DISSERTATION REPORT ON SHORT RUN UNDER PRICING OF INDIAN INITIAL PUBLIC OFFERINGS (IPOs)

A dissertation report Submitted in partial fulfillment of the requirement for the MBA degree course of Bangalore University By: APARNA T. Reg. No. 03VWCM6009 (2003-2005) Under the guidance and support of Prof. S.P.Srinivasan Faculty Alliance Business Academy Bangalore

ALLIANCE BUSINESS ACADEMY BANGALORE 560 076 Batch: 2003-05

DECLARATION
I Aparna T. of MBA IV Semester, studying at Alliance Business Academy, Bangalore, hereby declare that this dissertation, titled Short Run Under Pricing of Indian IPOs has been prepared by me as part of the requirements of the MBA Program of the Bangalore University (Batch of 2003-2005). My guide for the dissertation has been Prof. S.P.Srinivasan I further declare that this project report has not been submitted earlier to any other University or Institute for the award of any Degree or Diploma.

Date: Place: Bangalore Aparna T.

Reg. No: 03VWCM6009

ON COLLEGE LETTERHEAD

CERTIFICATE

This is to certify that Ms. Aparna T. student of MBA 4th. Semester of our Institute has completed the Dissertation titled Short Run Under Pricing of Indian IPOs, under my guidance and that no part of this report has been submitted for the award of any other Degree or Diploma to any other Board or University.

Date: Place: Bangalore

S.P.Srinivasan Faculty
Alliance Business Academy

ACKNOWLEDGEMENTS
This study was made possible with the consultations, support and kind opinions from several people. So with immense gratitude, I acknowledge all those, whose guidance and valuable inputs have helped in the materialization of this project. I am indebted to Prof. S.P.Srinivasan, faculty of finance, Alliance Business Academy, for his unfailing support throughout the study. His timely suggestions and novel ideas provided a better insight for the organizational study of the company. I thank Alliance Business Academy, for providing me with the opportunity to carry out this dissertation. I thank all my friends, whose help and suggestions, have helped shape my dissertation into what it is today. Finally, I am immensely grateful to my family for their constant encouragement and support. Aparna T.

CONTENTS
Sl. No. 1. RESEARCH ABSTRACT CHAPTER 1 THEORETICAL BACKGROUND TO PROJECT Initial Public Offer Participants Procedure Bookbuilding 2. Eligibility Norms for Companies Issuing Securities Benefits of Public Equity Issue Costs of Initial Public Equity Offering IPO Under Pricing Alternative Theories of Under Pricing CHAPTER 2 DESIGN OF THE STUDY a) Statement of Problem b) Objectives of The Research c) Scope of The Research 3. d) Research methodology e) Limitations of the Study f) Operational Definitions of Concepts g) Overview of the Chapter Scheme CHAPTER 3 PROFILE The Indian Economy The Indian Consumer Market The Indian Financial Sector The Indian Capital Markets The Indian New Issues market The Indian Secondary Market Investors Outlook CHAPTER 4 DATA ANALYSIS AND INTERPRETATION CHAPTER 5 A. Summary of Findings B. Recommendations C. Conclusion Bibliography Page No. 1

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5. 6.

40 53

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LIST OF TABLES AND CHARTS

LIST OF TABLES Table No. Difference between shares offered through book 1.1 building and offer of shares through normal public issue 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 4.16 Table Showing Primary Market Summary Equity Returns, Volatility, Market Capitalization and Price Earnings - (P/E) Ratio Indoco Remedies Ltd. Bharati Shipyard Ltd Deccan Chronicle Holdings Ltd S.A.L. Steel Ltd. National Thermal Power Corporation Limited IndiaBulls Financial Services Ltd Tata Consultancy Services Ltd. New Delhi Television Ltd. Datamatics Technologies Ltd. Dishman Pharmaceuticals & Chemicals Ltd. Biocon Ltd. Petronet LNG Ltd. Power Trading Corporation of India Ltd. Patni Computer Systems Ltd. Companies following Book Building Route EPS, P\E, Market Price and Issue Price of Seasoned Offerings made in 2004 & 2005 Page No. 2 35 38 40 40 41 41 42 42 42 43 43 44 44 44 45 45 49 50

LIST OF GRAPHS & CHARTS Sl. No. 1. CHART1: Percentage of IPOs in each category of correlation Page No 47

2.

CHART 2: Comparative Correlations of IPOs

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RESEARCH ABSTRACT
This study empirically examines the existence of short run under pricing in the Indian initial public offerings (IPOs) during 2004. The sample consists of all 18 firms listed on the Bombay Stock Exchange (BSE) that had made public issues in 2004. The dissertation report commences with an insight and theoretical background to IPOs, the procedures, bookbuilding process at the two major stock exchanges of India, obligations of issuing company and presents a brief survey of the literature, highlighting the various theories advanced to explain the phenomenon of short run IPO underpricing. The next portion of the research deals with the design of the study. It outlines the objective, scope and limitations of this study. The research methodology is described in this portion. The objective of this research is to establish whether or not Indian IPOs were underpriced in 2004 so as to enable the development of various mechanisms to prevent arbitrary over pricing or under pricing, which may be detrimental to the interest of investors. The ensuing part of the report throws light on the Indian economy and capital markets, focusing especially on the new issue and secondary markets which have a significant bearing on the pricing of issues. Chapter 4 contains analysis and interpretation. The correlation between individual IPO returns and market returns and the co-efficient of determination have been calculated to conclude whether the IPOs were under priced. Seasoned offerings were examined on the basis of the P\E ratio and EPS to determine whether the offer price matched with the calculated market price. The results also show that underpricing is prevalent to a great extent The empirical results are presented and discussed in Chapter 5, along with concluding comments, recommendations and scope for future research in the same field.

THEORETICAL BACKGROUND TO PROJECT INITIAL PUBLIC OFFER

Initial Public Offer is the first sale of stock by a private company to the public. For owners of a successful and growing private business an initial public offering (IPO) provides an opportunity to further advance the growth of the business through the injection of public funds. The term initial public offering (IPO) refers to a company's first issuance of stock on the open market. In most cases, the IPO makes the company's stock accessible to a large group of public investors for the first time. If a brand new company or a company already in existence, but with no shares listed on the stock exchange, decides to invite the public to buy shares, it is called an Initial Public Offering or an IPO. Since it is the first time it is approaching the public for money, it is also referred to as 'going public'. PARTICIPANTS IN AN INITIAL PUBLIC OFFER Issuing Firm Merchant Bankers, Book Running Lead Manager Registrars Investing Public -Retail investors - Institutional investors Bankers to an issue Depositories Intermediaries- printers, advertising agencies, mailing agencies, etc. Underwriters SEBI Securities an Exchange Board of India

PROCEDURE Corporates may raise capital in the primary market by way of an initial public offer, rights issue or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in the primary market. This Initial Public Offering can be made through the fixed price method, book building method or a combination of both the fixed price and bookbuilding method. In case the issuer chooses to issue securities through the book building route then as per SEBI guidelines, an issuer company can issue securities in the following manner: a. 100% of the net offer to the public through the book building route. b. 75% of the net offer to the public through the book building process and 25% through the fixed price portion. c. Under the 90% scheme, this percentage would be 90 and 10 respectively. TABLE 1.1: Difference between shares offered through book building and offer of shares through normal public issue: Features Fixed Price process Price at which the securities are Pricing offered/allotted is known in advance to the investor. Demand for the securities Demand offered is known only after the closure of the issue. Payment if made at the Payment time of subscription wherein refund is given after allocation. Book Building process Price at which securities will be offered/allotted is not known in advance to the investor. Only an indicative price range is known. Demand for the securities offered can be known everyday as the book is built. Payment only after allocation

BOOKBUILDING Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which aids price and demand discovery. It is a process used for marketing a public offer of equity shares of a company. It is a mechanism where, during the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The process aims at tapping both wholesale and retail investors. The offer/issue price is then determined after the bid closing date based on certain evaluation criteria. The Process: The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'. The Issuer specifies the number of securities to be issued and the price band for orders. The Issuer also appoints syndicate members with whom orders can be placed by the investors. Investors place their order with a syndicate member who inputs the orders into the 'electronic book'. This process is called 'bidding' and is similar to open auction. A Book should remain open for a minimum of 5 days. Bids cannot be entered less than the floor price. Bids can be revised by the bidder before the issue closes. On the close of the book building period the 'book runner evaluates the bids on the basis of the evaluation criteria which may include Price Aggression -Investor quality -Earliness of bids, etc. The book runner and the company conclude the final price at which it is willing to issue the stock and allocation of securities.

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Generally, the numbers of shares are fixed; the issue size gets frozen based on the price per share discovered through the book building process. Allocation of securities is made to the successful bidders. Book Building is a good concept and represents a capital market which is in the process of maturing. As per SEBI, only electronically linked transparent facility is allowed to be used in case of book building. An open outcry system cannot be used.

