IPO Project Report

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INITIAL
PUBLIC
OFFER
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Topics Covered
 Executive Summary
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 Introduction
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 What Is An IPO
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 Why Go Public
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 Getting In An IPO
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 IPO  Advantages & Disadvantages

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 Parameters To Judge An IPO

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 Understanding The Role Of Intermediaries -- 16
 Registration Process
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 IPO Scams
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 Salient Features Of IPO Scams

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 Operational Deficiencies
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 Measures To Prevent Scams

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 Recent IPO’s
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 DEFINITIONS AND ABBREVIATIONS

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 Bibliography
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EXECUTIVE SUMMARY
As we all know IPO – INITIAL PUBLIC OFFERING is the

hottest topic in the current industry, mainly because of India being a
developing country and lot of growth in various sectors which leads a
country to ultimate success. And when we talk about country’s growth
which is dependent on the kind of work and how much importance to
which sector is given. And when we say or talk about industries growth
which leads the economy of country has to be balanced and given
proper finance so as to reach the levels to fulfill the needs of the
society. And industries which have massive outflow of work and a big
portfolio then its very difficult for any company to work with limited
finance and this is where IPO plays an important role.
This report talks about how IPO helps in raising fund for the
companies going public, what are its pros and cons, and also it gives us
detailed idea why companies go public. How and what are the steps
taken by the companies before going for any IPO and also the role of
(SEBI) Securities and Exchange Board of India the BSE and NSE , what
are primary and secondary markets and also the important terms
related to IPO. It gives us idea of how IPO is driven in the market and
what are various factors taken into consideration before going for an
IPO. And it also tells us how we can more or less judge a good IPO.
Then we all know that scams have always been a part of any sector
you go in for which are covered in it and also few recommendations are
given for the same. It also gives us some idea about what are the
expenses that a company undertakes during an IPO.
IPO has been one of the most important generators of

funds for the small companies making them big and given a new vision
in past and it is still continuing its work and also for many coming
years.
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INTRODUCTION
IPO stands for Initial Public Offering and means the new
offer of shares from a company which was previously unlisted. This is
done by offering those shares to the public, which were held by the
promoters or the private investors prior to the IPO. In the case when
other investors or Promoter held the shares the stake holding comes
down to the extent their shares are offered to the public. In other cases
new shares are issued to the public and the shares, which are with the
promoters stay with them. In both cases the share of the promoters in
the total capital comes down.
For example say there are 100 shares in a company and 50

of these are offered to the public in an IPO then in such a case the
promoter’s stake in the company comes down from 100% to 50%. In
another case the company issues 50 additional shares to the public
and the stake of the promoter comes down from 100% to 67%.
Normally in an IPO the shares are issued at a discount to

what is considered their intrinsic value and that’s why investors keenly
await IPOs and make money on most of them. IPO are generally priced
at a discount, which means that if the intrinsic value of a share is
perceived to be Rs.100 the shares will be offered at a price, which is
lesser than Rs.100 say Rs.80 during the IPO. When the stock actually
lists in the market it will list closer to Rs.100. The difference between
the two prices is known as Listing Gains, which an investor makes
when investing in IPO and making money at the listing of the IPO. A
Bullish Market gives IPO investors a clear opportunity to achieve long
term targets in a short term phase.
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What is an IPO
An IPO is the first sale of stock by a company to the public.

A company can raise money by issuing either debt or equity. If the
company has never issued equity to the public, it's known as an IPO.
Companies fall into two broad categories: private and

public.
A privately held company has fewer shareholders and its owners don't
have to disclose much information about the company. Anybody can
go out and incorporate a company: just put in some money, file the
right legal documents and follow the reporting rules of your
jurisdiction. Most small businesses are privately held. But large
companies can be private too. Did you know that IKEA, Domino's Pizza
and Hallmark Cards are all privately held?
It usually isn't possible to buy shares in a private company.

You can approach the owners about investing, but they're not
obligated to sell you anything. Public companies, on the other hand,
have sold at least a portion of themselves to the public and trade on a
stock exchange. This is why doing an IPO is also referred to as "going
public."
Public companies have thousands of shareholders and are

subject to strict rules and regulations. They must have a board of
directors and they must report financial information every quarter. In
the United States, public companies report to the Securities and
Exchange Commission (SEC). In other countries, public companies are
overseen by governing bodies similar to the SEC. From an investor's
standpoint, the most exciting thing about a public company is that the
stock is traded in the open market, like any other commodity. If you
have the cash, you can invest. The CEO could hate your guts, but
there's nothing he or she could do to stop you from buying stock.
The first sale of stock by a private company to the public,

IPO’s are often issued by smaller, younger companies seeking capital
to expand, but can also be done by large privately-owned companies
looking to become publicly traded. In an IPO, the issuer obtains the
assistance of an underwriting firm, which helps it determine what type
of security to issue (common or preferred), best offering price and time
to bring it to market. IPO’s can be a risky investment. For the individual
investor, it is tough to predict what the stock will do on its initial day of
trading and in the near future since there is often little historical data
with which to analyze the company. Also, most IPO’s are of
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companies going through a transitory growth period, and they are

therefore subject to additional uncertainty regarding their future value.
Primary and Secondary markets
In the primary market securities are issued to the public
and the proceeds go to the issuing company. Secondary market is term
used for stock exchanges, where stocks are bought and sold after they
are issued to the public.
PRIMARY MARKET
The first time that a company’s shares are issued to the

public, it is by a process called the initial public offering (IPO). In an IPO
the company offloads a certain percentage of its total shares to the
public at a certain price.
Most IPO’S these days do not have a fixed offer price.

