,2011 to 6th march, 2011
Source of data : Primary data Secondary data: magazine, newspaper. book
Tools & techniques :
MAAR (Market Abnormal Adjusted Return) CAAR(Cumulative Abnormal Adjusted Return)
Chapter schema :1. Introduction of India Advantage Securities Ltd. 2. Research Methodology3. Introduction About Capital Market4. Introduction Of IPOs5. General Analysis6. Conclusion7. Bibliography
Data collection : 25IPOs-offer price of all 25 IPO. & price (in same day, after
1month, 3month, 6month, 1year, 2year, 3year,) from listing date.
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Limitation of study:
Study is only of 25 IPOs from year 2007 of different sectors. It may not give complete idea about the performance of IPOs in short & long run.
Study analysis the perform only on compare to the retain of index effect of other factor are market.
Tools which are used may have certain militate.
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CHAPTER 3:
INTRODUCTION
ABOUT
CAPITAL MARKET
MEANING OF CAPITAL MARKET
STRUCTURE AND SIZE OF CAPITAL MARKET
PRIMARY MARKET & SECONDARY MARKET
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CAPITAL MARKET
MEANING OF C APITAL M ARKET:
“Capital market refers to the market for rising of financial
resources by the business enterprises, firms, government, semi- government
bodies, public sector units and other organization.”
Capital market is an organized market for long term funds required for
meeting long term needs of business enterprises. It converts savings into profitable
investments for industrial development.
Capital market is a wide term used to comprise all operation in the new
issues market and stock market. New issues made by the companies constitute the
Primary marker. While trading in the existing securities relates to the secondary
market. While we can only buy in the Primary market, we can buy and sell
securities in the secondary market. Market comprises some who demand and other
who supply these resources.
T HE C APITAL /S HARE M ARKET:
The origination of the Indian securities market may be traced back to 1875,
when 22 enterprising brokers under a Banyan tree established the Bombay Stock
Exchange (BSE). Over the last 125 years, the Indian securities market has evolved
continuously to become one of the most dynamic, modern and efficient securities
markets in Asia. Today, Indian markets conform to international standards both in
terms of structure and in terms of operating efficiency.
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Structure and Size of the Markets:
Corporation of the exchanges assumes the counter-party risk of each
member and guarantees settlement through a fine-tuned risk management system
and an innovative method of online position monitoring. It also ensures the
financial settlement of trades on the appointed day and time irrespective of default
by members to deliver the required funds and/or securities with the help of a
settlement guarantee fund. Today India has two national exchanges, the Bombay
Stock Exchange (BSE) and the National Stock Exchange (NSE). Each has fully
electronic trading platforms with around 9400 participating broking outfits.
Foreign brokers account for 29 of these. There are some 9600 companies listed on
the respective exchanges with a combined market capitalization near $125.5bn.
Any market that has experienced this sort of growth has an equally substantial
demand for highly efficient settlement procedures. In India 99.9% of the trades,
according to the National Securities Depository, are settled in dematerialized form
in a T+2 rolling settlement environments. In addition, trades are guaranteed by the
National Clearing Corporation of India Ltd (NSCCL) and Bank of India
Shareholding Ltd (BOISL), Clearing Corporation houses of NSE and BSE
respectively. The main functions of the Clearing Corporation are to work out (a)
what counter parties owe and (b) what counter parties are due to receive on the
settlement date. Furthermore, each exchange has a Settlement Guarantee Fund to
meet with any unpredictable situation and a negligible trade failure of 0.003%. The
Clearing
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1.) Primary Market:
Primary market is the market for those securities which are issued first
time in the market for the public. The New Issue Market deals with new securities
i.e. securities which were not previously availably and are offered to the investing
public for the first time. Primary market is a market for New issues or New
financial claims. Hence, it is called New Issue Market. The market, therefore,
derives its name from the fact that it makes available a New Block of Securities for
public subscription. In the Primary market, borrowers exchange new financial
securities for long term funds. It facilitates capital formulation.
Companies raise its capital in the primary market though:
(i) Public Issue
(ii) Right Issue
(iii) Primary placement/subscription
The most popular method of raising capital is sale of securities to the
public by new companies is called Public Issue. Right Issue means, when existing
company first offered. The security to existing shareholders on a Pre –emptive
bases, while company want to raise additional capital is called capital is called
Right Issue. Private placement imagine private sale of securities to small group
investors.
