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1. INTRODUCTION
Companies opt for Initial Public Offerings (IPOs) and approach potential investors for
capital, to raise funds for their various strategic plans. However, for an investor it is
questionable as to whether it makes sense to subscribe to the deluge offerings or not.
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Figure 1
(NSE INDEX- NIFTY) Bull and Bear Rally during 2006 2010
7000
6000
Bear Rally-1
5000
4000
3000
2000
1000
Bull Rally-1
0
2-Jan-06 2-Jan-07
Bull Rally-2
2-Jan-08
2-Jan-09
2-Jan-10
Moreover, special focus on manufacturing and service sectors with respect to IPO
performance in these periods has given preference in the present study. Other studies
with comparative analysis on manufacturing and service sector found to be scarce.
Hence, comparative analysis of the manufacturing and service sectors on the:
1. Listing day(first day) return
2. Short term return, and
3. Long term return would give insight to the investors regarding the right time for
investment in hot issue shares.
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2.1. Hypotheses
1. There is no significant relationship between the average rates of returns obtained
while investing in hot issue shares (oversubscribed IPOs) and the time periods such as
a) First day of trade b) Short term and c) Long term.
2. There is no significant relationship between the average rates of returns obtained
while investing in hot issue shares (oversubscribed IPOs) in manufacturing sector and
the time periods such as a) First day of trade b) Short term and c) Long term.
3. There is no significant relationship between the average rates of returns obtained
while investing in hot issue shares (oversubscribed IPOs) in service sector and the
time periods such as a) First day of trade b) Short term and c) Long term.
4. There is no significant relationship between the average rates of returns obtained
while investing in hot issue shares (oversubscribed IPOs) and the time periods such as
a) First day of trade b) Short term and c) Long term.
5. There is no significant relationship between the average rates of returns obtained
while investing in hot issue shares (over subscribed) in manufacturing sector and the
time periods such as a) First day of trade b) Short term and c) Long term.
6. There is no significant relationship between the average rates of returns obtained
while investing in hot issue shares (over subscribed) in service sector and the time
periods such as a) First day of trade, b) Short term and c) Long term.
2.2. Methodology
2.2.1. Sample
Sample containing 220 from 321 companies came out with IPO, during the period
2006- 2010 have been considered in the study (Table 1). Out of 220 companies 94
were graded by registered agencies (Table 2). The information is drawn from the
SEBI, NSE and ICRA.
Table 1
Year wise IPOs & Sampling Frame
Year
2006
2007
2008
2009
2010
Total
Number
Population
91
107
38
21
64
321
of IPOs
Sample
70
69
18
14
49
220
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Table 2
Grading Sector Wise
Sector
Service
Manufacturing
Total
High (4 and 5)
18
7
25
Grades
Medium (3)
28
13
41
Low (1 and 2)
14
14
28
Total
60
34
94
Return on first day is the return on the closing hours of the listing day.
Short term return is considered as the return after the first year of listing and
Long term return is considered as return on 30 th October 2015. Long term is
considered as more than five years.
These returns are again classified as positive and negative returns. The shares
have categorized into two sectors such as manufacturing and service. The graded
shares are grouped into three categories such as High, Medium and Low. Shares
with 4 and 5 grades are categorized as high grade, shares with 3 grade are
categorized as medium grade and shares with 1 and 2 grades are categorized as low
grade.
2.2.3. Technique
Cross sectional analysis is carried out to explore the significance or difference with
respect to returns generated in various time periods. Data collected were analyzed
using various statistical tools and the results are presented. Null hypotheses
formulated for the purpose of present investigation are put together using inferential
statistical tools. Chi-Square test is used to find out the significant association between
sectors, grading and returns. During discussion, attention has to been given in arriving
at a conclusive perspective on the analysis, hypotheses testing and interpretation of
data related to the variables. The results are discussed in detail.
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Table 3
Grading and Listing day return
Classification of
Grading
High
Medium
Low
Total
Return
Negative
4 (16%)
19 (46.3%)
14 (50%)
37 (39.4%)
Positive
21 (84%)
22 (53.7%)
14 (50%)
57 (60.6%)
Total
25(100%)
41(100%)
28(100%)
94(100%)
From Table 4 it is observed that the grading influences listing day returns whether
positive or negative. Further, the results of Chi-square provide the first indication that
the hypotheses is not supported, grading has an influence on listing day returns
whether positive or negative. Hence we reject the null hypotheses that there is
significant relationship between grading and listing day returns (positive or negative).
It is inferred from table 4 that there is relationship between grading and listing day
returns.
Table 4
Chi Square Listing day return
Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear As
N of Valid Cases
Value
7.881
8.606
6.094
94
df
2
2
1
It is found that 60.6% of the graded IPOs have provided positive return on the
listing day. Among this, while considering higher grades 84% has provided positive
return on the listing day, whereas in medium grade 53.7% have got positive return and
in low grade 50% have got positive return. From this it can be concluded that
investing in higher graded IPOs are advisable, provided the shares are sold on the
first day of the listing. Another possibility is that to short sell such shares on the
listing day. The study supports the findings of previous studies [2,17,18,19] where
they establish the presence of underpricing during the initial book building process
and creating artificial demand for retail investors during the initial hike of share price
on the first day. This is reported to be the advantage of information edge, which
financial institutions have over retail investors.