BOOK BUILDING AT NSE The NSE has set up nation-wide network for trading whereby members can trade remotely from their offices located all over the country. NSE decided to offer this infrastructure for conducting online IPOs through the Book Building process. NSE operates a fully automated screen based bidding system called NEAT IPO that enables trading members to enter bids directly from their offices through a sophisticated telecommunication network. Book Building through the NSE system offers several advantages: The NSE system offers a nation wide bidding facility in securities It provide a fair, efficient & transparent method for collecting bids using latest electronic trading systems Costs involved in the issue are far less than those in a normal IPO The IPO market timings are from 10.00 a.m. to 3.00 p.m. On the last day of the IPO, the session timings can be further extended on specific request by the Book Running Lead Manager. Procedures Issuers Issuers desirous of using NSE's online IPO system are required to comply with the following procedures: 1. Submit a written request as per prescribed format (Letter1, Letter2, BRLM) for usage of electronic facilities and software of NSE

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2. Give details regarding Book Running Lead Manager, Co Book Running Lead Managers and Syndicate Members. Trading Members The Book Running Lead Manager will give the list of trading members who are eligible to participate in the Book Building process to the Exchange. Members have to submit a one time undertaking to the Exchange. Eligible trading members have to give in the prescribed format details of the user IDs that they would like to use. Subscribers Subscribers can approach any of the approved trading members for submitting bids in the NEAT IPO system. On line transaction registration slip are generated automatically after entering the bids in to the system which acts as proof of the registration of each Bid option. BOOKBUILDING AT BSE BSE offers the book building services through the Book Building software that runs on the BSE Private network. This system is one of the largest electronic book building networks anywhere spanning over 350 Indian cities through over 7000 Trader Work Stations via eased lines, VSATs and Campus LANS The software is operated through book-runners of the issue and by the syndicate member brokers. Through this book, the syndicate member brokers on behalf of themselves or their clients' place orders. Bids are placed electronically through syndicate members and the information is collected on line real-time until the bid date ends. In order to maintain transparency, the software gives visual graphs displaying price v/s quantity on the terminals.

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ELIGIBILITY NORMS FOR COMPANIES ISSUING SECURITIES No company shall make any issue of a public issue of securities, unless a draft prospectus has been filed with the Securities and Exchange Board of India (SEBI), through an eligible Merchant Banker, at least 21 days prior to the filing of Prospectus with the Registrar of Companies (ROCs). Public Issue by Unlisted Companies Securities and Exchange Board of India (Disclosure and Investor Protection) Guidelines for Capital Issues 2000 chapter 2 states the following in this respect. Clause 2.2: 2.2.1 No unlisted company shall make a public issue of any equity share or any security convertible at a later date into equity share unless the company has;i. a track record of distributable profits in terms of section 205 of Companies Act, for at least three (3) out of immediately preceding five (5) years; and ii. a pre-issue net worth of not less than Rupees One crore in three (3) out of preceding five (5) years, with the minimum net worth to be met during immediately preceding two (2) years. 2.2.2 An unlisted company which does not satisfy the requirement specified in Clause 2.2.1 above, can make a public issue of equity share capital or any security convertible at later date into equity share capital, provided a public financial institution or a scheduled commercial bank:a. b. has appraised the project to be financed through the proposed offer to the public; and; not less than 10% of the project cost is financed by the said appraising bank or institution by way of loan, equity, participation in the issue of security in the proposed issue or combination of any of them.

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c.

the appraising bank or institution shall bring in the minimum specified contribution at least one day before the opening of the public issue.

Public Issue by Listed Companies Clause 2.3: 2.3.1 A listed company shall be eligible to make a public issue of equity shares or any security convertible at later date into equity share. Provided that, if as a result of the proposed issue, net worth of the company becomes more than five times the net worth prior to the issue, the company shall satisfy either the provisions of Clause 2.2.1 or Clause 2.2.2, before it can make the proposed public issue. 2.3.2 Public issue by listed companies which has changed its name to indicate as if it was engaged in the business / activities in information technology sector during a period of three years prior to filing of offer document with the Board, shall be eligible to make a public issue of equity share or securities convertible at a later date into equity share, if; b. it has a track record of distributable profits in terms of Section 205 of Companies Act, for at least three (3) out of immediately preceding five (5) years from the information technology business / activities, and (ii) it has a pre-issue net worth of not less than Rs. One Crore in three (3) out of preceding five (5) years, with the minimum net worth to be met during immediately preceding two (2) years. c. if the company does not satisfy the requirements specified in clause (a) above, it can make a public issue provided that it satisfies the requirements laid down in sub-clauses (a), (b) and (c ) of clause 2.2.2. PRE- ISSUE OBLIGATIONS Memorandum of Understanding (MOU) has been entered into between a lead merchant banker and the issuer company specifying their mutual rights, liabilities and obligations relating to the issue. Inter-se Allocation of Responsibilities of each merchant banker shall be demarcated as specified in Schedule II of Securities and Exchange

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Board of India (Disclosure and Investor Protection) Guidelines for Capital Issues 2000. Due Diligence Certificate should be furnished to the Board by the Lead Merchant Bankers. The Lead Merchant Banker should furnish Certificates Signed by the Company Secretary or Chartered Accountant, in Case of Listed Companies Making Further Issue of Capital. The issuer shall submit an undertaking to the Board to the effect that transactions in securities by the `promoter' the 'promoter group' and the immediate relatives of the `promoters during the period between the date of filing the offer documents with the Registrar of Companies or Stock Exchange as the case may be and the date of closure of the issue shall be reported to the Stock exchanges concerned within 24 hours of the transaction(s). Appointment of Intermediaries Appointment of Merchant Bankers Appointment of Co-managers Appointment of Other Intermediaries The Lead Merchant Banker should ensure that Bankers to the Issue are appointed in all the mandatory collection centers. Underwriting: The Lead merchant banker shall satisfy themselves about the ability of the underwriters to discharge their underwriting obligations. Despatch of Issue Material The issuer company can also appoint authorized collection agents in consultation with the Lead Merchant Banker subject to necessary disclosures including the names and addresses of such agents made in the offer document. The investors from the places other than from the places where the mandatory collection centers and authorized collection agents are located, can forward their applications along with stock invests to the Registrars to the Issue directly by Registered Post with Acknowledgement Due.

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POST- ISSUE OBLIGATIONS Lead Merchant Banker shall ensure the submission of the post-issue monitoring reports as per formats specified in Schedule XVI. The Post -issue Lead Merchant Banker shall actively associate himself with post-issue activities namely, allotment, refund and despatch and shall regularly monitor redressal of investor grievances arising therefrom. Co-ordination with Intermediaries The lead merchant banker shall ensure compliance with the instructions issued by the RBI on handling of stock invest by any person including Registrars. If the issue is proposed to be closed at the earliest closing date, the lead Merchant Banker shall satisfy himself that the issue is fully subscribed before announcing closure of the issue. In case there is a devolvement on underwriters, the lead Merchant Banker shall ensure that the underwriters honour their commitments within 60 days from the date of closure of the issue. In a public issue of securities, the Executive Director/Managing Director of the Regional Stock Exchange along with the post issue Lead Merchant Banker and the Registrars to the Issue shall be responsible to ensure that the basis of allotment is finalized in a fair and proper manner in accordance with the guidelines. The Post -Issue Lead Merchant Banker shall submit within two weeks from the date of allotment, a Certificate to the Board certifying that the stock invests on the basis of which allotment was finalized, have been realized. BENEFITS OF PUBLIC EQUITY ISSUE 1. Lowers the cost of capital for the firm: one of the main lessons from portfolio theory is that risk reduction due to diversification lowers the

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risk (and required return) for stocks. This won't work if owner-manager has a large undiversified stake in the firm 2. A "wealth constraint" prevents current owner-managers from financing the project. Equity is often used to pump in fresh finance. 3. Provides liquidity for current stockholders (for consumption or diversification). COSTS OF INITIAL PUBLIC EQUITY OFFERING Agency costs Costs of reporting/filing with the S.E.C., SEBI and other regulatory bodies Costs of corporate control outside stockholders can impose costs on managers if they feel that the firm isn't being managed in the stockholders' interests, even if they only represent a minority position Disclosure of proprietary information may be helpful to competitors, other contracting parties. An IPO require a company to divulge information such as expected profitability, capital structure, new business opportunities etc. Some such information which serves as a competitive advantage by the issuing company can now be used by the competitors. As such, the cost of IPO is risk of losing competitive edge due to disclosure of information. Under pricing: An IPO issues capital and underpricing is a substantial cost of the issued capital. Information asymmetry creates greater uncertainty about the value of the firm and makes it more difficult to value and it is costly for investors to attain information. By issuing capital at a discount results in fewer proceeds and hence a higher cost of raising capital.