2.) Secondary Market:
Secondary market is the market for those securities which have
already been available in the market and listed on a stock exchange. The main
benefit of Secondary market is securities sold and purchased continuously among
investors without involvement of company. This market consists of all stock
exchange recognized by the Government of India. The stock exchange in India are
regulated under the securities contracts (Regulation) Act, 1956.
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CHAPTER 4:
INTRODUCTION
OF
IPO
WHAT IS AN IPO?
WHY MAY A COMPANY NEED AN IPO?
WHAT ARE THE TWO SIDE OF IPO COIN?
WHO CAN" TOSS THE IPO COIN"
PREPARING FOR IPO REGULATORY.
PROCESS OF IPO.
IDEAL PROCESS OF IPO.
THE PROCEDURE FOR THE ISSUE OF AN IPO.
DOCUMENT OF IPO.
IPO MARKET IN INDIA
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INTRODUCTION OF IPO:
The transition from being a private company to a public one is one of the most important events in the life of a firm. It is also one of particular interest to institutional investors, and the transition is facilitated through the INITIAL PUBLIC OFFERING (IPO) process. The IPO provides a fresh source of capital Shareholders such as venture capitalists a liquid market for their shares. From an institutional investor's perspective, the IPO provides an opportunity to share in the rewards of the growth of the firm.
When a firm issues equity to the public for the first time, it makes an initial public offering consisting of two kinds of issues – the primary issue and the follow-on issue. In a primary, the firm raises capital for itself by selling stock to the public, whereas in the follow on issue, existing large shareholders sell to the public a substantial number of shares they currently own.
It is a well documented fact that IPOs tend to be generally under-priced, though some issues tend to be overpriced. From the viewpoint of financial research, IPO under-pricing in the sense of abnormal short-term returns on IPOs has been found in nearly every country in the world. This suggests that IPO under-pricing may be the outcome of basic problems of information and uncertainty in the IPO process, and is unlikely to be a figment of institutional peculiarities of any one market.
There have also been various studies made to suggest the reasons for such underpricing. From the investors’ point of view, this under-pricing appear to provide the sure and quick profit that most dream about. Though first day return could vary, few of the issues tend to provide a very high return over the first day. One of the examples is VA Linux which had a first day return of 700%. It is also seen that for some of the issues, the first day return could also be negative. It then becomes inevitable for most investors to measure the performance of IPOs by the short term (usually within one week of issue), as the general scheme is to buythe shares at a low initial offering price and sell it the next day when the price increases.
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Pricing of the IPOs are done by the issuers with guidance from underwriters from investment banks. There are various ways to price the stocks but what is commonly used now is a process called book building. It is basically a capital issuance process used in an Initial Public Offer which aids price and demand discovery. It is also a process used for marketing a public offer of equity shares of a company. During the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer/issue price is then determined by the issuing company after the bid closing date based on the various bids that have been collected. For a more detailed discussion of book building, one can visit any of the many stock exchanges. An example of the book building process can be seen from the National Stock Exchange. This Initial Public Offering can also be made through the fixed price method or a combination of both book building and the fixed price method.
There have been various studies conducted on the price changes of the shares after prolonged periods (six months to five years). These studies show that while the short-run performance of IPOs is often quite impressive, the long-run performance over the subsequent three to five years is not as impressive. Excluding the initial-day return, IPOs tend to underperform various benchmarks. However, these studies focus mainly on developed economies and tend to neglect the developing counterparts. A study by Madhusoodanan and Thiripalraju studies the performance of Indian IPOs prior to 1996.
It is in the hope that the long term performance of IPOs in developing economies can also be a useful indicator to the potential investor that this study is to be undertaken. The purpose of this paper is to examine the long-run performance of IPOs in Indian stock market which were issued during 2000-2001. The IPO literature has shown that the IPO issues and performance is based on a cycle. In some years there are a large number of IPOs while in some years, there are only a few IPOs. When it is a vintage year with a large number of IPOs, most IPOs tend to do well on the first day but tend to do poorly over a long term whereas in years when there are only a few IPOs, the results tend to be mixed. The long run performance is likely to be affected while we include IPOs from different time periods because the market movements in different market conditions are likely to be different. In order to see that results are not confounded by the time period when IPO was issued, it was decided to include IPOs that were issued within a one-year period. This has resulted in a sample of 116 companies which had IPOs in this period from various industries. This study is important mainly because the Indian stock market has been performing very well from the year 2001
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and our research wants to show whether this performance is due to the established firms or the performance also gets to the newly issued shares through IPOs.