Instead they follow a method called BOOK BUILDIN PROCESS, where
the offer price is placed in a band or a range with the highest and the
lowest value (refer to the newspaper clipping on the page). The public
can bid for the shares at any price in the band specified. Once the bids
come in, the company evaluates all the bids and decides on an offer
price in that range. After the offer price is fixed, the company allots its
shares to the people who had applied for its shares or returns them
their money.
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SECONDRY MARKET
Once the offer price is fixed and the shares are issued to
the people, stock exchanges facilitate the trading of shares for the
general public. Once a stock is listed on an exchange, people can start
trading in its shares. In a stock exchange the existing shareholders sell
their shares to anyone who is willing to buy them at a price agreeable
to both parties. Individuals cannot buy or sell shares in a stock
exchange directly; they have to execute their transaction through
authorized members of the stock exchange who are also called STOCK
BROKERS.
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Why Go Public?
Basically, going public (or participating in an "initial public
offering" or IPO) is the process in which a business owned by one or
several individuals is converted into a business owned by many. It
involves the offering of part ownership of the company to the public
through the sale of debt or more commonly, equity securities (stock).
Going public raises cash and usually a lot of it. Being

publicly traded also opens many financial doors:
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 Because of the increased scrutiny, public companies can usually

get better rates when they issue debt.
 As long as there is market demand, a public company can always

issue more stock. Thus, mergers and acquisitions are easier to do
because stock can be issued as part of the deal.
 Trading in the open markets means liquidity. This makes it

possible to implement things like employee stock ownership
plans, which help to attract top talent.
Being on a major stock exchange carries a considerable

amount of prestige. In the past, only private companies with strong
fundamentals could qualify for an IPO and it wasn't easy to get listed.
The internet boom changed all this. Firms no longer

needed strong financials and a solid history to go public. Instead, IPOs
were done by smaller startups seeking to expand their businesses.
There's nothing wrong with wanting to expand, but most of these firms
had never made a profit and didn't plan on being profitable any time
soon. Founded on venture capital funding, they spent like Texans
trying to generate enough excitement to make it to the market before
burning through all their cash. In cases like this, companies might be
suspected of doing an IPO just to make the founders rich. This is known
as an exit strategy, implying that there's no desire to stick around and
create value for shareholders. The IPO then becomes the end of the
road rather than the beginning.
How can this happen? Remember: an IPO is just selling

stock. It's all about the sales job. If you can convince people to buy
stock in your company, you can raise a lot of money.
Getting In On an IPO
The Underwriting Process
Getting a piece of a hot IPO is very difficult, if not

impossible. To understand why, we need to know how an IPO is done, a
process known as underwriting.
When a company wants to go public, the first thing it does

is hire an investment bank. A company could theoretically sell its
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shares on its own, but realistically, an investment bank is required - it's

just the way Wall Street works. Underwriting is the process of raising
money by either debt or equity (in this case we are referring to equity).
You can think of underwriters as middlemen between companies and
the investing public. The biggest underwriters are Goldman Sachs,
Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan
Stanley.
The company and the investment bank will first meet to

negotiate the deal. Items usually discussed include the amount of
money a company will raise, the type of securities to be issued and all
the details in the underwriting agreement. The deal can be structured
in a variety of ways. For example, in a firm commitment, the
underwriter guarantees that a certain amount will be raised by buying
the entire offer and then reselling to the public. In a best efforts
agreement, however, the underwriter sells securities for the company
but doesn't guarantee the amount raised. Also, investment banks are
hesitant to shoulder all the risk of an offering. Instead, they form a
syndicate of underwriters. One underwriter leads the syndicate and the
others sell a part of the issue.
Once all sides agree to a deal, the investment bank puts

together a registration statement to be filed with the SEC. This
document contains information about the offering as well as company
info such as financial statements, management background, any legal
problems, where the money is to be used and insider holdings. The SEC
then requires a cooling off period, in which they investigate and make
sure all material information has been disclosed. Once the SEC
approves the offering, a date (the effective date) is set when the stock
will be offered to the public.
During the cooling off period the underwriter puts together

what is known as the red herring. This is an initial prospectus
containing all the information about the company except for the offer
price and the effective date, which aren't known at that time. With the
red herring in hand, the underwriter and company attempt to hype and
build up interest for the issue. They go on a road show - also known as
the "dog and pony show" - where the big institutional investors are
courted.
As the effective date approaches, the underwriter and

company sit down and decide on the price. This isn't an easy decision:
it depends on the company, the success of the road show and, most
importantly, current market conditions. Of course, it's in both parties'
interest to get as much as possible.
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Finally, the securities are sold on the stock market and the
money is collected from investors.
As you can see, the road to an IPO is a long and

complicated one. You may have noticed that individual investors aren't
involved until the very end. This is because small investors aren't the
target market. They don't have the cash and, therefore, hold little
interest for the underwriters. If underwriters think an IPO will be
successful, they'll usually pad the pockets of their favorite institutional
client with shares at the IPO price. The only way for you to get shares
(known as an IPO allocation) is to have an account with one of the
investment banks that is part of the underwriting syndicate. But don't
expect to open an account with $1,000 and be showered with an
allocation. You need to be a frequently trading client with a large
account to get in on a hot IPO.
Bottom line, your chances of getting early shares in an IPO are slim to
none unless you're on the inside. If you do get shares, it's probably because nobody else
wants them. Granted, there are exceptions to every rule and it would be incorrect for us to
say that it's impossible. Just keep in mind that the probability isn't high if you are a small
investor.
IPO – ADVANTAGES AND

DISADVANTAGES
The decision to take a company public in the form of an
initial public offering (IPO) should not be considered lightly. There are
several advantages and disadvantages to being a public company,
which should thoroughly be considered. This memorandum will discuss
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the advantages and disadvantages of conducting an IPO and will briefly

discuss the steps to be taken to register an offering for sale to the
public. The purpose of this memorandum is to provide a thumbnail
sketch of the process. The reader should understand that the process
is very time consuming and complicated and companies should
undertake this process only after serious consideration of the
advantages and disadvantages and discussions with qualified advisors.
Advantages of going public
 Increased Capital
A public offering will allow a company to raise capital to use for

various corporate purposes such as working capital, acquisitions,
research and development, marketing, and expanding plant and
equipment.
 Liquidity
Once shares of a company are traded on a public exchange,