IPO UNDER PRICING Underpricing is a function of the difference between the offer price and the traded price on the first trading day. The offer price is announced prior to

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trading begins, the first trading price sets the opening price and the last price paid sets the closing price. Under pricing of IPOs is the result of the interactive process between the offer price and the trading price on the secondary market, while the information asymmetry hypotheses only focus on the determination of the offer price. In advanced economies, it has been found that IPO under pricing is positively related to the trading price in the secondary market, i.e., the higher the P/E ratio of the market (used as a proxy for trading price level in the secondary market), the more under pricing that occurred in the IPO. An IPO is characterized by a high degree of information asymmetry due to less public historical information, no secondary trading, and few large owners. A high disclosure level decreases information asymmetry and lead to a lower risk in the investment. Therefore it is often argued that a higher disclosure level in the prospectus, i.e. a decreased ex-ante uncertainty, entails a lower under pricing at the IPO stage. The Rock Model: One of the most convincing models is due to Rock (1986), who applies the concept of the winners curse to the new issues market. It is based on a horizontal asymmetry of information, specified to exist between different groups of investors. He specifies that there are two groups of potential investors in the market, called informed and uninformed. In this model, the true value of the IPO share, v, is unknown. The issuer pre-selects an offer price p and an offer quantity, Z. There are two states of the world, i.e., p < v (underpricing) and p > v (overpricing). International evidence on short-run under pricing The IPO market in the United States has been examined extensively. Studies of U.S. IPOs report that average initial returns are near 15% with most estimates in the 10-20% range. In other countries, average initial returns on IPOs of privately held firms are always positive, but show much greater variability. IPO samples in Belgium,

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Canada, Finland, France, Netherlands, and the United Kingdom illustrate similar or smaller degrees of underpricing compared to U.S. IPO samples. In developing economies, average initial returns (for conventional IPOs) are still more variable and typically greater than for the United States. In other countries (Brazil, Korea, Singapore, Taiwan, Thailand) estimates of short-run underpricing in the 25% to 80% have been reported. Evidence of underpricing is vast and the level of underpricing is higher in emerging markets than in developed markets. For example, underpricing in China is 178% and in USA between 11.4% and 47.8%. ALTERNATIVE THEORIES OF IPO UNDER PRICING An initial public offering of securities brings together the current owners of the firm, a financial intermediary (the underwriter), and a set of potential new shareholders all within a particular institutional framework. Various theories of under pricing have been proposed that focus on one or more of the players in the IPO process. We summarize the most important theoretical models that attempt to explain the empirical regularities in the conventional new issue market. 1.1 Principal-agent theory and costly monitoring Financial intermediaries (underwriters) are assumed to have superior information (relative to the issuing firm) about pricing conditions in capital markets. Because the issuing firm (the principal) cannot perfectly monitor the underwriter's (agent's) efforts in marketing the new issue, the model predicts that underwriters tend to under price IPOs both to minimize their selling efforts and to maximize the probabilities of a successful offering. 1.2. Asymmetric information and the winner's curse hypothesis Informed investors subscribe to IPOs only when they expect a positive initial return, while uninformed investors subscribe to every IPO. If under priced, IPOs would be oversubscribed by informed investors, resulting in rationing of shares to uniformed investors. If overpriced, IPOs would be sold exclusively

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to uninformed investors who would earn negative initial returns (thus, the socalled winner's curse). Since informed investors are more likely to buy new shares when they are under priced, then the amount of excess demand will be higher for the more under priced IPOs. So the uninformed investors face a winner's curse: they are allocated only a fraction of the most desirable new issues, while they are allocated a large proportion of the least desirable issues. That is to say, if they win the allocation, it is because the informed investors do not want the shares. To keep the uninformed investors in the market, therefore, requires an additional premium (the under pricing of IPOs) sufficient to compensate them. Because issuers must continue to attract uninformed as well as informed investors, new issues must be under priced (on average) to provide uninformed investors with acceptable rates of return. 1.3. Reputation building hypothesis Because under pricing is costly to the issuing firm, firms have an incentive to reveal their low-risk character to the market. One way for firms to signal their quality is by selecting underwriters with high prestige. The notion of reputation building might also apply to firms or governments that make repeated public offerings of securities. 1.4. Signaling theory Signaling theory applies to an issuer who intends to sell shares through an initial public offerings and subsequent (seasoned) public offerings. Given the existence of both good and bad firms and asymmetric information, investors will value a signal that the IPO is from a good firm. A good firm can afford to signal by under pricing its IPO, because only good firms can be expected to recoup their initial loss after their true performance is realized. By bearing a large initial cost, good firms can credibly signal their type. Bad firms run the risk that their true type will be realized, and so they cannot afford to signal. Underpricing, which is a cost that bad firms cannot profitably sustain and which deters lower-quality issuers from imitating, is an equilibrium outcome for

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issuers to distinguish themselves from the pool of low-quality issuers and signal their quality to the investors.

1.5. Investor sentiment theories The theories reviewed so far focus on the IPO price, and appeal to rational or equilibrium models to generate under pricing. The investor sentiment approach focuses instead on after-market pricing, and argues that irrational investor over-optimism may drive up the prices for IPOs resulting in the under pricing. Behavioral theories assume either the presence of irrational investors who bid up the price of IPO shares beyond true value, or that issuers are subject to behavioral biases and therefore fail to put pressure on the underwriting banks to have under pricing reduced. This literature is still in its infancy. When investor demand for IPOs is subject to fads rather than on valuation based on fundamentals, investor sentiment leads to initial under pricing. Investor sentiment links easily to the cycle of hot and cold IPO markets. And, as well, if the initial under pricing effect is based on initial over optimism, this helps to reconcile the long-run underperformance of IPOs. 1.6 Information Gathering and the Market Feedback Hypothesis Another approach based on information asymmetries is assuming that investors are more informed than the issuer, for example about the market demand for shares. In this situation, the issuer faces a placement problem. Thus the underwriter may underprice the IPO to induce investors to reveal their valuations of the company during the pre-sale book building period. The underwriter must underprice issues for which favorable information is revealed by more than those for which unfavorable information is revealed, and there will only be a partial adjustment of the offer price from the original file price ranges. That is to say, those IPOs for which the offer price is revised upwards will be more underpriced than those for which the offer price is revised downwards.

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1.7Information Cascade and the Bandwagon Hypothesis Informational cascades can develop in some forms of IPOs if investors make their investment decisions sequentially: later investors can condition their bids on the bids of earlier investors, rationally disregarding their own information. Successful initial sales are interpreted by subsequent investors as evidence that earlier investors held favorable information, encouraging later investors to invest whatever their own information. Conversely, disappointing initial sales can dissuade later investors from investing irrespective of their private signals. As a consequence, demand either snowballs or remains low over time. The possibility of cascades gives market power to early investors who can demand more under pricing in return for committing to the IPO and thus starting a positive cascade. It is in this sense that cascades may play a role in explaining IPO under pricing. An issuer may underprice its IPO to avoid a negative cascade. In an informational cascade, investors make their decisions by judging the interest of other investors. They only subscribe to new shares when they believe that the offering is going to be popular. That is to say, the IPO market may be subject to bandwagon effects. A positive bandwagon or cascade means that the IPO is underpriced, and vice versa. This hypothesis supported by Amihud, Hauser, and Kirsh (2001) found that IPOs tend to be either undersubscribed or hugely oversubscribed, with very few moderately oversubscribed. But cascades are not inevitable. In bookbuilding cascades do not develop because the underwriter can maintain secrecy over the development of demand in the book. Bookbuilding also offers the issuer the valuable option to increase the offer size if demand turns out to be high (either unconditionally, by issuing more shares, or conditionally, by giving the underwriter a so called over allotment option). If investors can communicate freely, cascades also do not form, for then investors can learn the entire distribution of signals. Yet, it is argued that issuers are better off with cascades than with free communication, because free communication aggregates all available information which maximizes the issuing companys informational disadvantage compared to investors. Moreover, preventing free communication reduces the chance that one

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investors negative information becomes widely known, and so reduces the likelihood that the IPO will fail. 1.8 Prospect Theory and Mental Accounting Some theorists argue that issuers fail to get upset about leaving millions of dollars on the table in the form of large first-day returns because they tend to sum the wealth loss due to under pricing with the (often larger) wealth gain on retained shares as prices jump in the after-market. Such complacent behavior benefits the investment bank if investors engage in rent-seeking to increase their chances of being allocated underpriced stock. The decisionmakers initial valuation beliefs are reflected in the mean of the indicative price range reported in the issuing firms IPO registration statement. This belief serves as a reference point against which the gain or loss from (as opposed to the expected utility of) the outcome of the IPO can be assessed. The offer price for an IPO routinely differs from this reference point, either because the bank manipulated the decision makers expectations by low-balling the price range, or in reflection of information revealed during marketing efforts directed at institutional investors. 1.9 Underpricing as a Means to Retain Control Underpricing gives managers the opportunity to protect their private benefits by allocating shares strategically when taking their company public. Managers seek to avoid allocating large stakes to investors for fear that their non-valuemaximizing behavior would receive unwelcome scrutiny. Small outside stakes reduce external monitoring, owing to two free-rider problems. First, because it is a public good, shareholders will invest in a sub-optimally low level of monitoring. Second, greater ownership dispersion implies that the incumbent managers benefit from a reduced threat of being ousted in a hostile takeover. The role of under pricing in this view is to generate excess demand. Excess demand enables managers to ration investors so that they end up holding smaller stakes in the business.

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DESIGN OF THE STUDY

Statement of the Problem: Initial public offering (IPO) under pricing exists in almost every stock market, although the degree of under pricing varies from country to country. Numerous studies document the phenomenon, showing that investors in IPOs, on average, earn abnormally high first day return, and a number of hypotheses have been advanced and tested against the data of both developed and emerging markets. IPO under pricing has been noted as one of the ten puzzles facing financial research since there is little consensus in this field. However, little research has been on Indian markets, in this regard. The Indian capital market has witnessed a sudden spurt in the number of IPOs over the past 2 years. It has therefore become necessary to see whether the pricing strategies adopted by the issuing companies have any effect on the subscription and post issue shortterm returns from an IPO. There is a need to analyze the short-run price performance of IPOs to determine the extent of market forces and the extent to which other unique forces affect the prices. Objectives of the Research: This paper studies IPO under pricing in India's stock market. The objective in this research is to examine empirically the existence of short run IPO under pricing in the Indian equity markets. To locate plausible reasons if any for such a phenomenon. This study aims to empirically test whether initial public offerings (IPOs) tend to be under priced leading to positive initial short-run returns.

The results would therefore provide a basis for developing mechanisms to prevent either excessive over-pricing or under pricing as the case may be.