The study uses various methods to ascertain the significance of the over or underperformance of IPOs. Among the many reasons for the performance which we see, one of them could be the sensitivity of the results to the choice of benchmarks. Dimson and Marsh, Ritter, Gregory et al, Fama and French and Fama have successively demonstrated the sensitivity of the long-run performance of the IPOs the benchmark used in the study. For this reason, the effect of various benchmarks on the return measurements will be studied so as to elucidate the possibility that the magnitude of the performance is benchmark dependent.
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What is an IPO ?
An IPO or an Initial Public Offer is a company's first sale of equity shares to
general public. Shares offered in an IPO are often, but not always, those of newly
set up companies seeking outside equity capital and a public market for their
shares.
“An initial public offer is an equity product that allows you to buy cheap
tomorrow’s possible winners”
-George Mathew
An Initial Public Offering (IPO) can be a good investment avenue for equity
investors. While the IPO market is dry these days, a fresh crop is expected soon.
Let us take five minutes to understand IPOs and to decide whether to invest in
them or not.
Suppose your friend owns a business, his company is profitable and he
wants to grow the company faster. For this he needs money. Instead of debt, he
wants to offer a part of his company for sale in the stock market. He will make,
what is called, a ‘public offer’ of shares (after a number of procedures and
regulatory processes). If the issue is successful, his company will ‘list’ or begin to
trade in a stock exchange. So, an IPO is a fresh offer, where a company that is not
yet trading, wants to sell shares directly to the investors. The shares can be offered
‘at par’, that is, at face value of Rs 2 Rs 5 or Rs 10, or at a premium. After this,
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your friend is no longer the only owner but will have ‘diluted’ his share. The
‘owners’ of the company may now be thousands of people he may not even know.
Yet, if he holds the majority shares, he will still take all the decisions about the
company. All the share holders are now entitled to vote, may get dividends and
bonuses. They also have the option to exit from the shares by selling their stock in
the secondary market, making a capital appreciation or loss as the price changes
from the issue price.
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Why may a Company need an IPO ?
To meet short-term requirements, the company may approach banks,
lenders or may even accept fixed deposits from the public/shareholders. To
meet its long-term requirements, funds can be raised either through loan from
lenders, Banks, Institutions etc., (which carry financial burden) or through the
issue of capital. Capital can be raised through private placement of shares,
public issue, rights issue, etc. Public Issue means raising funds from the public.
Promoters of the company may have plans for the company that may require
infusion of money. The main purpose of the public issue, amongst others, is to
raise money through the public and to get its shares listed at any of the
recognized stock exchanges in India. The following may be some other reasons
for a company to go public:
Raising funds to finance capital expenditure programs like expansion,
diversification, modernization, etc;
Financing of increased working capital requirements;
Financing acquisitions like a manufacturing unit, brand acquisitions, tender
offers for shares of another firm, etc;
Debt financing ;
Exit route for exiting investors.
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An IPO has two sides to it, consisting of advantages and disadvantages.
Moreover, it needs to be balanced, and this is done by the Regulatory Bodies
such as The Securities and Exchange Board of India (SEBI), so that it does not
fall on one side. Due to this property of an IPO, it has been referred to as a
“Coin” in this report.
What are the two sides of IPO coin ?
Advantages Disadvantages
Money non-refundable except in the case of
winding up or buy back of shares
No financial burden i.e. no fixed rate of
interest payable. However, in order to
service the equity, dividend may be paid.
Enhances shareholder's value if the
company performs well
Greater Transferability
Trading & Listing of securities at stock
exchanges
Better Liquidity of securities
Helps building reputation of promoters,
company & its products / services, provided
the company performs well
Time consuming process
Expensive
Several Legal formalities.
Involvement of many intermediaries
Transparency Requirements and public
disclosure of information may lead to
lack of privacy
Continuous Compliance of provisions
of listing agreement and other legal
requirements
Constant scrutiny of performance by
investors
May lead to takeover of the company
Securities of the company may be
made subjective to speculative attacks.
How is the “coin” made to balance (Controls)?