those shares have a market value and can be resold. This allows
a company to attract and retain employees by offering stock
incentive packages to those employees. Moreover, it also
provides investors in the company the option to trade their
shares thus enhancing investor confidence.
 Increased Prestige
Public companies often are better known and more visible than
private companies, this enables them to obtain a larger market
for their goods or services. Public companies are able to have
access to larger pools of capital as well as different types of
capital.
 Valuation
Public trading of a company's shares sets a value for the

company that is set by the public market and not through more
subjective standards set by a private valuator. This is helpful for
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a company that is looking for a merger or acquisition. It also

allows the shareholders to know the value of the shares.
 Increased wealth
The founders of the company often have the sense of increased

wealth as a result of the IPO. Prior to the IPO these shares were
illiquid and had a more subjective price. These shares now have
an ascertainable price and after any lockup period these shares
may be sold to the public, subject to limitations of federal and
state securities laws.
Disadvantages of going Public
 Time and Expense
Conducting an IPO is time consuming and expensive. A

successful IPO can take up to a year or more to complete and a
company can expect to spend several hundreds of thousands of
dollars on attorneys, accountants, and printers. In addition, the
underwriter's fees can range from 3% to 10% of the value of the
offering. Due to the time and expense of preparation of the IPO,
many companies simply cannot afford the time or spare the
expense of preparing the IPO.
 Disclosure
The SEC disclosure rules are very extensive. Once a company is a

reporting company it must provide information regarding
compensation of senior management, transactions with parties
related to the company, conflicts of interest, competitive
positions, how the company intends to develop future products,
material contracts, and lawsuits. In addition, once the offering
statement is effective, a company will be required to make
financial disclosures required by the Securities and Exchange Act
of 1934. The 1934 Act requires public companies to file quarterly
statements containing unaudited financial statements and
audited financial statements annually. These statements must
also contain updated information regarding nonfinancial matters
similar to information provided in the initial registration
statement. This usually entails retaining lawyers and auditors to
prepare these quarterly and annual statements. In addition, a
company must report certain material events as they arise. This
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information is available to investors, employees, and

competitors.
 Decisions based upon Stock Price
Management's decisions may be effected by the market price of

the shares and the feeling that they must get market recognition
for the company's stock.
 Regulatory Review
The Company will be open to review by the SEC to ensure that

the company is making the appropriate filings with all relevant
disclosures.
 Falling Stock Price
If the shares of the company's stock fall, the company may lose
market confidence, decreased valuation of the company may
effect lines of credits, secondary offering pricing, the company's
ability to maintain employees, and the personal wealth of
insiders and investors.
 Vulnerability
If a large portion of the company's shares are sold to the public,

the company may become a target for a takeover, causing
insiders to lose control. A takeover bid may be the result of
shareholders being upset with management or corporate raiders
looking for an opportunity. Defending a hostile bid can be both
expensive and time consuming. Once a company has weighed
the advantages and disadvantages of being a public company, if
it decides that it would like to conduct an IPO it will have to retain
a lead
Parameters to judge an IPO
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Good investing principles demand that you study the

minutes of details prior to investing in an IPO. Here are some
parameters you should evaluate:-
 Promoters
Is the company a family run business or is it professionally
owned? Even with a family run business what are the credibility and
professional qualifications of those managing the company? Do the top
level managers have enough experience (of at least 5 years) in the
specific type of business?
 Industry Outlook
The products or services of the company should have a
good demand and scope for profit.
 Business Plans
Check the progress made in terms of land acquisition,
clearances from various departments, purchase of machinery, letter of
credits etc. A higher initial investment from the promoters will lead to a
higher faith in the organization.
 Financials
Why does the company require the money? Is the company
floating more equity than required? What is the debt component? Keep
a track on the profits, growth and margins of the previous years. A
steady growth rate is the quality of a fundamentally sound company.
Check the assumptions the promoters are making and whether these
assumptions or expectations sound feasible.
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 Risk Factors
The offer documents will list our specific risk factors such
as the company’s liabilities, court cases or other litigations. Examine
how these factors will affect the operations of the company.
 Key Names
Every IPO will have lead managers and merchant bankers.
You can figure out the track record of the merchant banker through the
SEBI website.
 Pricing
Compare the company’s PER with that of similar
companies. With this you can find out the P/E Growth ratio and
examine whether its earning projections seem viable.
 Listing
You should have access to the brokers of the stock
exchanges where the company will be listing itself.
Understanding the role of intermediaries
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 Who are the intermediaries in an issue?
Merchant Bankers to the issue or Book Running Lead

Managers (BRLM), syndicate members, Registrars to the issue, Bankers
to the issue, Auditors of the company, Underwriters to the issue,
Solicitors, etc. are the intermediaries to an issue. The issuer discloses
the addresses, telephone/fax numbers and email addresses of these
intermediaries. In addition to this, the issuer also discloses the details
of the compliance officer appointed by the company for the purpose of
the issue.
 Who is eligible to be a BRLM?
A Merchant banker possessing a valid SEBI registration in

accordance with the SEBI (Merchant Bankers) Regulations, 1992 is
eligible to act as a Book Running Lead Manager to an issue.
 What is the role of a Lead Manager? (pre and post issue)
In the pre-issue process, the Lead Manager (LM) takes up

the due diligence of company’s operations/ management/ business
plans/ legal etc. Other activities of the LM include drafting and design
of Offer documents, Prospectus, statutory advertisements and
memorandum containing salient features of the Prospectus. The BRLMs
shall ensure compliance with stipulated requirements and completion
of prescribed formalities with the Stock Exchanges, RoC and SEBI
including finalization of Prospectus and RoC filing. Appointment of
other intermediaries viz., Registrar(s), Printers, Advertising Agency and
Bankers to the Offer is also included in the pre-issue processes. The LM
also draws up the various marketing strategies for the issue.
The post issue activities including management of escrow
accounts, co-ordinate non-institutional allocation, intimation of
allocation and dispatch of refunds to bidders etc are performed by the
LM. The post Offer activities for the Offer will involve essential follow-
up steps, which include the finalization of trading and dealing of
instruments and dispatch of certificates and demat of delivery of
shares, with the various agencies connected with the work such as the
Registrar(s) to the Offer and Bankers to the Offer and the bank
handling refund business. The merchant banker shall be responsible for
ensuring that these agencies fulfill their functions and enable it to
discharge this responsibility through suitable agreements with the
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Company.
 What is the role of a registrar?
The Registrar finalizes the list of eligible allottees after