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a) Scope of the Research: The research covers Indian IPOs listed on BSE & NSE over the previous year 2004 up to January 2005. The IPOs are of companies belonging to different sectors. b) Research Methodology: Data Sources: The data used for the purpose of analysis consists of 14 IPOs now listed on the Bombay Stock Exchange (BSE). The main sources of data are websites of BSE and NSE (National Stock Exchange). Literature for this study has been gathered from textbooks and journals. Only secondary data sources have been utilized for this study. Type of Research: It is a correlational study wherein a correlation between market return and stock returns is being done to understand whether the phenomenon of short run under pricing exists or not. Methodology: To facilitate direct comparison with existing empirical evidence, the measures of performance for each IPO the methodology is as follows: The total return for stock i at the end of the first trading day is calculated as: Ri1 = (Pi1 / Pi 0) 1 ;where Pi1 is the price stock i at the close of the first trading day, Pi 0 is the offer price and Ri1 is the total first-day return on the stock. The return on the market index during the same time period is: Rm1 = (Pm1 / Pm0) 1 ;where Pm1 is the market index value at the close of first trading and Pm0 is the market index value on the offer day of the appropriate stock, while Rm1 is the first days comparable market return. Using these two returns, the market adjusted abnormal return for each IPO on the first day of trading is computed as: MAARi1 = [(1 + Ri1) / (1 + Rm1)] 1

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This measure of the abnormal returns does not take into account the systematic risk associated with each issue. When MAARi1 is interpreted as an abnormal return, the assumption is that the systematic risk of the IPOs under consideration is the same as that of the index, i.e., the betas of the IPOs average to unity. An examination of under pricing at the end of the first days trading (t=1), at the end of five days of trading (t=5) as well as the situation at the end of twenty-one days of trading (t=21) is done to find the short run price performance of these IPOs. Next, the correlation between market return and individual stock returns is calculated for the first, fifth and twenty-first day of trading. Then the co-efficient of determination is calculated to see how much of the return is because of market forces and how much is based on individual stock performance in the stock exchange. The findings are then segregated and categorized as high correlation, moderate correlation and low correlation for the purpose of analysis. The median and mean are calculated to ascertain if all the IPOs examined for the year tend towards being over priced or under priced. The companies whose IPOs have low correlation are further examined to see whether the book building route was used or not and whether the final offer price matches the price quoted by retail and institutional investors. Based on the findings, recommendations have been made. If the offer price does not match the price quoted by institutional investors, it can be said that the company has deliberately under priced the issue by taking advantage of the information asymmetry in the market. The owners know more about the firm than potential investors and this difference in information about the firm is the information asymmetry. IPOs usually have higher information asymmetry compared to already listed firms due to shorter history, less public historical information, no secondary trading, and a few large owners.

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Also the volatility of the prices post listing has been measured. This is done to find out if there is any price manipulation. By examining if the companies with greenshoe option have lower price volatility, we can say that the greenshoe option acts as a price stabilizing mechanism. c) Limitations of the Study:

The study focuses only on Indian IPOs. This study limits itself to IPOs occurring only in the previous year. This study has not analyzed IPOs of any other years. The index values of only Bombay Stock Exchange (BSE) have been considered. Only the BSE SENSEX has been utilized for the purpose of calculation. Other Indian indices have not been taken into consideration. IPOs listed on regional stock exchanges have not been examined. As data for analysis has been obtained only from one source, there is no method to cross verify for errors if any, in the data. The measure of the abnormal returns does not take into account the systematic risk associated with each issue.

d) Operational Definitions of Concepts:

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1. Agency Cost: Cost that owners (principals) have to incur in order to ensure that their agents (managers) make financial decisions consistent with their best interests. 2. Bid price: The highest price any buyer is willing to pay for a given security at a given time. Quoted bid is a maximum price that a market maker will pay for a security. 3. Book Building: SEBI Guidelines defines Book Building as a process undertaken by which a demand for the securities proposed to be issued by a corporate body is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document. 4. Capital Markets: This market brings together all the providers and users of capital, all the financial products, like stocks and bonds which make the transfer of capital possible, and all the people and organizations which support the process 5. Co-Efficient Of Determination: The coefficient of determination, r 2, is useful because it gives the proportion of the variance (fluctuation) of one variable that is predictable from the other variable. It is a measure that allows us to determine how certain one can be in making predictions from a certain model/graph. The coefficient of determination is the ratio of the explained variation to the total variation. 6. Cold Issue: An issue that sells at a discount to the public offering price on the first day of trading. A cold market is defined as a market with few offerings and lower initials returns. 7. Common Stock: Securities representing equity ownership in a corporation, providing voting rights, and entitling the holder to a share of the company's success through dividends and/or capital appreciation. In the event of liquidation, common stockholders have rights to a company's assets only after bondholders, other debt holders, and preferred stockholders have been satisfied. Typically, common stockholders receive one vote per share to elect the companys board of directors. Common shareholders also receive voting rights regarding other company matters

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such as stock splits and company objectives. In addition to voting rights, common shareholders sometimes enjoy what are called "preemptive rights". Preemptive rights allow common shareholders to maintain their proportional ownership in the company in the event that the company issues another offering of stock. This means that common shareholders with preemptive rights have the right but not the obligation to purchase as many new shares of the stock as it would take to maintain their proportional ownership in the company. 8. Correlation: An analysis of the co- variation of two or more variables is usually called correlation. When the relationship is of a quantitative nature, the appropriate tool for discovering and measuring the relationship and expressing it in a brief formula is known as correlation. Correlation analysis helps in determining the degree of relationship between two or more variables. It does not tell us anything about the cause and effect relationship. 9. Cost of Capital: The opportunity cost of an investment, i.e. the rate of return that a company would otherwise be able to earn at the same risk level as the investment that has been selected. 10. Derivatives: They are a type of financial instrument whose value is derived from the price of some underlying asset (e.g. an interest level or stock market index). They are designed to help companies hedge (protect themselves against the risk of price changes) or as speculative investments from which great profits can be made. 11. EPS: (Earnings per Share): The earnings considered in ascertaining the Companys EPS comprises the net profit / (loss) after tax. The number of shares used in computing basic EPS is the weighted average number of shares outstanding during the year. The diluted EPS is calculated on the same basis as basic EPS, after adjusting for the effects of potential dilutive equity shares unless the effect of adjustments becomes anti-dilutive. 12. Financial Intermediary: A third party who facilitates a deal between two other parties. They can be middlemen, brokers, distributors, investment bank and underwriters.

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13. Floor Price: Floor price is the minimum price at which bids can be made. 14. Greenshoe Option: A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO). The green shoe option, which is also often referred to as an over-allotment provision, allows the underwriting syndicate to buy up to an additional 15% of the shares at the offering price if public demand for the shares exceeds expectations and the stock trades above its offering price. 15. Hot Issue: An issue that sells at a premium over the public offering price on the first day of trading. A hot market is usually defined as a market with a high number of offerings and high initials returns. 16. Imperfect Market: A market in which the public does not immediately receive full access to financial information about securities and in which buyers are not immediately matched with sellers for particular securities. 17. Index: Investors, both individual and institutional, use the market index as a benchmark against which they evaluate the performance of their own or institutional portfolio. An index is a number used to represent the changes in a set of values between a base time period and another time period. A stock Index is a number that helps measure the levels of the market. Returns on the Index are supposed to represent the returns on the market. A stock index is a derivative asset because it derives its existence and value from independent stocks issued by corporations. 18. Institutional Investor: Entity with large amounts to invest, such as investment companies, mutual funds, brokerages, insurance companies, pension funds, investment banks and endowment funds. Institutional investors are covered by fewer protective regulations because it is assumed that they are more knowledgeable and better able to protect themselves. They account for a majority of overall volume. 19. 20. Issuing Firm: The company which issues securities for sale, in this IPO: The first sale of stock by a private company to the public. For case, the company issuing shares to the public for subscription. owners of a successful and growing private business an initial public

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offering (IPO) provides an opportunity to further advance the growth of the business through the injection of public funds. The term initial public offering (IPO) refers to a company's first issuance of stock on the open market. In most cases, the IPO makes the company's stock accessible to a large group of public investors for the first time. If a brand new company or a company already in existence, but with no shares listed on the stock exchange, decides to invite the public to buy shares, it is called an Initial Public Offering or an IPO. Since it is the first time it is approaching the public for money, it is also referred to as 'going public'. 21. Listing: Listing means admission of securities of an issuer to trading privileges on a stock exchange through a formal agreement. The prime objective of admission to dealings on the Exchange is to provide liquidity and marketability to securities, as also to provide a mechanism for effective management of trading. 22. Market Price: The price at which a security is currently selling on the market. 23. Median: the median by definition is the middle value of the distribution. Whenever the median is given as a measure, one-half of the items in the distribution have a value of the size of the median value or smaller and the other half have a value, the size of the median or larger. The median is a positional average. Median is the central value of the distribution or the value that divides the distribution into two equal parts. 24. Merchant Banker: Any person engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to the securities as manager, consultant, advisor or rendering corporate advisory service in relation to such issue management. 25. New Issue Market: It is a market for new financial claims. It deals with those securities which are issued to the public for the first time. It is often called primary market and facilitates capital formation. 26. Offer Price: The price at which the company offers the security for sale to the public who have subscribed to such securities. 27. Oversubscription: When the public subscribes to shares in excess of the number of shares being issued, it is called over subscription.