Applicable Laws
A Company is required to comply with the following laws in connection with a public
issue:
Provisions of The Companies Act, 1956
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Net Tangible Assets of at least Rs. 3 crores in each of the preceding 3 full years (of 12 months each), of which not more than 50% is held in monetary assets. If more than 50% is held in monetary assets, the company should have firm commitments to deploy such excess in its business/projectTrack record of distributable profits in for 3 out of preceding 5 yearsNet Worth of at least Rs. 1 crores in each of the preceding 3 full years (of 12 months each)Issue size + previous issue in current FY is lesser than 5 times pre-issue net worth
Securities Contracts (Regulations) Act, 1956
SEBI Rules & Regulations
Compliance to the Listing Agreement with the concerned stock exchanges after the
listing of securities.
RBI regulations in case of foreign.
Who can “Toss the IPO Coin”?
Eligibility Criteria for Public Issuance of Securities
No
Fixed Price or Book building (no minimum allocation to QIBs)
Only Book building, with compulsory allocation of at least 50% to QIBs
Or At least 15% participation in project by FIs/banks, of
which at least 10% should come from the appraiser(s) and additionally allocation of at least 10% to QIBs.
And
Yes
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Preparing for IPO – Regulatory:
Company should adopt best corporate governance practices to assist Investors
appreciate greater transparency and disclosure. These have to be complied with
before listing.
Minimum post-issue face value capital of the Company shall be Rs. 10 crores
Or Compulsory market making for 2 years
Board of Directors Committees
Change in Board composition to reflect public shareholders’ interest
Increase number of non-executive directors to constitute at least 50% (If the chairman of the board is an executive director then the board should have at least 50% independent directors or else at least 1/3rd)
Audit committee of at least 3, all being non-executive directors, with majority being independent & at least 1 director having financial & accounting knowledge
Remuneration committee to determine the Company’s policy on specific remuneration packages for executive directors
Investor Grievance committee
Company would have to ramp up Secretarial and Compliance teams
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Process of IPO :
For private companies in the United States , the first issue of securities to the speculative and rarely do they result in large gains for investors. However, since capital is often needed to grow a private company and values of companies are public is referred to as an Initial Public Offering (IPO). IPO's are extremely best determined in the marketplace, IPO's continue to be used as a way for growing private companies.
IPO's are often one of the hottest topics in financial management. Behind the glamour and the glitz of Initial Public Offerings (IPO's) there is a tremendous amount of hard work and personal sacrifice. IPO's require a core group of highly skilled professionals who must literally work around-the-clock for one year. Therefore, one of the first steps to a successful IPO is the formation of a seasoned, experienced team of professionals who will make the IPO happen. You must recruit the best possible people you can find - there is no time to supervise inexperienced MBA's fresh out-of-school.
Once an IPO team (Investment Banker, Legal Council, SEC Expert, Outside Auditor, etc.) has been formed, you can establish a plan for the IPO Process. A basic timeline for an IPO will usually consist of:
Month 12: Recruit new management to run the public company - CEO, CFO, etc. Start compiling the financial information.
Month 11: Start due diligence work - worthless assets are written off, inconsistencies with GAAP are resolved, etc.
Month 10: Start drafting the prospectus. Coordinate the collection of data to minimize duplicative efforts.
Month 9: Establish a board of directors for the newly formed public company.
Month 6: Establish transition contracts for services and products that will now be provided to the newly formed public company. Some new contracts will be needed, such as independent audits of financial statements.
Month 5: Finalize historical financial statements. Start preparing interim (stub) financial statements for current period.
Month 4: Finalize pro forma and interim financial statements. Make revisions to draft prospectus.
Month 3: Convene new board of directors. Audit of interim financials should be complete.
Month 2: Outside auditors opinion is issued. Membership with stock exchange is complete.
Month 1: File prospectus with SEC (Securities Exchange Commission). Issue press release and sell the company to investors.
Before the IPO Process is complete, it is essential to implement all of the necessary controls, procedures, and systems that will now be required within "public life." Staff changes must be made, new financial systems tested, functions like human resources must be managed, etc. The entire IPO process is much more involved than most people realize. A great IPO team and proper planning is the key to a smooth IPO process.
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Ideal IPO Process :
On Monday morning, the newspaper should carry an advertisement which is the prospectus of the IPO, which only talks about the firm and is silent on valuation.