deleting the invalid applications and ensures that the corporate action
for crediting of shares to the demat accounts of the applicants is done
and the dispatch of refund orders to those applicable are sent. The
Lead manager co-ordinates with the Registrar to ensure follow up so
that that the flow of applications from collecting bank branches,
processing of the applications and other matters till the basis of
allotment is finalized, dispatch security certificates and refund orders
completed and securities listed.
 What is the role of bankers to the issue?
Bankers to the issue, as the name suggests, carries out all

the activities of ensuring that the funds are collected and transferred to
the Escrow accounts. The Lead Merchant Banker shall ensure that
Bankers to the Issue are appointed in all the mandatory collection
centers as specified in DIP Guidelines. The LM also ensures follow-up
with bankers to the issue to get quick estimates of collection and
advising the issuer about closure of the issue, based on the correct
figures.
 Question on Due diligence
The Lead Managers state that they have examined various

documents including those relating to litigation like commercial
disputes, patent disputes, disputes with collaborators etc. and other
materials in connection with the finalization of the offer document
pertaining to the said issue; and on the basis of such examination and
the discussions with the Company, its Directors and other officers,
other agencies, independent verification of the statements concerning
the objects of the issue, projected profitability, price justification, etc.,
they state that they have ensured that they are in compliance with
SEBI, the Government and any other competent authority in this
behalf.
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What is the Registration Process?

Going public requires a Registration Statement which is a
carefully crafted document that is prepared by your attorneys and
accountants. It requires detailed discussions on information pertaining
to:
 Business product/service/markets
 Company Information
 Risk Factors
 Proceeds Use (How are you going to use the money)
 Officers and Directors
 Related party transactions
 Identification of your principal shareholders
 Audited financials
After your registration statement is prepared, it is

submitted to the Securities and Exchange Commission and various
other regulatory bodies for their detailed review. When this process is
completed, you and your management team will do a "road show" to
present your company to the stock brokers who will then sell your
stock to the public investors. Assuming they can successfully sell your
issue, you’ll receive your money. Then it's simple, all you have to do is
make a lot more money with the proceeds so as to increase the value
of your, your teams and the public investors stock.
IPO SCAMS
YES BANK Ltd. CASE
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The modus operandi adopted in manipulating the YES Bank

Ltd (YBL)'s initial public offering (IPO) allotment involved opening of
over 7,500 benami dematerialised accounts.
These accounts were with the National Securities

Depository Ltd (NSDL) through Karvy Stockbroking Ltd (Karvy-DP). Of
the 13 erring entities, the chief culprits identified by SEBI were Ms
Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd.
While Ms Panchal opened 6,315 benami DP accounts,

another entity Sugandh opened 1,315 benami accounts. Each of these
accounts applications were made for 1,050 shares, paying application
money of Rs 47,250 each. By applying for small lots (1,050 shares
through each accounts), they misused the retail allotment quota
stipulated for IPOs. The shares allotted in IPO to the benamis of Ms
Panchal and Sugandh would have otherwise gone to genuine retail
applicants.
The IPO of YBL opened on June 15, 2005 and its shares
were listed on the BSE and the NSE on July 12, 2005.
It was observed that Ms Panchal had transferred 9,31,600

shares to various entities in seven off-market transactions on July 11 -
a day prior to the listing and commencement of trading on the stock
exchanges. In order to get an allotment of 9,31,600 shares, Ms Panchal
would have had to apply for crores of shares involving many crores of
rupees in application money.
However, Ms Panchal's name did not appear in the list of

top 100 public issue allottees. Thus, it was suspected that Ms Panchal
must have made multiple applications or that other applicants were
acting as a front for her.
Ms Panchal had applied for only 1,050 shares in the YES

Bank IPO, paying the application money of Rs 47,250. And she did not
receive any allotment in the IPO. On July 6, Ms Panchal received 150
shares each from 6,315 allottees through off-market transactions
aggregating 9,47,250 YBL shares.
Curiously, as per the dematerialised account data furnished

by NSDL, of the above 6,315 entities as many as 6,221 entities have a
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same address in Ahmedabad. There are three more addresses of

locations in Ahmedabad, which have been linked to Ms Panchal. All the
6,315 entities have their bank accounts with Bharat Overseas Bank and
demat accounts with Karvy-DP.
By applying for the maximum possible number of shares

per applicant while being categorised as retail applicant and by putting
in large number of applications in the lot of 1,050 shares, Ms Panchal
and her associates (real or fictitious) have attempted to corner the
maximum possible number of shares in the IPO allotment.
This tantamounts to an abuse of IPO allotment process, the

SEBI order said.
A similar modus operandi was adopted by Sugandh, which

received 150 shares each from 1,315 dematerialised accounts
aggregating 1,97,250 shares in off market transactions.
According to SEBI findings, Ms Panchal and others booked

profits to the tune of about Rs 1.70 crore on the day of the listing of
YES Bank shares.
SEBI unearths another IPO scam in IDFC

SEBI on Thursday 12th Jan 06 unearthed yet another abuse
of IPO norms in the IDFC's initial public offering (IPO) where a few
investors opened over 14,000 dematerialised accounts to corner large
number of shares of the company. This is the second such incident,
after a similar such violations were detected in the YES Bank's IPO.
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SEBI said in IDFC's IPO too four investors opened as many

as 14,807 dematerialized accounts with Karvy-DP and "strangely", all
these account holders have their bank accounts with Bharat Overseas
Bank Ltd, Ahmedabad. SEBI order said: "further probe is required for
examining the systemic fault, if any, of the registrar Karvy-RTI i.e.
Karvy Computer Shares P Ltd, and the lead managers Kotak Mahindra
Capital Company Ltd, DSP Merrill Lynch Ltd and SBI Capital Markets Ltd
in identifying and weeding out the benami applications."
Reference is being made to the RBI to examine the role of