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28. P\E: Calculated as price per share divided by earnings per share. The price per share (numerator) is the market price of a single share of the stock. The Earnings per share (denominator) is the Net Income of the company for the most recent 12 month period, divided by number of shares outstanding. Calculated as: Market Value per share/Earnings per Share. EPS (Earnings per Share) is usually from the last four quarters (trailing P/E), but sometimes can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation is the sum of the last two actual quarters and the estimates of the next two quarters. Sometimes the P/E is referred to as the "multiple," because it shows how much investors are willing to pay per dollar of earnings. In general, a high P/E means high projected earnings in the future. However, the P/E ratio actually doesn't tell us a whole lot by itself. It's usually only useful to compare the P/E ratios of companies in the same industry, or to the market in general, or against the company's own historical P/E. 29. Portfolio: A collection of investments all owned by the same individual or organization. These investments often include stocks, which are investments in individual businesses; bonds, which are investments in debt that are designed to earn interest; and mutual funds, which are essentially pools of money from many investors that are invested by professionals or according to indices. 30. Private Placement: When the issue house or broker buys the securities outright, with the intention of placing them with their clients afterwards is called private placement. 31. Privately Held Firms: Private equities are equity securities of unlisted companies. Private equities are generally illiquid and thought of as a long-term investment. Private equity investments are not subject to the same high level of government regulation as stock offerings to the general public. Private equity is also far less liquid than publicly traded stock.

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32.

Public Equity Capital: Ownership interest in a corporation in the

form of common stock or preferred stock. It is the risk-bearing part of the company's capital and contrasts with debt capital which is usually secured and has priority over shareholders if the company becomes insolvent and its assets are distributed. 33. Qualified Institutional Buyer: Primarily referring to institutions that manage at least $100 million in securities including banks, savings and loans institutions, insurance companies, investment companies, employee benefit plans, or an entity owned entirely by qualified investors. Also included are registered broker-dealers owning and investing, on a discretionary basis, $10 million in securities of non-affiliates. 34. 35. Retail Investor: An individual who purchases small amounts of Seasoned Public Offerings Or Secondary Public Offering securities for him/herself, as opposed to an institutional investor. Secondary Public Offering refers to a public offering subsequent to an initial public offering. A secondary public offering can be either an issuer offering or an offering by a group that has purchased the issuer's securities in the public markets. 36. SEBI: Securities Exchange Board of India is the apex body, similar to SEC (Securities Exchange Commission) of USA, which is responsible for the development and regulation of stock markets in India. The primary objective of SEBI is to promote healthy and orderly growth of the securities market and secure investor protection. SEBI functions under a separate legislation in the name of Securities and Exchange Board of India Act, 1992. 37. 38. Spot Markets: Market in which goods are traded for immediate Stag: They are brokers who neither buy nor sell securities in the delivery and payment. market. They simply apply for subscription to new issues, expecting to sell them at a higher price later when such issues are quoted on the stock exchange. 39. Stock Exchange: The Securities Contracts (regulation) Act of 1956 defines a stock exchange as an association, organization or body of

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individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities. Securities or stock exchanges are privately organized markets which are used to facilitate trading in securities. In India, Stock Exchange means any stock exchange, which has been granted recognition under section 4 of the Securities Contracts (Regulation) Act, 1956. 40. Systematic Risk: Risk that is common to all securities of the same class (stocks, bonds, options)--also known as "market risk". This risk cannot be eliminated by diversifying one's portfolio. Also called market risk, or non-diversifiable risk. It is risk attributable to factors affecting all investments. The measure of systematic risk is widely known as "BETA." 41. Underwriting: It is an arrangement under which, one or more persons or institutions, called underwriter, or underwriters, agree to take up the whole or a certain portion of the unsubscribed shares or debentures of a company for a certain remuneration called underwriting commission. 42. Underwriters: are those who underwrite the shares and debentures issued by companies. They may be individuals, partnership firms, joint stock companies, banks and specialized institutions. 43. Venture Capital venture capital - Venture Capital is the money and resources made available to startup firms and small businesses with exceptional growth potential. Most venture capital money comes from an organized group of wealthy investors.

e) Overview of the Chapter Scheme: CHAPTER 1 This chapter gives an introduction to the study. It commences with a description of Initial Public Offerings, procedures, bookbuilding, NSE and BSE procedures and obligations. It continues with the benefits and costs of public issues, IPO under pricing and various theories of under pricing.

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CHAPTER 2 The second chapter contains a description of the design of the study. It begins with the statement of the problem and objectives of the study. It then outlines how the study was carried out, the limitations of the study and also gives the definitions of the various terms used throughout this study. CHAPTER 3 This chapter contains a backdrop to the study. It profiles the Indian economy, specifically the financial sector and capital markets. It highlights some key features and developments in the Indian capital market, focusing on the primary as well as the secondary markets. It also contains literature on the two major stock exchanges of India- NSE and BSE. This chapter ends with a profiling of investors and the outlook of the Indian capital markets. CHAPTER 4 Data analysis and interpretation of results of the study undertaken are contained in this chapter. The inferences drawn from the results are explained in this chapter. CHAPTER 5 This chapter summarizes the findings of the study carried out. It also contains recommendations, based on the results and finally the conclusion sums up the objective of the study as well as lists out the various paths of future research in the same field.

PROFILE
The Indian Economy Fourth largest economy (US$ 3 trillion GDP) in terms of Purchasing Power Parity after USA, China and Japan. The fundamentals of the Indian economy have become strong and stable. The macro-economic indicators are at present the best in

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the history of independent India with high growth, foreign exchange reserves, and foreign investment and robust increase in exports and low inflation and interest rates. India is the second fastest growing economy of the world at present. The GDP growth in the first nine months of 2003-2004 has averaged 8.1%. The growth rate in the third quarter September December 2003 reached 10.4% making India the fastest growing major market in the world in that period. India has recorded one of the highest growth rates in the 1990s. The target of the 10th Five Year Plan (2002-07) is 8%. India's services sector growth of 7.9% over the period 1990-2001 is the second highest in the world. The target of the government is 7-8 per cent economic growth in a sustained manner. The foreign exchange reserves have reached a record level of US$ 120 billion in July, 2004. India is the sixth largest foreign exchange holder in the world. This is remarkable considering the fact that the Forex reserves went under US$ one billion in 1991 before the economic reforms started. The comfortable situation of forex reserves has facilitated further relaxation of foreign exchange restrictions and a gradual move towards greater capital account convertibility. According to IMF (2003 report) India's Forex Policies are in line with global best practices. Current account is in surplus for the last two fiscal years, 2002-03 and 2003-04. Given the large foreign exchange reserves, the Government has made premature repayment of US$ 3 billion of 'high-cost' loans to World Bank and Asian Development Bank and is considering further premature payment of other loans. The Government has decided to (i) discontinue receiving aid from other countries except the following five: Japan, UK, Germany, USA, EU, and the Russian Federation and (ii) to make pre-payment

36

of all bilateral debt owed to all the countries except the five mentioned above. Since July 2003, India has become a net creditor to IMF, after having been a borrower in the past. The Indian Consumer Market Large and growing market of 1 billion people of which 300 million are middle class consumers. The domestic demand is expected to double over the ten-year period from 1998 to 2007. The number of households with "high income" is expected to increase by 60% in the next four years to 44 million households. Every month, there is an addition of more than 1.5 million cell phone subscribers. By December 2005, the total number is expected to reach 100 million from 31 million in January 2004. PC sales in 2003-04 are expected to reach 3 million units from 2.3 million in the previous year. Sales of cars in 2003-2004 crossed the one million mark.

The Indian Financial Sector The financial sector is in a process of rapid transformation. Reforms are continuing as part of the overall structural reforms aimed at improving the

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productivity and efficiency of the economy. The role of an integrated financial infrastructure is to stimulate and sustain economic growth. The US$ 28 billion Indian financial sector has grown at around 15 per cent and has displayed stability for the last several years, even when other markets in the Asian region were facing a crisis. This stability was ensured through the resilience that has been built into the system over time. The financial sector has kept pace with the growing needs of corporate and other borrowers. Banks, capital market participants and insurers have developed a wide range of products and services to suit varied customer requirements. The Reserve Bank of India (RBI) has successfully introduced a regime where interest rates are more in line with market forces. Financial institutions have combated the reduction in interest rates and pressure on their margins by constantly innovating and targeting attractive consumer segments. Banks and trade financiers have also played an important role in promoting foreign trade of the country. The Indian banking system has a large geographic and functional coverage. Presently the total asset size of the Indian banking sector is US$ 270 billion while the total deposits amount to US$ 220 billion. The sector is set to witness the emergence of financial supermarkets in the form of universal banks providing a suite of services from retail to corporate banking and industrial lending to investment banking. While corporate banking is clearly the largest segment, personal financial services is the highest growth segment.

The Indian Capital Markets The Indian capital markets have witnessed a transformation over the last decade. India is now placed among the mature markets of the world.