The IPO should take place on Tuesday evening, from 4 PM to 5 PM. The auction should be a simple uniform-price auction with full transparency. A picture of the demand schedule, and the cut-off price, should update on the screen in real-time.
Investors should be able to go to any NSE terminal and place orders into the auction. This harnesses 10,000 odd computer screens in 300 cities all over India in the auction process. From the issuers perspective, NSCC should perform the credit enhancement exactly as it does on the equity market. At a legal level, all orders on the screen should be placed by NSCC, thus shielding the issuer from the credit risk associated with anonymous order placement.
There should be no fragmentation of the shares on offer. All shares to be sold should go through a single auction. If a retail investor wanted to "access the IPO at prices close to the offer price" she would just place non--competitive bids at the IPO, where she bids to buy (say) 100 shares at the IPO price, whatever it proves to be.
Allocation of shares in the depository should take place on Tuesday itself. There should be no physical shares. Trading on NSE should start on Wednesday (the next day). This gives us a one-- day lag between the IPO and the start of trading.
This proposed IPO process sounds startlingly effective. To put it in perspective, it is part of the same disintermediation process that we have seen in other areas of areas of the financial markets. With anonymous, electronic trading on the
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equity market, the broker/dealer has been fundamentally disinter mediated out of secondary market trading, which is now dominated by the actions of buyers and sellers (and not intermediaries). In that same fashion, the IPO process proposed here uses technology to link up the issuer and the investor with a transparent pricing mechanism, and eliminates the traditional overheads of intermediation.
The Procedure for the Issue of an IPO:
Many of these steps can be undertaken prior to formal launch of the
offering and filing of the offer document with SEBI and other regulators
Preparing for IPO.
Review business plan.
Capital structuring.
Initiate research.
Corporate governance.
Financial statements.
Due diligence.
Business and legal due diligence.
Re-stated audited financials.
Exemptions and approvals.
=Offer document.
Business overview.
Management discussion.
Statutory disclosures.
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Pre-issue marketing.
Meeting with institutional investors.
Research briefings.
Corporate publicity.
Launch IPO
File with SEBI.
Road shows.
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Document of IPO:
A company coming out with a public issue has to come out with an offer document/prospect.
An offer document is the document that contains all information you need about the company. It will tell you why the company is coming is out with a public issue. It’s financial and how the issue will be priced.
The Draft Offer Document is the offer document in the draft stage. Any company making a Public issue is required to file the draft offer document with the Securities and Exchange Board of India(SEBI).The market regulator.
If SEBI demands any changes. They have to be made. Once the changes are make. It is field with the registrar of companies are the Stock Exchange. It must be filed with SEBI at least 21 days before the company files it with the ROC/ Stock Exchange during the period. You can check it out on the SEBI website.
Red Herring prospectus is just like the above except that it will have all the information as a draft offer document. It wills, howrver, not have the details of the price or the number of shares being offered or the amount of issue. That is because the Red Herring prospectus is used in bookbuiling issues only, Where the details of the find price are know only after bidding is concluded,
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IPO MARKET IN INDIA :
The IPO Market in India has been developing since the liberalization of the Indian economy. It has become one of the foremost methods of raising funds for various developmental projects of different companies.
The IPO Market in India is on the boom as more and more companies are issuing equity shares in the capital market. With the introduction of the open market economy, in the 1990s, the IPO Market went through its share of policy changes, reforms and restructurings. One of the most important developments was the disassembling of the Controller of Capital Issues (CCI) and the introduction of the free pricing mechanism. This step helped in developing the IPO Market in India, as the companies were permitted to price the issues. The Free pricing mechanism permitted the companies to raise funds from the primary market at competitive price.
The Central Government felt the need for a governed environment pertaining to the Capital market, as few corporate houses were using the abolition of the Controller of Capital Issues (CCI) in a negative manner. The Securities Exchange Board of India (SEBI) was established in the year 1992 to regulate the capital market. SEBI was given the authority of monitoring and regulating the activities of the bankers to an issue, portfolio managers, stockbrokers, and other intermediaries related to the stock markets. The effects of the changes are evident from the trend of the resources of the primary capital market which Includes rights issues, public issues, private placements and overseas issues. The IPO Market in India experienced a boom in its activities in the year 1994.In the year 1995 the growth of the Indian IPO market was 32 %.The growth was halted with the South East Asian crisis. The markets picked up speed again with the introduction of the software stocks.