BhOB, HDFC Bank, Indian Overseas Bank, ING Vysya Bank and Vijaya
Bank in opening the bank accounts of these benami entities and
apparently funding them.
According to SEBI, Karvy-DP, which was also named in the

YES Bank IPO case, has not adhered to `Know-your-Client' norms, as
per the reports of inspection submitted by NSDL and CDSL on the DP.
Also, some of the documents collected by CDSL during the course of
inspection show that Karvy-DP has obtained letters purportedly issued
by the banks' concerned such as BhOB as proof of identity and proof of
address of the person for the purpose of opening dematerialised
accounts.
"It is seen that one branch manager has on the same date
signed as authorized signatory of different branches of the bank. This
raises a doubt as to the authenticity of the bank documents obtained
by Karvy-DP for opening dematerialised accounts," the SEBI order by
its Whole-time Director Mr G. Anantharaman said. SEBI also banned
four investors (in whose names the multiple accounts were opened)
viz., Ms Roopalben Nareshbhai Panchal (who was also named in the
YES Bank IPO scam), Sugandh Estates & Investments P Ltd, Mr
Purshottam Ghanshyam Budhwani and Mr Manojdev Seksaria from
doing any kind of transactions in the securities market, till further
directions.
Another 35 firms were also barred from participating in the IPOs in the
future, till further orders, the SEBI order said.
MARUTI Case
Fictitious Demat A/c’s opened in 2003 itself
`First IPO in which key players took part was Maruti'
P a g e | 23
The Charges
DPs have been accused by SEBI of not fully implementing

the `maker-checker' concept, data entry errors, scanning of officials'
signatures, and appointing themselves as the second holder.
Description
Some of the demat accounts that were used to manipulate
allotments in the initial public offer of Yes Bank and IDFC were opened
during 2003, and not in the last year as was earlier believed. The first
IPO in which the key operators have participated was that of Maruti
Udyog Ltd, in June 2003, though the numbers of fictitious demat
accounts were not very high then, the interim order from Securities
and Exchange Board of India has said.
SEBI's investigations have now pegged that a "total of 24

key operators have indulged in abusive practices in respect of 21
IPOs".
The evidence against Karvy DP has stemmed from the fact

that almost all the demat accounts which served as conduits for these
master account holders were held with Karvy DP, according to the
order. These 24 operators have 34 demat accounts; of which 16 demat
accounts are held with Karvy DP.
Due Diligence Not Taken
The market regulator's investigations have pointed out

that, while opening demat accounts the depository participants were
not exercising due diligence. Persons involved in the scam have
collected proofs of identity and addresses from groups of persons and
used this to open bogus bank accounts.
Inter-linkages
The master account holders were found to have made off-

market transfer of the IPO shares to various common groups of entities
who appear to be their principals. It is seen that some of the master
account holders have also made off-market transfers amongst
P a g e | 24
themselves. This shows that there are inter-linkages amongst the

master account holders as well as between groups of master account
holders and their principals, the order said.
Depository participants have been accused by SEBI of not

fully implementing the `maker-checker' concept, data entry errors,
scanning of officials' signatures, and appointing themselves as the
second holder.
With some of the DPs also acting as brokers, stock

exchanges have been advised to examine the role and involvement of
brokers and sub-brokers by way of participation in IPOs either directly
or indirectly and their dealings in the shares subsequent to listing.
Exchanges are to submit a report on this within a month.
SEBI bars Karvy, 23 other entities

Alleged involvement in IPO allotment scam
In the dock
Ban on several entities including HDFC Bank, IDBI Bank,

ING Vysya Bank and Motilal Oswal Securities from opening fresh demat
accounts.
The regulator also pulled up NSDL and CDSL for `grave management
lapses'.
Description
SEBI on Thursday 27th April 2006 came down heavily on

stock market intermediaries by banning several entities including
Karvy group of companies, Pratik DP and Indiabulls Securities, for their
alleged involvement in the IPO allotment scam. SEBI has also barred
several entities including HDFC Bank, IDBI Bank, ING Vysya Bank and
Motilal Oswal Securities from opening fresh demat accounts.
In an interim order issued today after the second round of

investigations, the capital market regulator has banned 24 entities
from buying and selling securities till further orders.
P a g e | 25
Common address
SEBI also said 15 Depository Participants at National

Securities Depository Ltd (NSDL) including Kotak Securities, Citibank,
ICICI Bank, Bank Paribas and IndusInd Bank had more than 500 demat
account holders sharing the common address.
It asked NSDL to conduct inspection on whether all the

demat account holders are genuine. NSDL has also been asked to
check whether the Know Your Customer norms of SEBI have been duly
complied with and take action against suspect accounts on verification.
Analysts felt the SEBI order was akin to capital punishment

for the entities involved in the securities market scam.
"In view of the detailed findings, Karvy DP and Pratik DP

prima facie do not appear to be fit to deal in securities market as SEBI-
registered intermediaries. Appropriate quasi-judicial proceedings are
being initiated against the two DPs," the 252-page order issued late in
the evening said.
SEBI said the other business groups of Karvy appear to

have acted in concert in the gamut of IPO manipulations. "I further
direct Karvy Stock Broking Ld, Karvy Computer Share PVT Ltd, Karvy
Investor Services and Karvy Consultants not to undertake fresh
business as registrar to the issue and share transfer agent," Mr G
Anantharaman, Whole-Time Member, SEBI, said.
NSDL, CDSL pulled up
The regulator also pulled up NSDL and CDSL for `grave

management lapses'. The findings revealed "contributory negligence"
on the part of the depositories and their managements.
"The promoters of NSDL and CDSL are directed to take all

appropriate actions including revamping of management which clearly
has allowed matters to come to such a sorry pass," the order said.
The order, to be treated as a `show-cause notice', has

given 15 days time to the parties named for filing objections.
P a g e | 26
IPO scam: HDFC Bank, 2 others fined