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Capital markets and securities transactions in India are regulated by the Capital Markets division of the Department of Economic Affairs. The Indian Financial system is regulated and supervised by two government agencies under the Ministry of Finance - They are: (a) The Reserve Bank of India [RBI] and (b) The Securities Exchange Board of India [SEBI] All parts of the financial system are interconnected with one another and the jurisdictions of the RBI and the SEBI overlap in many fields. Key progressive initiatives in recent years include: The depository and share dematerialization systems that have Replacing the flexible, but often exploited, forward trading The infotech-driven National Stock Exchange (NSE) with a enhanced the efficiency of the transaction cycle mechanism with rolling settlement, to bring about transparency national presence (for the benefit of investors across locations) and other initiatives to enhance the quality of financial disclosures. Corporatisation of stock exchanges. The Securities and Exchange Board of India (SEBI) has

effectively been functioning as an independent regulator with statutory powers. Indian capital markets have rewarded Foreign Institutional The Mumbai Stock Exchange continues to be the premier Investors (FIIs) with attractive valuations and increasing returns. exchange in the country with an increase in market capitalization from US$ 40 billion in 1990-1991 to US$ 203 billion in 1999-2000. The stock exchange has about 6,000 listed companies and an average daily volume of about a billion dollars. Many new instruments have been introduced in the markets, including index futures, index options, derivatives and options and futures in select stocks. Key features of the Indian Capital markets are:

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Vibrant capital market comprising 23 stock exchanges with over 9000 listed companies. Bombay Stock Exchange is the second largest after NYSE. Stock market trading and settlement system are of world class. Indian stock market considered as having one of the greatest long-term potential in the world. Sound banking system with a network of 70,000 branches, among the largest in the world. Bank deposit is roughly half of GDP among the highest in the world. Non-Performing Liabilities are just 2.3% of assets. According to Credit Lyonnais (CLSA), India is the stock market with the greatest short-term and long-term potential in Asia. Market capitalization of stocks traded on the Indian bourses touched an all-time high of US$ 292 billion in April 2004. The number of companies with a market capitalization of over US$1 billion is 48. Of these, 24 companies have reached market caps of US$ 2 billion in 2003. The $ 2.4 billion offer for 10 per cent of ONGCs shares was sold out in the first 30 minutes in the first week of March 2004. FIIs accounted for 87 per cent of the bids. India is the best performing market among major countries since the current boom started in May 2003. According to a CLSA study of 2003, a basket of 16 of India's large capitalization companies gives a 30 per cent average return on equity compared with 17 per cent for a group of 17 large listed companies in China. BSE Sensex increased by 70% from January to December 2003 and it is widely expected to repeat this performance in 2004. India has the third largest investor base in the world. India's stock market trading and settlement systems are world class. India has one of the world's lowest transaction costs based on screen-based transactions, paperless trading and a T+2 settlements cycle.

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There are 70,000 bank branches in India - among the highest in the world. According to the September 2003 report of Institutional Investor magazine "The Indian banking system is healthy, meeting Basel norms for capital adequacy " There are 186 branches of foreign banks operating in India

The Indian New Issues Market In 2003, the number of IPOs, seasoned offers and offers for sale were only 13. In 2004 they totaled to 26. In 2005, already 15 public issues have been made in the first half of the year. This sudden surge in the new issue market shows the interest that investors, both retail and institutional, are showing in this profitable investment avenue. A rebound in primary market issues, particularly in initial public offerings (IPOs) of equities, was the most significant development in the securities markets of 2004. Household investor participation increased, based on stock market index returns of 72 per cent in 2003 followed by 11 per cent in 2004, and growing confidence in the transparency and robustness of the market design which was put in place over the 1993-2001 period. The number of accounts at NSDL, a proxy for the number of participants in the market, which had nearly stagnated in 2002 at 3.8 million, grew by 21 per cent and 29 per cent in the two subsequent years, to reach roughly 6 million as of end-2004. On average, in 2004, 5,400 new accounts were opened per weekday. Gross turnover on NSE and BSE, putting together spot and derivatives, rose to Rs.86,28,645 crore in 2004, of which Rs.5,47,449 or 5.8 per cent was made up by Foreign Institutional Investors (FIIs).

The Primary Market- IPO Market

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The volume of public issues rose by roughly five times to a level of Rs.35,859 crore in 2004 (Table 3.1). Beyond this, a considerable volume of issuance also takes place through private placements. The bulk of this was made up of equity issuance, which amounted to Rs.33,475 crore in 2004. This was the highest-ever level of public equity issuance in Indias history, over two times higher than the previous peak of 1995. The public debt market continued to languish at low levels, and the bulk of primary issuance of debt securities took place through private placement. Table 3.1: Table Showing Primary Market Summary Calendar Year (Rs. Crore) 2001 Debt Equity Of which, IPOs Number of IPOs Mean IPO size Total Source: SEBI 4,916 726 525 17 31 5,643 2002 3,451 2,373 1,981 6 330 2003 3,790 2,892 1,940 13 149 2004 2,383 33,475 22,611 26 870

5,825

6,682

35,859

The growing sophistication of the market was visible in a slew of very large issues. The mean IPO size rose from Rs.31 crore in 2001 to Rs.870 crore in 2004. The success of these large issues has dispelled earlier doubts about the feasibility of billion-dollar offerings in the Indian market. A major development in the Indian primary market has been the introduction of screen based bookbuilding, where securities are auctioned through an anonymous screen based system, and the price at which securities are sold is

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discovered on the screen.

This eliminates the delays, risks and

implementation difficulties associated with traditional procedures. Despite considerable skepticism about the extent to which computers could replace the services of highly skilled investment bankers, it is reported that resource mobilisation through bookbuilding rose steadily from 25 per cent of public equity offerings in 2001 to 53 per cent in 2002, 64 per cent in 2003 and 99 per cent in 2004. In this process, the primary market has matched the secondary market in terms of using technology to achieve an impersonal system of price discovery with widespread retail participation that spans the country. The Indian Secondary Market- Stock Markets One international ranking in the area of finance, where India figures, is the size of securities exchanges, as measured by the number of transactions. While the average value of transaction in India is small by world standards, India has a very large number of transactions, which are required to be implemented by commensurately large and yet low-cost IT systems. In 2002, NSE displaced Shanghai to take 3rd place, and BSE moved up from 8th rank in 2001 to 5th rank in 2003. NSE and BSE were stable at rank 3 and 5 respectively in 2003 and 2004. BSE: The Stock Exchange, Mumbai, popularly known as "BSE" was established in 1875 as "The Native Share and Stock Brokers Association". It is the oldest one in Asia, even older than the Tokyo Stock Exchange, which was established in 1878. It is a voluntary non-profit making Association of Persons (AOP) and is currently engaged in the process of converting itself into demutualised and corporate entity. It has evolved over the years into its present status as the premier Stock Exchange in the country. It is the first Stock Exchange in the Country to have obtained permanent recognition in 1956 from the Government of India under the SCRA - Securities Contracts (Regulation)Act,1956. BSE's On Line Trading System, popularly known as the BOLT system took its genesis in the year 1994, as part of the four phase computerization program to create an automated trading environment. BOLT system aimed at

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converting the Open Outcry system of trading to a screen-based trading system. NSE: The National Stock Exchange of India Limited has genesis in the report of the High Powered Study Group on Establishment of New Stock Exchanges, which recommended promotion of a National Stock Exchange by financial institutions (FIs) to provide access to investors from all across the country on an equal footing. Based on the recommendations, NSE was promoted by leading Financial Institutions at the behest of the Government of India and was incorporated in November 1992 as a tax-paying company unlike other stock exchanges in the country. NSE's IT set-up is the largest by any company in India. It uses satellite communication technology to energize participation from around 400 cities spread all over the country. With upgradation of trading hardware, NSE can handle up to 1 million trades per day. NSE has also put in place NIBIS (NSE's Internet Based Information System) for on-line real-time dissemination of trading information over the internet. NEAT is a state-of-the-art client server based application. At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. NSE is one of the largest interactive VSAT based stock exchanges in the world. Today it supports more than 3000 VSATs and is expected to grow to more than 4000 VSATs in the next year. Currently more than 9000 users are trading on the real time-online NSE application. While index returns were strong in the recent period, the rise in market value was roughly proportional to the rise in corporate earnings, giving a stable price to earnings (P/E) ratio. The Nifty index, which shows the biggest 50 liquid stocks in the country, experienced a sharp growth in market capitalization from Rs.2,85,007 crore in 2001 to Rs.9,02,831 crore in 2004. Strong returns of 71.9 per cent in 2003 were followed by modest returns of 10.7 per cent in 2004. Index volatility in 2004 was elevated to 2001 levels, reflecting the flow of news in these two years. Table 3.2: Equity Returns, Volatility, Market Capitalization and Price Earnings (P/E) Ratio

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2001 BSE Sensex: Returns (per cent) End-year market capitalization Daily Volatility End-year P/E Nifty : Returns (per cent) End-year market capitalization Daily Volatility End-year P/E Source: SEBI -16.2 2,85,007 1.62 15.35 -17.9 2,46,230 1.71 15.57

2002

2003

2004

3.5 2,76,916 1.10 14.64

72.9 6,35,015 1.17 18.86

13.1 7,35,528 1.59 17.07

3.3 3,52,943 1.07 14.83

71.9 6,34,248 1.23 20.73

10.7 9,02,831 1.73 15.32

Investors There is growing evidence about increasing participation in the securities markets. The number of accounts at NSDL (National Securities Depositories Ltd.) which is the best measure of the number of participants in the market, had stagnated in 2001 and 2002 at roughly 3.7 to 3.8 million. This grew by 21 per cent and then 29 per cent in the following two years, to reach roughly 6 million as of end-2004. The evidence for 2004 corresponds to 5,400 new depository accounts being opened per weekday. The average trade size on the NSE and BSE spot markets in 2004 was Rs.27,715 and Rs.23,984 respectively. This highlights the domination of

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individual investors in price discovery. The average trade size at the NSE derivatives segment rose significantly from 2001 to 2004. The domination of individual investors in the derivatives market is even more complete than that found on the spot market. Institutional investors (including most domestic and foreign) account for roughly 10.8 per cent of spot market turnover, and just 3.3 per cent of derivatives turnover. Since price discovery primarily takes place on the derivatives market, this suggests that individual investors and not institutional investors dominate price discovery. Outlook SEBI has embarked upon new efforts on the primary market, in response to the difficulties seen with the bunching of public issues in 2004. The equity market now has fairly well functioning components on the entire food chain, comprising pre-IPO (venture funds, private equity funds), the IPO market (electronic auctions), secondary market (nationwide electronic trading), market participants (households, mutual funds, insurance companies, FIIs), the market for corporate control (M&A market), and the indexation industry (stock market indexes, index funds, index derivatives). All aspects of this ecosystem come together in delivering the observed liquidity and market efficiency.