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CHAPTER 5:
GENERAL
ANALYSIS
LIST OF IPO. CLOSING PRICE OF IPO. CALCULATION METHOD FOR SHORT TERT & LONG TERM
PERFORMANCE OF IPO. SHORT TERM PERFORMANCE OF IPO. LONG TERM PERFORMANCE OF IPO.
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For the analysis I have selected following IPOs. I have collect IPOs from year 2006 to 2008. So it is possible to measure long-term performance.
Name of IPOListing Date Offer Price(RS.)
1. Porwal auto component Ltd 17-Dec-06 682. Aries agro ltd 14-Dec-06 1203. Transformer and rectifier ltd 7-Dec-06 4254. Burnpur cement ltd 28-Nov-06 125. Jyoti laboratory ltd 12-Nov-06 6206. Renaissnce jwellary ltd 19-Nov-06 1257. Edelweiss capital ltd 15-Nov-07 7258. Mundra port & SEZ ltd 1-Nov-07 4009. Barak valley cement ltd 29-Oct-07 3710. Allied computer int. ltd 19-Oct-07 1211. Chemical biotech ltd 9-Sep-07 1612. Vishal info. Technology ltd 21-Jul-07 14013. KSK energy venture ltd 23-Jun-07 24014. Sejal architectural glass ltd 9-Jun-07 10515. Avon washing system ltd 9-Jun-07 1016. Bafna Pharmaceuticals ltd 27-May-07 4017. Aishwariya telecom ltd 15-Apr-08 3218. Sita Shree food product ltd 11-Apr-08 2719. Niraj cement structureal ltd 22-Jun-08 17520. Godrej properties ltd 9-Dec-08 10021. Think soft global service ltd 22-Sep-08 12022. Euro multivision ltd 24-Sep-08 7023. C mahendra export ltd 31-Dec-08 9524. Punjab &Sind bank 13-Dec-08 11325. Power Grid corporation of
CALCULATION METHOD FOR SHORT- TERM PRAFORMANCE OF IPOS :
The methodology used by Aggarwal, Leal and Hernandez (1993) to measure the short-run performance for each IPO and for groups of IPOs. The total return for stock “i” at the end of the first trading day is calculated as:
Ri1= (Pi1/Pi0) -1 (1)
Where Pil is the closing price of the stock i at the first trading day, and Pi0 is its offering price and Ril is the total first-day return on the stock. The return on the market index during the same time period is:
R m1 =(P m1/ P m0) - 1 (2)
where P m1is the closing market index value at the first trading day and P m0 is the closing market index value on the offering day of the appropriate stock, while R m1 is the first day’s comparable market return.
Using these two returns, the market-adjusted abnormal return for each IPO on the first day of trading is computed as:
MAARi1= 100(1+ Ri1/1+ R m1-1) (3)
MAAR is the sample mean abnormal return for the first trading day and may be viewed as a Performance index which reflects the return, in excess of the market return, on an investment divided equally among N new issues in a sample:
Average MAAR=∑i=1
N
MAARi1
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CALCULATION METHOD FOR LONG- TERM PRAFORMANCE OF IPOS:
The Long Term Performance Is Based on CAAR Model it means Cumulative Average Abnormal Return:
Average CAART=1N
Σ ε¿
where the abnormal return in month t after the IPO for firm I is given by εit and N is the number of firms in the sample.
Figure 1 Distribution of First Day Return of 25 company
INTERPRETATION:
The average first day returns for the entire sample of 25 selected company. Figure 1 shows the frequency of the market-adjusted initial returns of IPOs for the entire sample of Indian stocks. For the Indian market, the Average MAAR is found to 81.46%.so Average MAAR has a greater return in a first day. And it is a high profit potential in a first day of initial public i.e. 81.46% return on first day. And the positive for the investor. So IPOs are generally performed better in same day for giving good return.
1 3 5 7 9 11 13 15 17 19 21 23 25
-50
0
50
100
150
200
MAAR(%)
MAAR(%)
MA
AR
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LONG- TERM PRAFORMANCE OF IPOS:
The long term performance of IPOs for them. 1month. 3month .6month .12month .24month 36month. The analysis is below:
Power Grid corporation of india ltd 99.31 87.25 -12
AVG. TOTAL -0.92
AVERAGE CAAR -0.92
CHART OF 1 MONTH RETURN :
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Figure 2 Distribution of 1 Month Returns 25 company
INTERPRETATION:
The Average CAAR for monthly is -0.92. So it is a negative for the company & the investor. Also company takes a risk for IPOs. And less profit potential of IPOs after long period i.e. monthly for investor.