The Reserve Bank of India on Monday 27th Feb 2006 fined
HDFC Bank, IDBI and ING Vysya Bank for violation of Know Your
Customer norms and other irregularities in relation to the recent IPO
scam.
HDFC Bank has been slapped with the highest penalty of

Rs 25 lakh; ING Vysya Bank - Rs 10 lakh and IDBI Ltd Rs 5 lakh.
This is the second time HDFC Bank has been fined for
violation of KYC norms. In January, the bank was imposed a penalty of
Rs 5 lakh.
According to an RBI release, these banks have been fined,

"for violation of regulations on KYC norms, for breach of prudent
banking practices and for not adhering to its directives/guidelines
relating to loans against shares/ IPO."
Salient Features of IPO scam
Modus operandi
P a g e | 27
 Current account opened in the name of multiple companies on

the same date in the same branch of a bank
 Sole person authorized to operate all these accounts who was

also a Director in all the companies
 Identity disguised by using different spelling for the same name

in different companies
 Multiple accounts opened in different banks by the same group of

joint account holders
 Huge funds transferred from companies accounts to the

individual’s account which was invested in IPO’s
 Loans/ overdrafts got sanctioned in multiple names to bypass

limit imposed by RBI
 Loans sanctioned to brokers violating guidelines
 Multiple DP accounts opened to facilitate investment in IPO
 Large number of cheques for the same value issued from a single
account on the same day
 Multiple large value credits received by way of transfer from

other banks
 Several accounts opened for funding the IPO on the request of

brokers, some were in fictitious names
 Refunds received got credited in brokers a/cs
 Margin money provided by brokers through single cheque
 Nexus between merchant banker, brokers and banks suspected
Operational deficiencies
Factors that facilitated the scam
P a g e | 28
 Photographs not obtained
 Proper introductions not obtained
 Signatures not taken in the presence of bank official
 Failure to independently verify the identity and address of all

joint account holders
 Directors identity/ address not verified
 Customer Due Diligence done by a subsidiary
 Objective of large number of jt. account holders opening account

not ascertained
 Purpose of relationship not clearly established
 Customer profiling based on risk classification not done
 Poor monitoring and reporting system due to inadequate

appreciation of ML issues
 Absence of investigation about use and sources of funds
 Unsatisfactory training of personnel
 No system of fixing accountability of bank officials responsible for

opening of accounts and complying with KYC procedures
 Ineffective monitoring and control
Measures to prevent scams

 An analysis of IPO scam clearly brings out the laxity on the part
of banks to scrupulously implement the KYC/AML guidelines
P a g e | 29
issued from time to time. It also raises serious concerns about

the integrity of the systems & systemic risks.
 While scams may still happen despite best of preventive

measures, it should not undermine the efforts being made to
insulate the financial sector from money laundering. It is going to
be a long fight with constant need to improve and innovate new
strategies.
 It is important to understand that the risks banks run as a result

of non-compliance with regulatory and statutory guidelines can
cause severe reputational and financial damage to individual
banks and the Indian banking system as a whole
 Need for comprehensive operational framework implementing

important aspects of KYC instructions e.g.
 Documentation procedure for opening of all types of customer

accounts;
 Clarity in understanding of risk classification of accounts and

proper customer profiling
 Ongoing monitoring of medium and high risk accounts
 Enhanced due diligence in respect of accounts with beneficial

ownership, non-face to face transactions, group companies, high
risk businesses and wire transfers etc.
 Prompt reporting of cash and suspicious transactions to Principal

Officer by branches
 An effective audit machinery
 Good understanding of regulatory and statutory prescriptions in

letter and spirit
 Clear demarcation of duties and responsibilities
 Violations to be dealt with sternly
Recent IPOs
P a g e | 30
IPO Rating Offer Price Open Date Close Date
September
Richa Knits 30 13 Sep 2006 19 Sep 2006
Gwalior Chem 71-85 11 Sep 2006 14 Sep 2006
Usher Agro 15 05 Sep 2006 11 Sep 2006
Atlanta 150 01 Sep 2006 07 Sep 2006
HOV Services 200-240 04 Sep 2006 07 Sep 2006
Action Const 110-130 01 Sep 2006 07 Sep 2006
Deep Industries 36 29 Aug 2006 04 Sep 2006
KEW Industries 30 28 Aug 2006 01 Sep 2006
August
Voltamp Trans 345 24 Aug 2006 29 Aug 2006
Tech Mahindra 365 01 Aug 2006 04 Aug 2006
GMR Infra 210 31 Jul 2006 04 Aug 2006
July
Shirdi Ind 67-78 29 Jun 2006 08 Jul 2006
June
Vigneshwara 110-124 07 Jun 2006 16 Jun 2006
Bluplast Ind 32 05 Jun 2006 09 Jun 2006
Allcargo Global 675 01 Jun 2006 06 Jun 2006
Prime Focus 417 25 May 2006 03 Jun 2006
DEFINITIONS AND ABBREVIATIONS
P a g e | 31
I. CONVENTIONAL/ GENERAL TERMS
Term
Description
AGM Annual General Meeting of Pratibha Industries Limited
Articles / Articles of Articles of Association of Pratibha Industries Limited

