Annexure I

PRICE PERFORMANCE OF IPO’s IN INDIAN STOCK MARKET

(NEED, SCOPE, OBJECTIVES, LITERATURE REVIEW, REFRENCES)

Submitted to Lovely Professional University

Submitted by: Supervisor:

MANIK MAHAJAN 10906459. B-46 MISS ASHU KAKKAR

PRIYAM SHARMA Registration No. B-40. COD-S

SAGIR ALAM Registratin No. B-39.

DEEPAK SHARMA Registration No. B-38.

DEPARTMENT OF MANAGEMENT

LOVELY PROFESSIONAL UNIVERSITY

PHAGWARA
 Annexure II

TO WHOMSOEVER IT MAY CONCERN

This is to certify that the Synopsis titled “PERFORMANCE OF IPO’s IN INDIAN STOCK
MARKET” carried out by Mr. Manik Mahajan; S/o Mr. Shakti Mahajan has been accomplished
under my guidance & supervision as a duly registered MBA student of the Lovely Professional
University, Phagwara.

His Synopsis represents his original work and is worthy of consideration for making a research
project in the next term.

Miss Ashu Kakkar

Date: 28Th OCT 2010

 Annexure III

DECLARATION

I, "MANIK MAHAJAN”, hereby declare that the work presented herein is genuine work done
originally by me and has not been published or submitted elsewhere for the requirement of a
degree program. Any literature, data or works done by others and cited within this synopsis has
been given due acknowledgement and listed in the reference section.

MANIK MAHAJAN

Date: 28th OCT 2010

 PERFORMANCE OF IPO’S IN INDIAN STOCK MARKET

INITIAL PUBLIC OFFER

The first public offering of equity shares or convertible securities by a company, which is
followed by the listing of a company’s shares on a stock exchange, is known as an ‘Initial Public
Offering’. In other words, it refers to the first sale of a company’s common shares to investors on
a public stock exchange, with an intention to raise new capital. The most important objective of
an IPO is to raise capital for the company. It helps a company to tap a wide range of investors
who would provide large volumes of capital to the company for future growth and development.
A company going for an IPO stands to make a lot of money from the sale of its shares which it
tries to anticipate how to use for further expansion and development. The company is not
required to repay the capital and the new shareholders get a right to future profits distributed by
the company.

When a company lists its shares on a public exchange, it will almost invariably look to issue
additional new shares in order at the same time. The money paid by investors for the newly-
issued shares goes directly to the company (in contrast to a later trade of shares on the exchange,
where the money passes between investors). An IPO, therefore, allows a company to tap a wide
pool of stock market investors to provide it with large volumes of capital for future growth. The
company is never required to repay the capital, but instead the new shareholders have a right to
future profits distributed by the company and the right to a capital distribution in case of
dissolution.

The existing shareholders will see their shareholdings diluted as a proportion of the company's
shares. However, they hope that the capital investment will make their shareholdings more
valuable in absolute terms.

In addition, once a company is listed, it will be able to issue further shares via a rights issue,
thereby again providing itself with capital for expansion without incurring any debt. This regular
ability to raise large amounts of capital from the general market, rather than having to seek and
negotiate with individual investors, is a key incentive for many companies seeking to list.

SIGNIFICANCE OF IPO
Investing in IPO has its own set of advantages and disadvantages. Where on one hand, high
element of risk is involved, if successful, it can even result in a higher rate of return. The rule is:
Higher the risk, higher the returns. The company issues an IPO with its own set of management
objectives and the investor looks for investment keeping in mind his own objectives. Both have a
lot of risk involved. But then investment also comes with an advantage for both the company and
the investors.
NEED OF THE STUDY
The need of this study arises as we have studied different IPO’S introduced in the Indian market
and the performance of all the IPO’S differ with respect to the different sectors and long term
and short term horizons. Most of the studies are contradictory in nature, some studies reflect that
the performance of IPO’S is positive and returns are comparatively larger than in the short run ,
but in some studies it has been discussed that the performance of IPO’s in short run is better than
the long run. This contradiction is due to the performance of IPO’s in different time horizons and
different sectors.

Therefore there is a need for this research which will look upon the various factors affecting the
performance of the IPO’s and to see the short run and long run performance of the IPO’s.

SCOPE OF THE STUDY

The research is carried by studying 248 IPO’s that have been introduced in the Indian Stock
Market between the periods 2001-2007.the performance of the IPO’s will be studied with respect
to the period of 3 years from the date of the listing. The study is restricted to only Initial Public
Offerings excluding the follow on public offers.