Power Grid corporation of india ltd 99.31 109.7 10
AVG. TOTAL -4.76 AVERAGE CAAR -2.84
CHART OF 3 MONTH RETURN :
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Figure 3 Distribution of 3 Month Returns of 25 company
INTERPRETATION:
The Average CAAR for Quarterly is -2.84. So it is a negative for the company & the investor. Also company takes a risk for IPOs. And less profit potential of IPOs after long period i.e. quarterly return for investor. As compare to monthly return it is a high risk for each 25 companies & investor.
Power Grid corporation of india ltd 99.31 111.25 12
AVG. TOTAL -2.56 AVERAGE CAAR -2.75
CHART OF 6 MONTH RETURN :
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Figure 4 Distribution of 6 Month of 25 company
INTERPRETATION:
The Average CAAR for haft yearly is -2.75. So it is a negative for the company & the investor. Also company takes a risk for IPOs. And less profit potential of IPOs after long period i.e. haft yearly return for investor. As compare to monthly return it is a high risky but quarterly return less risky for each 25 companies & investor.
Power Grid corporation of india ltd 99.31 103.54 4
AVG. TOTAL 1.24 CAAR -1.75
CHART OF YEARLY RETURN :
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Figure 5 Distribution of Yearly Returns of 25 company
INTERPRETATION:
The Average CAAR is -1.75.So it is a negative for the company & the investor. Also company takes a risk for IPOs. And less profit potential of IPOs after long period i.e. Yearly return for investor. As compare to monthly return it is a high risky but quarterly return & haft yearly return less risky for each 25 companies & investor.
Power Grid corporation of india ltd 99.31 72.19 -27
AVG. TOTAL 2.76 CAAR -0.848
CHART OF 2 YEARLY RETURN :
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Figure 5 Distribution of 2 Yearly Returns of 25 company
INTERPRETATION:
The Average CAAR is -0.848 .So it is a negative for the company & the investor. Also company takes a risk for IPOs. And less profit potential of IPOs after long period i.e. 24 Monthly returns for investor. As compare to monthly return it is a less risky but quarterly return & haft yearly return also less risky and from the duration of 24 month the risk has been reduced for each 25 companies & for investor.
Power Grid corporation of india ltd 99.31 87.21 -12
AVG. TOTAL -5.92 CAAR -1.69
CHART OF 3 YEARLY RETURN :
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Figure 5 Distribution of 3 Yearly Returns of 25 company
INTERPRETATION:
The Average CAAR is -1.69.So it is a negative for the company & the investor. Also company takes a risk for IPOs. And less profit potential of IPOs after long period i.e. 36 Monthly returns for investor. As compare to monthly return it is a less risky but quarterly return & haft yearly return also less risky and from the duration of 36 month the risk has been reduced for each 25 companies & investor.
CHART FOR CAAR :
1 4 7 10 13 16 19 22 25
-50
-40
-30
-20
-10
0
10
20
30
40
50
3YEARLY RETURN(%)
3YEARLY RETURN(%)
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MONTH Average CAAR
1 -0.923 -2.846 -2.75
12 -1.7524 -0.84836 -1.69
INTERPRETATION:
The Average CAAR has Been Negatives for Entire 36 Month .so in long term performance is poorly for the 25 selected companies. And negative response by Indian invertors. And negative returns get in long term IPOs.
The short-term is positive i.e. Average MAAR is 81.46% and the long-term performance is negative for each month i.e. average CAAR. and short-term performance of IPOs is the positive and the higher chance to earn return in short-term IPOs for Indian investor.
The long-term performance of these companies shows that investment in Indian IPOs provides negative abnormal return by the end of the 36 month
The short-term performance of these companies shows that investment in Indian IPOs provides positive abnormal return by the end of the first trading day. And the higher chance to earn profit in short-term IPOs for Indian invertors
This study shows that investment in IPOs generally negative benefit to Indian investor in long term IPOs. And positive for short-term IPOs.
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CHAPTER 7:
Bibliography
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Book: The IPOs Decision: Why And How Companies Go Public, Jason