Association / AOA
Companies Act / Act The Companies Act, 1956 as amended from time to time
Depository A Company formed and registered under the Companies Act, 1956
and which has been granted a certificate of registration under sub-
section (1A) of Section 12 of the Securities and Exchange Board of
India Act, 1992
Depositories Act The Depositories Act, 1996, as amended from time to time
Depository Participant A depository participant registered as such under sub-section (1A) of
Section 12 of the Securities and Exchange Board of India Act, 1992
FEMA Foreign Exchange Management Act, 1999, as amended from time to
time, and the regulations framed there under
FDI Foreign Direct Investment
FII Foreign Institutional Investor [as defined under FEMA (Transfer or
Issue of Security by a Person Resident Outside India) Regulations,
2000] registered with SEBI.
Financial year / Fiscal Period of twelve months ended March 31 of that particular year
year / FY
Indian GAAP Generally accepted accounting principles in India
I.T. Act The Income-Tax Act, 1961, as amended from time to time
Memorandum / MOA Memorandum of Association of Pratibha Industries Limited
NRI / Non-Resident A person resident outside India who is a citizen of India or is person
Indian of Indian origin as defined in Foreign Exchange Management
(Deposit) Regulations, 2000]
ROC Registrar of Companies, Maharashtra situated at 100, Everest
Building, Marine Lines, Mumbai 400002
RBI Reserve Bank of India
SCRR Securities Contracts (Regulation) Rules, 1957, as amended from
time to time.
SEBI The Securities and Exchange Board of India, constituted under the
SEBI Act, 1992
SEBI Act Securities and Exchange Board of India Act, 1992 as amended from
time to time
SEBI/(DIP) Guidelines SEBI (Disclosure and Investor Protection) Guidelines, 2000, as
amended, including instructions and clarifications issued by SEBI
from time to time
II.OFFERING RELATED TERMS
P a g e | 32
Allotment Issue of Equity Shares of the Company pursuant to the Public Issue
to the successful Bidders.
Allottee The successful Bidder to whom the Equity Shares are being issued.
Bankers to the Issue ICICI Bank Limited, Standard Chartered Bank, Deutsche Bank,
Kotak Mahindra Bank Limited
Bid An indication to make an offer made during the Bidding Period by a
prospective investor to subscribe to Equity Shares of the Company at
a price within the Price Band, including all revisions and
modifications thereto
Bid Price / Bid Amount The amount equal to highest value of the optional Bids indicated in
the Bid cum Application Form and payable by the Bidder on
submission of the Bid in the Issue
Bid Opening Dates / Issue The date on which the Syndicate Members shall start accepting Bids
Opening Date for the Issue, which shall be the date notified in a widely circulated
English national newspaper, a Hindi national newspaper and a
Marathi regional newspaper
Bid Closing Date / Issue The date after which the Syndicate Members will not accept any
Closing Date Bids for the Issue, which shall be notified in a widely circulated
English national newspaper, a Hindi national newspaper and a
Marathi regional newspaper
Bid cum Application The Form in terms of which the Bidder shall make an offer to
Form purchase the Equity Shares of the Company and which will be
considered as the application for allotment of the Equity Shares in
terms of this Red Herring Prospectus
Bidder Any prospective investor who makes a Bid pursuant to the terms of
this Red Herring Prospectus
Bidding Period / Issue The period between the Bid/Issue Opening Date and the Bid/Issue
Period Closing Date inclusive of both days and during which prospective
Bidders can submit their Bids
Book Building Process Book building route as provided under Chapter XI of the SEBI
Guidelines, in terms of which, this Issue is being made
BRLM Book Running Lead Manager to the Issue, in this case being Vivro
Financial Services Private Limited
CAN / Confirmation of The note or advice or intimation of allocation of Equity Shares sent
Allocation Note to the Bidders who have been allocated Equity Shares in accordance
with the Book Building Process
Cap Price The higher end of the Price Band, above which the Issue Price will
not be finalized and above which no bids will be accepted
Cut-off price Cut-off price refers to any price within the Price Band. A Bid
submitted at Cut-off is a valid Bid at all price levels within the Price
Band
Designated Stock Bombay Stock Exchange Limited
Exchange
Designated Date The date on which the funds are transferred from the Escrow
Account of the Company to the Public Issue Account after the
Prospectus is filed with the ROC, following which the Board of
Directors shall allot Equity Shares to successful bidders
Red Herring Prospectus This Red Herring Prospectus issued in accordance with Section
60B of the Companies Act, which does not have complete
P a g e | 33
particulars on the price at which the Equity Shares are offered and
size of the Issue. It carries the same obligations as are applicable in
case of a Prospectus and will be filed with ROC at least three days
before the bid/offer opening date. It will become a Prospectus after
filing with ROC after the pricing
Equity Shares Equity Shares of the Company of the face value Rs. 10 each, unless
otherwise specified in the context thereof
Escrow Account Account opened with the Escrow Collection Bank(s) and in whose
favour the Bidder will issue cheques or drafts in respect of the Bid
Amount and refunds (if any) of the amount collected to the Bidders
Escrow Agreement Agreement entered into amongst the Company, the Registrar, the
Escrow Collection Bank(s), the Syndicate Members and the BRLMs
for collection of the Bid Amounts and refunds (if any) of the
amounts collected to the Bidders
Escrow Collection ICICI Bank Limited, Standard Chartered Bank, Deutsche Bank,
Bank(s) Kotak Mahindra Bank Limited
First Bidder The Bidder whose name appears first in the Bid cum Application
Form or Revision Form
Floor Price The lower end of the Price Band, below which the Issue Price will
not be finalized and below which no Bids will be accepted
Fresh Issue / Issue / Public Issue of 42,85,000 new Equity Shares of Rs. 10/- each for
Public Issue / Offer cash at the Issue Price of Rs. [•] per equity share aggregating to Rs.
[•] Lakhs by the Company in terms of this Red Herring Prospectus
Issue Account Account opened with the Banker to the issue to receive monies from
the Escrow Accounts on the Designated Date
Issuer Pratibha Industries Limited
Issue Price The final price at which Equity Shares will be issued and allotted in
terms of this Red Herring Prospectus, as determined by the
Company in consultation with the BRLMs, on the Pricing Date
Margin Amount The amount paid by the Bidder at the time of submission of his/her
Bid, being 10% to 100% of the Bid Amount
Members of the Syndicate The BRLM and the Syndicate Members
Non-Institutional Bidders All Bidders that are not Qualified Institutional Buyers, or Retail
Individual Bidders and who have Bid for Equity shares for an
amount more than Rs.1,00,000.
Non-Institutional Portion The portion of the Issue being a minimum of 5,78,475 Equity Shares
of Rs. 10/- each available for allocation to Non-Institutional Bidders
Pay-in-date The last date specified in the CAN sent to the Bidders
Pay-in-Period This term means
(i) With respect to Bidders whose Margin Amount is 100% of the
Bid Amount, the period commencing on the Bid/issue Opening
Date and extending until the Bid/issue Closing Date, and
(ii) With respect to Bidders whose Margin Amount is less than
100% of the Bid Amount, the period commencing on the
Bid/issue Opening Date and extending until the closure of the
Pay-in-Date
Price Band The Price band of a minimum price (Floor Price) of Rs.100/- and the
maximum price (Cap Price) of Rs. 120/- and includes revision
thereof
Pricing Date The date on which the Company in consultation with the BRLM
P a g e | 34
finalizes the Issue Price