2.3.2. Analysis and Discussion: Grading and Short term return
It is clear from Table 5 that among the total 94 shares that have been graded, 74
(78.7%) shares have given negative return and 20 (21.3%) shares have given positive
return. While considering the shares that have graded high, among the 25 shares, 18
(72%) shares have given negative return and 7 (28%) shares gave positive returns. In
the category of medium graded shares, among the 41 shares, 30 (73.2%) shares have
given negative return and 11(26.8%) shares gave positive returns. Where as in low
graded shares out of 28 shares 26 (92.9%) shares have given negative return and 2
(7.1%) shares gave positive returns in short term.
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Table 5
Grading and Short term return
Classification of
Grading
High
Medium
Low
Total
Return
Negative
18 (72%)
30 (73.2%)
26 (92.9%)
74 (78.7%)
Positive
7 (28%)
11(23.8%)
2 (7.1%)
20(21.3%)
Total
25 (100%)
41 (100%)
28 (100%)
94 (100%)
From Table 6 it is observed that grading does not influence short term returns
whether positive or negative. Further the results of Chi-square provide the first
indication that the hypotheses should support grading of IPOs does not have any
relationship at 0.05 confidence level on short term returns whether positive or
negative. However it shows statistically significant at 0.01 confidence level. Hence
we accept the null hypotheses that there is no significant relationship between grading
and short term returns (positive or negative) at 0.05 confidence level. It is inferred
from the above table that there is no relationship between grading and short term
returns (positive or negative).
Table 6 Chi Square Short term return
Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear As
N of Valid Cases
Value
4.769
5.564
3.549
94
Df
2
2
1
It is clear from the Table 7 that out of the total 94 shares that have been graded, 70
(74.5%) shares have given negative return and 24 (25.5%) shares have given positive
return. While considering the shares that have graded high, out of 25 shares 16 (64%)
shares have given negative return and 9 (36%) shares have given positive returns. In
medium grade category, out of 41 shares 31 (75.6%) shares have given negative
return and 10 (24.4%) shares have given positive returns. Where as in low graded
shares out of 28 shares 23 (82.1%) shares have given negative return and 5(17.9%)
shares have given positive returns in long term.
Table 7
Grading and Long term return
Classification of
Grading
High
Medium
Low
Total
Return
Negative
16(64%)
31(75.6%)
23(82.1%)
70(74.5%)
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Positive
9 (36%)
10(24.4%)
5(17.9%)
24(25.5%)
178
Total
25(100%)
41(100%)
28(100%)
94(100%)
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Table 8
Chi Square Long term return
Pearson Chi-Square
Likelihood Ratio
Linear-by-Linear As
No of Valid Cases
Value
Df
2.336
2.302
2.234
94
2
2
1
Asymp.
Sig. (2-sided)
.311
.316
.135
Table 9
Sectors and Listing day Return
Sectors
Service
Manufacturing
Total
Return
Negative
46 (34.6%)
31 (35.6%)
77 (35%)
Positive
87(65.4%)
56 (64.4%)
143 (65 %)
Total
133(100%)
87 (100%)
220 (100%)
It is clear from Table 10 that the sectors do not influence listing day returns
whether positive or negative. Further the results of Chi-square provide the first
indication that our hypotheses should be supported that sectors does not have an
influence on listing day returns whether positive or negative. Hence we accept the null
hypotheses that, there is no significant relationship between manufacturing and
service sectors and the listing day return (positive or negative).
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Table 10
Chi Square Listing day
Value
Df
Asymp.Sig.
(2-sided)
.874
.988
.874
PearsonChi-Square
.025
1
Continuity correction
.000
1
Likelihood Ratio
.025
1
Fishers Exact Test
Linear-by-Linear As
.025
1
.874
N of Valid Cases
220
*Not Significant at 0.05 and 0.01 significance level
Exact Sig
(2 sided)
.886
Exact Sig (1
sided)
.493
It is also clear from the study that among the total 220 oversubscribed IPOs
belonging to service and manufacturing sectors, 65% of the total shares generated
positive return on listing day. Among this, while considering the service sector, 65.4%
has provided positive return and 64.4% of manufacturing sector provided positive
return on the listing day. It can be inferred from the analysis that both service and
manufacturing sectors are indifferent in providing return on listing day in between 64
to 66%. The study supports the findings of various studies [11,16,18,20,21] on the
underperformance of IPOs in Indian and foreign stock markets and substantiate the
prevalent under pricing phenomena.
It is clear from the Table 11 that among the total sample of 220 shares,
151(68.6%) shares have given negative return and 69 (31.4%) shares have given
positive return. While considering the shares belonging to service sector, among the
133 shares 94 (70.7%) shares have given negative return and 39 (29.3%) shares have
given positive returns. In manufacturing sector, among the 87 shares, 57 (65.5%)
shares have given negative return and 30 (34.5%) shares gave positive returns in short
term.