OBJECTIVE OF THE STUDY

1. To analyze the price performance of IPO’s in Short Run.

2. To study the long run price performance of IPO’s in Indian Stock market

3. To analyze the impact of pricing (under pricing) on the stock returns.

REVIEW OF LITERATURE

Blum (1973) in his study “An Analysis of the Price Behavior of Initial Common
Stock Offerings” investigated the issues of relative performance of the over-the-counter market
With the initial common stock offerings, under pricing, and the risk involved thereof. The total
Period had been covered by the study w.e.f Jan 19, 1965 to June 30, 1970 with a random
sample of 400 initial common stock offerings. The market returns and risks associated with
these 400 issues have been calculated for 16 time periods, ranging from one week to one year
after the offering date. The study conducted so far suggests that the investment bankers have
either underpriced or pushed in the after-market those IPOs in which they held greatest
financial interest.

Shah (1995) in his study “The Indian IPO market: Empirical Facts” has analysed the stylized
empirical regularities about India’s IPO market, via
dataset of 2056, IPOs between time periods of 1991-1995. The present researcher has used
time series regression analysis. The empirical findings of the research study highlight that the
price at first listing was 105.6% above the offer price on an average. Secondly, listing delay
affects the IPO under pricing and is strongly related with the issue size. And finally,
Under pricing gently increases with offer price. But the shortcoming of the study is that stock
market return may also affect the very IPO planning process via longer lags but the sample
period runs too short to identify this.

Madhusoodanan and Thiripalraju (1997) in his study “IPO Underpricing, Issue

Mechanisms, and Size” analyzed the Indian IPO market for the short term as well as long term
underpricing. They also examine the impact of the issue size on the extent of under pricing in
these offerings and the performance of the merchant bankers in pricing these issues. The study
indicates that, in general, the under pricing in the Indian IPOs in the short run is higher than the
experiences of other countries. In the long-run too, Indian offerings have given high returns
compared to negative returns reported from other countries.

Krishnamurti (2002) in his study “The Initial Listing Performance of Indian IPOs” provides
an evidence for the wide spread under pricing of Indian IPOs by analysing386 IPOs in post
liberalizing era, from the period July 1992 to Dec 1994.The empirical evidence confirms the
under pricing phenomenon in Indian Market by using Raw returns, Market Adjusted Returns. It
also analyzed the factors responsible for pervasive and persistent occurrence of under pricing in
the IPO market. The researcher briefly describes the status of investment banking industry in
India and has also outlined the regulations and procedures involved in the new issue process in
India. The researcher has pointed out that the top and established lead managers in the industry
manages approximately 56% of the issues and thus he tried to convey that the market is being
held by the top merchant bankers and they enjoy the lion’s share in the market by analyzing the
overview of the investment banking industry. The research findings, after empirical analysis,
highlight that under pricing comes down with increasing offer prices and believed that the offer
is the proxy for the size of the firm. Secondly smaller firms are more risky because there exists a
greater degree of information asymmetry between insiders of the firm and outside investors. (A
main reason considered for under pricing) The initial listing returns of IPOs are related to
subscription levels and raw returns. Market adjusted returns are strongly related with
subscription levels. Under pricing is due to the merchant bankers’ inability the extent of demand
for the issue at the offer price. Large time lags between setting up of the offer price and the offer
opening date cause under pricing. In India, the lag period is typically three to four months long.
Adverse market movements during the time lag may create mis-pricing.

Singh (2003) has reported that the observable phenomenon of IPO market is characterized by
pervasive underpricing in the short run and underperformance in the long run. Indian investors
get very high returns up to a period of six months and thereafter the returns declines. The long-
term investors, who continue to hold their investments for a period of two–three years,
experiences negative returns.

Saurabh Ghosh (2004) in his study titled “Revisiting IPO Underpricing In India” examined
the factors explaining IPO under pricing in an emerging economy, India, using 1842 companies
that got listed on the Bombay Stock Exchange (BSE) from 1993 to 2001. Unlike the existing
works that analyzed the relation of ex-ante risk proxies and under pricing, this paper concentrates
on volatility of stock return just after listing and under pricing of Indian IPOs. Contrary to the
theoretical prediction, this paper finds a negative relation of under pricing and volatility. This
apparent contradiction could be due to the investors' optimism during the offer period and
subsequent revision in prices (immediately after listing) with the availability of new information
during the long offer-listing period. The high average risk, significant negative relation between
risk and under pricing during the high volume (hot) period and insignificant relation of the same
during the cold period suggest that some of the issuers took the advantage of investors' optimism
to collect as much money as possible during the hot period. The enthusiastic investors' paid a
high price, but their uncertainty about the future viability of the project became evident with the
subsequent disclosure of information during offer to listing period, which found its expression
through the aftermarket volatility.