DATA ANALYSIS & INTERPRETATION

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Indoco Remedies Ltd. TABLE 4.1 MAARi1 0.508928 Correlation -0.35863 Coefficient of Determination 0.128614 INFERENCE: The Market Adjusted Abnormal Returns show a decreasing trend from 50% on the first day of trading after listing to nearly 40% on the 5th day of trading and a further fall to about 29% on the 21 st. day of trading. This shows that the IPO was significantly under priced in the short run. The negative correlation suggests that the market has no bearing on the IPO price trend. The co-efficient of determination shows that only 12.86% of IPO returns were due to market forces. Bharati Shipyard Ltd. TABLE 4.2 MAARi1 1.158327 Correlation 0.972881 Coefficient of Determination 0.946498 INFERENCE: The Market Adjusted Abnormal Return was the highest on the first day of trading. The high degree of correlation suggests that price volatility of the IPO is greatly dependant on the index. The MAAR suggests that the IPO was under priced in the short run. However this could also be attributed to a possible bull run in the index. Almost 95% of the returns on the IPO are determined by the market as reflected by the high co-efficient of correlation. MAARi5 0.874901 MAARi21 1.024799704 MAARi5 0.396261 MAARi21 0.28771462

Deccan Chronicle Holdings Ltd

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TABLE 4.3 MAARi1 0.037416 Correlation 0.766123 Coefficient of Determination 0.586944 INFERENCE: The Market Adjusted Abnormal Returns are not very significant for this IPO on the first day and there are in fact no abnormal returns on the 5th. And 21st. trading days, suggesting that the IPO was not really under priced in the short run. The moderately high degree of correlation between the stock and the market only asserts that price of this stock is significantly influenced by the market and not as much by the pricing strategy of the company. S.A.L. Steel Ltd. TABLE 4.4 MAARi1 0.371638 Correlation 0.029092 Coefficient of Determination 0.000846 INFERENCE: The MAAR shows that while there is some amount of under pricing in the IPO, the low degree of correlation means that the IPO price performance is vastly uninfluenced by the market. The insignificant value of the co-efficient of determination shows that returns on the IPO stock are not influenced by market factors. Hence the initial positive returns on the IPO could be due to any of the reasons for under pricing, explained previously. MAARi5 0.236512 MAARi21 0.290486562 MAARi5 -0.06116 MAARi21 -0.147137459

National Thermal Power Corporation Limited

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TABLE 4.5 MAARi1 0.204904 Correlation 0.9813 Coefficient of Determination 0.962949 INFERENCE: The Market Adjusted Abnormal Returns for all three days tend to be within a close range. The high degree of correlation means that price movements of the IPO are influenced almost completely by the market movements and that the return on this IPO is determined to the extent of 96% by market forces. Hence, whatever the initial abnormal returns achieved, they may be an outcome, not of under pricing but of other factors. IndiaBulls Financial Services Ltd TABLE 4.6 MAARi1 0.190274 Correlation 0.590618 Coefficient of Determination 0.34883 INFERENCE: The moderate degree of correlation may be used to explain a part of the abnormal returns. The co-efficient of determination, though not very high, still influences the returns. However it can be said that, based on the increasing MAAR, the IPO was significantly under priced in the short run. Tata Consultancy Services Ltd. TABLE 4.7 MAARi1 0.140724 MAARi5 0.134845 MAARi21 0.112531287 MAARi5 0.271274 MAARi21 0.616561444 MAARi5 0.188569 MAARi21 0.21404305

Correlation 0.999988

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Coefficient of Determination 0.999975 INFERENCE: This IPO shows a perfect positive correlation, thereby suggesting that price volatility of the IPO is completely influenced by the market and the returns are also almost entirely due to the market and not individual stock performance. The initial MAAR may therefore be due to reasons other than under pricing. New Delhi Television Ltd. TABLE 4.8 MAARi1 0.448552 Correlation 0.319039 Coefficient of Determination 0.101786 INFERENCE: The Market Adjusted Abnormal Returns show that the IPO is under priced. There are significant initial positive returns with a declining trend. Since the correlation is low, we can infer that price performance of the IPO is not greatly influenced by the market and also only about 10% of the returns on the IPO are because of the market. Datamatics Technologies Ltd. TABLE 4.9 MAARi1 0.44536 Correlation 0.262958 Coefficient of Determination 0.069147 INFERENCE: The IPO is significantly under priced in the short run as seen by the enormous abnormal returns. The low degree of correlation further substantiates that even a rise in markets itself could not have influenced the IPOs price performance. The low co-efficient of determination shows that the market has insignificant influence on the returns in the short run. MAARi5 0.695225 MAARi21 0.484203738 MAARi5 0.319296 MAARi21 0.312139026

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Dishman Pharmaceuticals & Chemicals Ltd. TABLE 4.10 MAARi1 1.669369 Correlation -0.43974 Coefficient of Determination 0.193375 INFERENCE: This IPO has extremely high abnormal returns coupled with a negative correlation, thereby showing that there is substantial under pricing. The returns on the IPO also are determined only to the extent of 19% by the market. Biocon Ltd. TABLE 4.11 MAARi1 0.83771 Correlation 0.72636 Coefficient of Determination 0.527599 INFERENCE: While the MAAR is extremely positive and is showing an increasing trend, the correlation between the stock and the market is also significantly high. However the co-efficient of differentiation being only about 53% suggests that to a large extent, returns were influence by factors other that the market. Hence the IPO was under priced in the short run. Petronet LNG Ltd. TABLE 4.12 MAARi1 -0.03739 Correlation 0.43209 Coefficient of Determination 0.186702 MAARi5 0.076861 MAARi21 0.48971601 MAARi5 1.034112 MAARi21 0.868056405 MAARi5 1.788368 MAARi21 2.091053779

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INFERENCE: The moderate correlation and low co-efficient of determination prove that the market does not exercise too much influence on this stock. The Market Adjusted Abnormal Returns are in fact negative in the beginning. This means that the stock is not under priced. However, on the 21 st trading day, the MAAR is substantially high, suggesting that there may have been late investor reaction or a favourable turn in the market. Power Trading Corporation of India Ltd. TABLE 4.13 MAARi1 1.614515 Correlation -0.63904 Coefficient of Determination 0.408375 INFERENCE: The negative correlation means that the market has no influence or the reverse influence on the price of the stock or IPO. However, MAAR are phenomenal. This means that these returns are not boosted by the market. Only about 41% of returns are generated because of the market. Hence we can conclude that significant under pricing of the IPO was done. Patni Computer Systems Ltd. TABLE 4.14 MAARi1 0.093849 Correlation 0.580694 Coefficient of Determination 0.337205 INFERENCE: The abnormal returns range from around 9% on the first trading day to 4% in the remaining short run period. These returns are not significantly high. Correlation of about 58% suggests that the market affects the stock price in a significant manner. Here, it is difficult to assess if the IPO was under priced. The decreasing trend in MAAR also suggests that investors felt that there was not much under pricing. MAARi5 0.042864 MAARi21 0.043286713 MAARi5 2.034489 MAARi21 2.352614237

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CATEGORIZATION OF COMPANIES ON THE BASIS OF CORRELATION I. Companies with r > 70% Bharati Shipyard Ltd. Deccan Chronicle Holdings Ltd National Thermal Power Corporation Limited Tata Consultancy Services Ltd. Biocon Ltd. II. Companies with 70% > r > 40% IndiaBulls Financial Services Ltd Petronet LNG Ltd. Patni Computer Systems Ltd. III. Companies with r < 40% Indoco Remedies Ltd. S.A.L. Steel Ltd. New Delhi Television Ltd. book building process Datamatics Technologies Ltd. Dishman Pharmaceuticals & Chemicals Ltd. Power Trading Corporation of India Ltd.

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CHART1 The following is a diagrammatic representation of the percentage of IPOs in each category of correlation.

0 to -1 21% 0.7 to 1 37%

0 to 0.4 21%

0.4 to 0.7 21%

Among all the IPOs of 2004 and early 2005, it can be seen that 21% have negative correlation between stock returns and market return 21% have low correlation between stock returns and market return 21% have moderately positive correlation between stock returns and market return and 37% have high correlation between stock returns and market return

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CHART 2 The following is a graphical representation of the comparative correlations of IPOs.

BAR DIAGRAM
1.2

1 0.8

0.6 0.4 Correlation 'r'

0.2

0 1 -0.2 2 3 4 5 6 7 8 9 10 11 12 13 14

-0.4 -0.6

-0.8 IPO's

The median correlation calculated is 0.506392 The average or mean correlation calculated is 0.373123 This means that on an average Indian IPOs over the past one year have generally shown low correlation with the market, thereby suggesting that much of the pricing is due to the companies IPO pricing strategies or other extraneous factors, not being market related. The next step is to examine whether the IPOs showing low correlation have pursued book building route.