Table 11
Sectors and Short Term Return
Sectors
Service
Manufacturing
Total
Return
Negative
94 (70.7%)
57 (65.5%)
151(68.6%)
Positive
39 (29.3%)
30 (34.5%)
69 (31.4%)
Total
133(100%)
87 (100%)
220 (100%)
It is clear from Table 12 that the sectors does not influence short term returns
whether positive or negative. Further the results of Chi-square provide the first
indication that our hypotheses should support that sectors do not have any influence
on short term whether positive or negative. Hence we accept the null hypotheses that
there is no significant relationship between manufacturing and service sectors and
short term returns (positive or negative).
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Table 12
Chi Square Short term return
Pearson Chi-Square
Continuity correction
Likelihood Ratio
Fishers Exact Test
N of Valid Cases
Value
Df
.650
.433
.647
1
1
1
Asymp. Sig.
(2-sided)
.420
.511
.421
Exact Sig
(2 sided)
Exact Sig (1
sided)
.459
.255
220
It is clear from the Table 13 that among the total sample of 220 shares, 162
(73.6%) shares have given negative return and 58 (26.4 %) shares have given positive
return. While considering the shares which belong to service sector, out of 133 shares,
99 (74.4%) shares have given negative return and 34 (25.6%) shares have given
positive returns. In manufacturing sector, among the 87 shares, 63 (72.4%) shares
have given negative return and 24 (27.6%) shares gave positive returns in the long
term.
Table 13
Sectors and Long Term Return
Sectors
Service
Manufacturing
Total
Return
Negative
99 (74.4%)
63 (72.4%)
162 (73.6%)
Total
Positive
34 (25.6%)
24 (27.6%)
58 (26.4 %)
133(100%)
87 (100%)
220 (100%)
From Table 14 (Appendix), it is observed that the sectors do not influence long
term returns whether positive or negative. Further the results of Chi-square provide
the first indication that our hypotheses should support that sectors do not have any
influence on long term whether positive or negative. Hence we accept the null
hypotheses that there is no significant relationship between manufacturing and service
sectors and long term returns (positive or negative).
Table 14
Chi Square Long term return
Pearson Chi-Square
Continuity correction
Likelihood Ratio
Fishers Exact Test
N of Valid Cases
Value
df
.111
.031
.110
1
1
1
Asymp.
Sig.(2-sided)
.739
.860
.740
Exact Sig
(2 sided)
Exact Sig
(1 sided)
.756
.428
220
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2.4. Discussion
The study intends to find out the relevance of IPO grading on the day of listing, as
well as on short term and long term returns. Moreover, the study also brings out the
relevance of investing in oversubscribed IPOs on listing day, short term and long
term time periods.
From the study it is revealed that grading is not an indicator to get profits on short
term and long term basis. Only 20.3% and 25.5% of graded shares generated positive
return in short term and long term respectively. It is also clear from the study that total
of 220 overs subscribed IPOs belong to service and manufacturing sectors has not
performing as expected by the investors in short term and long term periods. The
study also reveals that shares of medium grade is generating more profit in all three
periods, this supports the previous study [22]. The study recommends the investors to
invest in service sectors with high grade in order to generate positive return on listing
day of the IPOs. In spite of the information asymmetry prevailing in the stock market,
retail investors are consciously burning their fingers. Credit rating and grading are the
supportive indicators that can be considered for investing but not for a trusted value
investing. Probably, focusing on these persistent hot issues and underpricing
phenomena, the regulator took lenient step on the mandatory grading.
In order to generate return from investment, individuals ought to look into two
important qualitative aspects viz, quality of the management and sustainability of the
business in the present and future economic scenario. Risk analysis is another
important tool by which companies ensure sustainability in future so that investors
will be in a position to gain return from the investment. Negative returns in short term
and long term periods are evident in the stock market which emphasizes under
valuation of shares in the book building process. Moreover it becomes a relevant
question that whether companies are conducting adequate risk analysis that involves,
risk identification, assessment and mitigation. It is an alarming situation to note that
among the total 321 oversubscribed IPOs, only 20.3% and 25.5% of graded shares
generated positive return in short term and long term respectively. This calls for
immediate action from the SEBI, RBI and relevant statutory and regulatory authorities
to take appropriate corrective actions to bring out the governance of Indian companies
back into action.
Summary
1. There is a significant relationship between grading and listing day returns (positive or
negative) at 0.05 significant level.
2. There is no significant relationship between grading and short term returns (positive
or negative).
3. There is no significant relationship between grading and long term returns (positive
or negative).
4. There is no significant relationship between Manufacturing and Service sectors and
listing day returns (positive or negative).
5. There is no significant relationship between manufacturing and service sectors and
short term returns (positive or negative).
6. There is no significant relationship between manufacturing and service sectors and
long term returns (positive or negative)
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