Promoters Mr. Ajit B. Kulkarni, Mrs. Usha B. Kulkarni, Mr. Datta B. Kulkarni,
Mr. Vinayak B. Kulkarni, Mr. Ramdas B. Kulkarni and Pratibha
Shareholding Private Limited
Prospectus The Prospectus filed with the ROC containing, inter alia, the Issue
Price that is determined at the end of the Book Building Process, the
size of the Issue and certain other information
Public Issue Account In accordance with Section 73 of the Companies Act, 1956, an
account opened with the Banker(s) to the Issue to receive monies
from the Escrow Account for the Issue on the Designated Date
QIB Portion The portion of the net issue being not less than mandatory 19,28,250
Equity Shares of Rs. 10 each at the Issue Price, available for
allocation to QIBs
Qualified Institutional Public Financial Institutions as specified in Section 4A of the
Buyers/ QIBs Companies Act, Scheduled Commercial Banks, Mutual Funds
registered with SEBI, Foreign Institutional Investors registered with
SEBI, Multilateral And Bilateral Development Financial Institutions,
Venture Capital Funds registered with SEBI, Foreign Venture
Capital Investors registered with SEBI, State Industrial Development
Corporations, Insurance Companies registered with the Insurance
Regulatory And Development Authority (IRDA), Provident Funds
with a minimum corpus of Rs.2500 Lakhs and Pension Funds with a
minimum corpus of Rs. 2500 Lakhs.
Retail Individual Bidders Individual Bidders (including HUFs and NRIs) who have not Bid for
an amount in excess of Rs.1,00,000/- in any of the bidding options in
the Issue.
Retail Portion The portion of the Net Issue being a minimum of 13,49,775 Equity
Shares of Rs.10 each available for allocation to Retail Individual
Bidder(s)
Registrar/ Registrars to Intime Spectrum Registry Limited
the Issue
Revision Form The Form used by the Bidders to modify the quantity of Equity
Shares or the Bid Price in any of their Bid cum Application Forms or
any previous Revision Form(s).
Syndicate Agreement The agreement to be entered into among the Company and the
members of the Syndicate in relation to the collection of Bids in this
Issue
Syndicate Members Intermediaries registered with SEBI and eligible to act as
underwriters. Syndicate Members are appointed by the BRLM and
include the BRLM
Syndicate The Syndicate Members collectively
TRS or Transaction The slip or document issued by the Syndicate Members to the
Registration Slip Bidder as proof of registration of the Bid
Underwriters The BRLM and Syndicate Members
Underwriting Agreement The Agreement among the BRLM, the Syndicate Members and the
Company to be entered into on or after the Pricing Date
P a g e | 35
Bibliography
Web Based
 www.investopedia.com
 www.sebi.com
 www.vivro.net
 www.intimespectrum.com
 www.pratibhagroup.com
Book Based
 Share Market Book  By Tarun Shah

 IPO Decision  By Jason Draho
Industry Based
 PRATIBHA GROUP OF COMPANIES
P a g e | 36

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 IPO  Advantages & Disadvantages

 Parameters To Judge An IPO

 Understanding The Role Of Intermediaries -- 16

 Salient Features Of IPO Scams

 Measures To Prevent Scams

 DEFINITIONS AND ABBREVIATIONS

As we all know IPO – INITIAL PUBLIC OFFERING is the

IPO has been one of the most important generators of

For example say there are 100 shares in a company and 50

Normally in an IPO the shares are issued at a discount to

An IPO is the first sale of stock by a company to the public.

Companies fall into two broad categories: private and

It usually isn't possible to buy shares in a private company.

Public companies have thousands of shareholders and are

The first sale of stock by a private company to the public,

companies going through a transitory growth period, and they are

The first time that a company’s shares are issued to the

Most IPO’S these days do not have a fixed offer price.

Going public raises cash and usually a lot of it. Being

 Because of the increased scrutiny, public companies can usually

 As long as there is market demand, a public company can always

 Trading in the open markets means liquidity. This makes it

Being on a major stock exchange carries a considerable

The internet boom changed all this. Firms no longer

How can this happen? Remember: an IPO is just selling

The Underwriting Process

Getting a piece of a hot IPO is very difficult, if not

When a company wants to go public, the first thing it does

shares on its own, but realistically, an investment bank is required - it's

The company and the investment bank will first meet to

Once all sides agree to a deal, the investment bank puts

During the cooling off period the underwriter puts together

As the effective date approaches, the underwriter and

As you can see, the road to an IPO is a long and

IPO – ADVANTAGES AND

the advantages and disadvantages of conducting an IPO and will briefly

Advantages of going public

A public offering will allow a company to raise capital to use for

Once shares of a company are traded on a public exchange,

Public trading of a company's shares sets a value for the

a company that is looking for a merger or acquisition. It also

The founders of the company often have the sense of increased

Disadvantages of going Public

 Time and Expense

Conducting an IPO is time consuming and expensive. A

The SEC disclosure rules are very extensive. Once a company is a

information is available to investors, employees, and

 Decisions based upon Stock Price

Management's decisions may be effected by the market price of

The Company will be open to review by the SEC to ensure that

 Falling Stock Price

If a large portion of the company's shares are sold to the public,

Parameters to judge an IPO

Good investing principles demand that you study the

Understanding the role of intermediaries

 Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead

 Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in

 What is the role of a Lead Manager? (pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up

 What is the role of a registrar?

The Registrar finalizes the list of eligible allottees after