Kumar (2007) in his study “Short and Long-run Performance of Book built IPOs in India”
has analyzed the long run as well as short run price performance with respect to the book
building process in India and has verified the presence of underpricing phenomenon in Indian
IPOs up to the time span of twenty four months from the date of listing. The study examines 156
firms (which issued their IPOs through book building route on the NSE) over the period of 1999
to May 2007. The researcher has analyzed the short run performance by applying the simple
returns and market adjusted returns to capture the market movements during the period between
the offer closures to listing. The long run performance analysis is done by studying the buy and
hold adjusted returns (BHAR) and monthly market adjusted returns (MMAR) at regular monthly
intervals from the second day of their listing. The index Nifty has been used for calculating the
market adjustments. The empirical evidence shows that 156 IPOs sampled in this paper on an
average IPOs got listed with 26.35% premium over the offer price and the medium premium of
around 18%. The results suggest that the larger the issue price, the lesser is the underpricing. If
the general market conditions are optimistic, the issue attracts more investors thus leading to
higher premium in returns.

Janakiramanan (2007) in his study “Under-Pricing and Long-Run Performance of Initial

Public Offerings in Indian Stock Market” has examined the evidence of the long run under
performance in the Indian market using the data set of firms over the period of 2000-02, by using
CAPM and three factor models as benchmarks. The researcher has taken a sample of 116
companies from various industries. The sample of the study consists of 116 IPOs issued by
companies in the Indian market during the period from 2000 to2001. The aftermarket
performance is taken for five years.
The researcher has used total return, market adjusted abnormal return for short run as well as for
long run. The study employs the basic capital asset pricing model (CAPM).The long term
performance of these companies shows that investment in Indian IPOs provides positive
abnormal return by the end of 60 days. The abnormal return is greater for investment in smaller
companies to investment in larger companies.

Vaidayanathan (2007) in his study “Determinants of IPO under pricing in the National
Stock Exchange of India” studied the price performance of IPOs in the NSE. The study
suggests that the demand generated for an issue during book building and the listing delay
positively impact the first day under pricing whereas the effect of money spent on the marketing
of the IPO is insignificant. The study considers the data from March 2004 to Oct 2006 and takes
into account 55 companies for analysis. The researcher has verified that the demand generated
for an issue during book building and the listing delay positively impact the first day under
pricing whereas the effect of money spent on the marketing of the IPO is insignificant. The
researcher has found that the degree of under pricing in the sample is varying from -33.04% to
82.5% with a mean value of 22.62%. There are only 27.27% which got listed at a discount to
their offer price (i.e. overpricing of issues), whereas 72.73% firms showed under pricing
phenomenon.

Singh and Kumar (2008) have analyzed short and long run under pricing of IPOs in the Indian
Capital markets by looking at different factors affecting them. The study proposed a model of
Under pricing taking oversubscription variables along with age and issue size. They have
performed industry wise analysis from the time period of Jan. 2006 to Oct.2006 by taking 116
IPOs. The study shows that Indian Capital markets are found to follow industry specific waves.
The sectors which are performing well are more underpriced in short run as well as perform well
in long
Khurshed, et al. (2008) in his study “Subscription patterns, offer prices and the under
pricing of IPOs: Evidence from India” has examined the timing and subscription pattern of
different groups of investors’ viz. retail investors. Authors have divided the study into two parts,
the Pre-listing period and Post-listing period under pricing. The sample period for the study is
March 1999 to March 2008 and the sample size is 239 IPOs. The authors have used descriptive
analysis, correlation techniques and multivariate regression. The results indicate that subscription
level of non-institutional investors and retail investors is significantly influenced by the
subscription pattern of qualified institutional buyers. Moreover, the findings show that the
transparency of the book-building process in Indian IPOs helps to nullify the winner’s curse
problem for the non-institutional and retail investors.

REFRENCES

 Kumar S. S. S. (2007), “Short and Long-run Performance of Book built IPOs in India"
Working Paper Series IIM Kozhikode

 Janakiramanan, S. (2007), “Under-Pricing and Long-Run Performance of Initial Public

Offerings in Indian Stock Market” Research Work NSE India website.

 Khurshed, Arif. , Pande, Alok. , Singh, AjaiK. (2006), “Subscription patterns, offer
prices and the under pricing of IPOs: Evidence from India”, Working Paper Series,
University of Manchester.

 Blum, James D. (1973), “ An Analysis of the Price Behavior of Initial Common

Stock Offerings”, The Journal of Finance, Vol.28, No.1, pp. 215

 Pande, Alok. Vaidayanathan, R. (2007), “Determinants of IPO under pricing in the

National Stock Exchange of India” Paper presented at the APRIA Conference in
Taipei.

 Ghosh, S. (March 31,2004). Revisiting IPO Underpricing In India.

 Madhusoodanan,thiripalraju (1997), “IPO Under pricing, Issue Mechanisms,

And Size” Working Paper, Institute for Financial Management and Research.
 Singh Priyanka, Kumar Brajesh (2008),” Short Run and Long Run Dynamics of Initial
Public Offerings: Evidence from India” Working Paper Series, IIM Ahmadabad.

 Krishanmurti, Chanderashekhar. (2002), “The Initial Listing Performance of Indian

IPOs”, Managerial Finance, Vol.28, No.2, pp. 39-51.

 Shah, Ajay. (1995), “The Indian IPO market: Empirical Facts” SSRN Library.