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Any abnormal returns earned by such companies in the short run are not due to market buoyancy as there is low correlation between market return and IPO return for these companies. The purpose of this exercise is to find out if the companies have pursued book building route and if the offer price matches the price quoted by qualified institutional buyers or not. TABLE 4.15: Companies following Book Building Route Company Name Indoco Remedies Ltd Book Building Route 100% book building process 100% book building process 100% book building process 100% book building process 100% book building process 100% book building process QIB price band Rs220-245 Issue Price

245.00

S.A.L. Steel Ltd.

Rs12-Rs14

14.00

New Delhi Television Ltd Datamatics Technologies Ltd. Dishman Pharmaceuticals & Chemicals Ltd. Power Trading Corporation of India Ltd.

Rs63 to Rs70

70.00

Rs110

110.00

Rs 155-175

175.00

Rs 16

16.00

INFERENCE: The firms showing low correlation have all followed book building route for price discovery of the IPOs. All the companies have an issue price at the higher end of the price band. Hence, no inference can be made as to whether these IPOs were over priced or under priced, based on the price range quoted by Q.I.B.s. However it can be said that despite having

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a price at the higher end of the price band, most IPOs still seemed to be underpriced.

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EVIDENCE OF UNDER PRICING IN SEASONED OFFERINGS The EPS and P\E ratio are used to calculate market price, using the formula: Market Price = EPS X P\E The resultant market price is then compared to the issue price on the BSE. If the issue price is greater than the calculated market price, there is over pricing. If the issue price is lower than the calculated price, there is under pricing. If the issue price is equal to the calculated price, then there is fair pricing of the issue. TABLE 4.16: Table showing EPS, P\E, Market Price and Issue Price of Seasoned Offerings made in 2004 & 2005 COMPANY NAME EPS P\E MP ISSUE PRICE ICICI Bank Ltd Rs.28.6 10.5 Rs. 300.30 Rs. 280

Allahabad Bank Oriental Bank of Commerce Punjab National Bank

Rs.13.8

6.7

Rs.92.46

Rs.82

Rs.8.1

35.8

Rs.289.98

Rs. 250

Rs.44.84

7.72

Rs.346.17

Rs.390

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INFERENCE: ICICI Bank Ltd The market price as calculated is greater than the issue price. Therefore, this issue has been under priced. Allahabad Bank

The market price as calculated is greater than the issue price. Therefore, this issue has been under priced. Oriental Bank of Commerce

The market price as calculated is greater than the issue price. Therefore, this issue has been under priced. Punjab National Bank

The market price as calculated is greater than the issue price. Therefore, this issue has been under priced. GREENSHOE OPTION AS A PRICE STABILIZER Companies with greenshoe option and their post-listing price volatility Deccan Chronicle Holdings Ltd - 14.1468 Tata Consultancy Services Ltd. - 18.6886 Dishman Pharmaceuticals & Chemicals Ltd. - 17.80148 Patni Computer Systems Ltd. - 15.11377 New Delhi Television Ltd. - 5.864284 Companies without greenshoe option and post-listing price volatility Indoco Remedies Ltd. - 15.82485 IndiaBulls Financial Services Ltd - 23.163837 Datamatics Technologies Ltd. - 8.874023 Biocon Ltd. - 40.20733 Petronet LNG Ltd. - 23.99213

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Bharati Shipyard Ltd - 17.1156464 S.A.L. Steel Ltd. - 0.756742 National Thermal Power Corporation Limited - 2.372989 Power Trading Corporation of India Ltd. - 3.97089 INFERENCE: From the above, it can be seen that the volatility in post-listing prices of companies with greenshoe option have a narrow range. For companies without greenshoe option, the volatility is having a wide range. So it can be inferred that in general the greenshoe option though doesnt completely prevent price volatility, limits it. Hence it can be said that greenshoe option does act as a price stabilizer.

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SUMMARY OF FINDINGS
The empirical evidence supports the view that under pricing exists in the Indian IPO market of 2004. Out of the 14 IPOs analyzed, 9 show definite signs of under pricing while 2 do not reflect clearly as to whether the abnormal returns are due to under pricing or not. Indoco Remedies Ltd.

Market Adjusted Abnormal Returns show a decreasing trend, there is negative correlation and the IPO is significantly under priced in the short run. Bharati Shipyard Ltd. The abnormal returns dip on the 5th day but resurge again by the 21st day. The IPO is found to have short run under pricing. Deccan Chronicle Holdings Ltd The results show that there is not much evidence of under pricing for this IPO S.A.L. Steel Ltd. The Market Adjusted Abnormal Returns coupled with a low co-efficient of determination point towards under pricing of this IPO. National Thermal Power Corporation Limited The high degree of correlation for this IPO makes it difficult to understand whether the significant amount of abnormal returns are due to market movements or due to under pricing itself. IndiaBulls Financial Services Ltd For this IPO, it was found that the moderate degree of correlation coupled with high abnormal returns points to the existence of under pricing. Tata Consultancy Services Ltd. None of the tests point towards the existence of any under pricing.

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New Delhi Television Ltd.

There is a decreasing trend in the initial returns and the low correlation shows that this IPO is significantly under priced. Datamatics Technologies Ltd.

The high abnormal returns along with a low correlation suggest heavy under pricing of this IPO. Dishman Pharmaceuticals & Chemicals Ltd. This IPO shows clear signs of under pricing with high abnormal returns a low correlation to substantiate the findings. Biocon Ltd. The co-efficient of determination suggests that whatever abnormal gains have accrued from this IPO, could be due to some amount of under pricing. Petronet LNG Ltd. This IPO shows that the late investor reaction may have caused the surge in the short run returns. Power Trading Corporation of India Ltd. The results conclude that there is significant under pricing of this IPO. The low co-efficient of determination paired with phenomenal abnormal returns prove that this is a classic case of under pricing. Patni Computer Systems Ltd. The results do not reflect any under pricing phenomenon on this IPO. The mean correlation between all IPO returns and market returns is 0.373123. This low correlation means that the abnormal returns on all IPOs in general are due to under pricing and not because of market returns. In the study undertaken it was found that all seasoned offerings were under priced. Though there is a variation in the extent of under pricing among the various public issues, there is a clear evidence of the existence of under pricing.

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The greenshoe options act as a price stabilizing mechanism but do not prevent the underpricing phenomenon. Thus we can safely summarize that under pricing phenomenon is prevalent in the Indian IPO market.

RECOMMENDATIONS
Under pricing can be favourable as well as unfavourable. Based on the results, the following recommendations can be made. The resulting winners curse experienced by uninformed investors has to be countered by deliberate underpricing. As such, in most cases substantial under pricing of IPOs cannot be avoided. Thus it is recommended to SEBI that some form of price stabilization mechanism (other than provision of greenshoe option) should be developed so as to prevent any manipulated inflated stock prices in the long run by companies or traders for their personal benefits. The precise details of the institutional framework potentially have a bearing on the efficiency of the capital-raising process. For instance, regulatory constraints imposed on the bank conducting the deal concerning the pricing or allocation of IPO shares can influence the extent of underpricing, as can the way pricing-relevant information is gathered, aggregated, and paid for. There can be manipulation on the part of the issuing company with regard to choice of merchant bankers and institutional investors who are invited for the road show. Hence it is recommended that some form of regulation should be laid down by SEBI with regard to the process of selecting bidders. The potential for using auction mechanisms to price and allocate IPOs rather than using only book building should be considered. A discriminatory-price auction system that prices IPOs based on investors bids, and investors paying what they bid, should also be considered as a means to reduce under pricing and thereby reduce

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fantastic short run abnormal returns and possibly a comparative under performance in the long run. Because the underwriting fees increase in gross proceeds, underwriters have a natural incentive to raise the offer price. Following a bookbuilding exercise, they could, for instance, overstate investor interest and price the IPO aggressively. This may increase the uninformed investors winners curse. Hence, companies using the bookbuilding route for price discovery must incorporate some form of price support mechanism putting a floor under early after-market prices and thus act as insurance against price falls. Going public is, in many cases, a step towards the eventual separation of ownership and control. Where the separation of ownership and control is incomplete, an agency problem between non-managing and managing shareholders can arise. It is therefore recommended that under pricing should be used as a tool to minimize agency costs. Agency costs are ultimately borne by the owners of a company, in the form of lower IPO proceeds and a lower subsequent market value for their shares. To the extent that managers are part-owners, they bear at least some of the costs of their own non-profit-maximizing behavior. Under pricing may be used as a tool to retain control. The non-valuemaximizing behavior of managers would receive unwelcome scrutiny but small outside stakes reduce external monitoring. Small outside stakes are possible only through retail investors. Hence, it is recommended to any regulatory authority or monitoring agency to use the existence of under pricing as a basis for examining the motives of the management.

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CONCLUSION
We can infer from the above undertaken study that short run under pricing which is an empirically proven phenomenon in developed markets is also prevalent in Indian markets as well. Based on the results of this study, it can be concluded that suggesting that firms leave considerable amounts of money on the table by way of under pricing their shares. Underpricing has tended to fluctuate a great deal. From this study it is evident that the extent of under pricing fluctuates a great deal from IPO to IPO. The scope of future research on this topic is vast. As this study has focused on only empirically establishing the existence of short run under pricing in India, future studies can elaborate on the extent of under pricing and possibly cover a longer time frame. The various theories put forth can be examined to see if any of them are true to Indian markets. A behavioral orientation towards the reasons for short run under pricing is an avenue of future studies in this area of finance. Other behavioral approaches to explain why the extent of underpricing varies so much and developing new methods to price IPOs so as to reduce the under pricing phenomenon can be other avenues of future research as well. The study carried out offers a basis for others to carry out extensive research in this field and also provides material evidence various parties who might gain or lose from such under pricing trends in Indian IPOs.

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