Professional Documents
Culture Documents
PREFACE
This report is on initial public offering (IPO). The formation of organisation and
the various types of organisation are discussed.
Capital is essential for running business. Different methods of raising capital are
elaborated here.
Then we have concentrated on explaining about the methods in IPO.
We have also explained why IPO is essential for an organisation. The benefits
and drawbacks of IPO are explained so that the organisation going for IPO are
aware of the consequences.
This helps the organisation to establish in a better position by taking the suitable
decision.
The different types of markets are studied to have a deeper understanding of
market situations.
The difference between primary and secondary market is known.
The knowledge about the methodology of IPO helps us to understand the
pricing methods in IPO.
Studying Institutions involved in IPO makes us aware of the specific institutions
which were helping organisation in going for IPO.
The role of institutions in IPO is studied in depth.
Advantages and disadvantages of going public are discussed in this topic. This
educates the organisations to do their business in deciding the efficient method
which enables them to earn maximum profit for the given constraints.
ACKNOWLEDGEMENT
We thank our Dean Mr. Krishnan for extending the full support in initiating
this project helping us through out the project.
We are indebted to thank Mr.Sudhir Kumar, our Mentor, for making
corrections and clarifications in the course of our project and also for directing
us towards the right path throughout the project.
We thank IIPM for providing the adequate infrastructure and helping us to get
the adequate information from the corporate.
We thank the people who helped to design the project report.
We acknowledge the contributions of the corporate as they provided the
valuable information.
Table of Contents
EXECUTIVE SUMMARY.......................................................................5
AIM OF THE STUDY...........................................................................6
ORGANISATION.................................................................................7
FORMS OF ORGANISATION................................................................8
FUND RAISING METHODS..................................................................9
WHAT IS IPO?.................................................................................10
WHY IPO? ......................................................................................12
WHO SHOULD ADOPT THIS ROUTE?..................................................13
FINANCIAL MARKETS ......................................................................18
PRIMARY VS SECONDARY MARKET ..................................................21
IPO METHODOLOGY.........................................................................24
DIFFERENT INSTITUTIONS INVOLVED ...............................................27
ROLE OF INSTITUTIONS ..................................................................33
ADVANTAGES& DISADVANTAGES OF GOING PUBLIC .........................36
SUCCESSFUL IPO COMPANIES .........................................................41
FAILURE IPO COMPANIES ................................................................45
CONCLUSION..................................................................................50
BIBLIOGRAPHY................................................................................51
EXECUTIVE SUMMARY
Organisations pursue collective goals. There are different types of
organisations.
Business organizations have four basic internal functions which they must
manage and control.
There are various fund raising methods.
Initial public offering (IPO), also referred to simply as a "public offering".
There are different methods of going public and there is risk involved in
investing in IPO.
Any company which wishes to become public limited can adopt the route.
A financial market is a mechanism that allows people to easily buy and sell
financial securities commodities.
The primary is that part of the capital markets that deals with the issuance of
new securities.
The secondary market is the financial market for trading of securities that have
already been issued in an initial private or public offering.
Financial institutions provide a service as intermediaries of the capital and debt
markets.
There are number of successful and failure companies in IPO.
ORGANISATION
DEFINITION
An organization is a social arrangement which pursues collective goals, which
controls its own performance, and which has a boundary separating it from its
environment.
Groups of people work together in organizations to make a product or provide a
service. Organizations vary greatly in size from local businesses employing a
small number of people to large multinational corporations that operate
globally.
Types of organization or companies:
Statutory companies
Registered companies
Private company
Public company
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Holding companies
Subsidiary companies
Government companies
Non-government companies
Utility companies: These are the companies which works in order to meet
services and support we need in our everyday lives. They are financed through
national and local taxes.
Retail outlets: Retail outlets are the places we use to buy goods. They
Production
Large corporations could not have grown to their present size without
is the first sale of stock by a private company to the public. IPOs are often
issued by smaller, younger companies seeking capital to expand, but can also be
done by large privately-owned companies looking to become publicly traded
stock to raise capital. Buyers of these shares have special status in the event the
underlying company encounters financial trouble. If profits are limited,
preferred-stock owners will be paid their dividends after bondholders receive
their guaranteed interest payments but before any common stock dividends are
paid.
WHAT IS IPO
Initial public offering (IPO), also referred to simply as a "public offering," is
the first sale of stock by a private company to the public. IPOs are often issued
by smaller, younger companies seeking capital to expand, but can also be done
by large privately-owned companies looking to become publicly traded.
In an IPO, the issuer may obtain the assistance of an underwriting firm, which
helps it determine what type of security to issue (common or preferred), best
offering price and time to bring it to market.
IPOs can be a risky investment. For the individual investor, it is tough to predict
what the stock will do on its initial day of trading and in the near future since
there is often little historical data with which to analyze the company. Also,
most IPOs are of companies going through a transitory growth period, and they
are therefore subject to additional uncertainty regarding their future value.
An IPO stands for Initial Public Offering. Basically, an initial public offering
occurs when a company that was previously privately owned decides to sell
shares of stock in order to raise money. The company generally finds an
investment bank to help them carry out the procedure. Generally, the company
seeking an IPO is smaller and younger and needs capital, but large privately
held firms have also been known to do this.
INVESTING IN AN IPO?
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IPOs are inherently very risky business. As a result, there is potential for huge
gains and huge losses. Since the company is starting to be listed on an
exchange, there is no historical market data for it and very little to research. On
the first day, the stock could gain hundreds of percentage points or lose
hundreds of percentage points.
Initial Public Offerings (IPOs) are the first time a company sells its stock to the
public. Sometimes IPOs are associated with huge first-day gains; other times,
when the market is cold, they flop. It's often difficult for an individual investor
to realize the huge gains, since in most cases only institutional investors have
access to the stock at the offering price. By the time the general public can trade
the stock, most of its first-day gains have already been made. However, a savvy
and informed investor should still watch the IPO market, because this is the first
opportunity to buy these stocks.
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WHY IPO?
When a privately held corporation needs to raise additional capital, it
can either take on debt or sell partial ownership. If the corporation chooses to
sell ownership to the public, it engages in an IPO. Corporations choose to "go
public" instead of issuing debt securities for several reasons. The most common
reason is that capital raised through an IPO does not have to be repaid, whereas
debt securities such as bonds must be repaid with interest. Despite this apparent
benefit, there are also many drawbacks to an IPO. A large drawback to going
public is that the current owners of the privately held corporation lose a part of
their ownership. Corporations weigh the costs and benefits of an IPO carefully
before performing an IPO.
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IPO METHODS
GOING PUBLIC
If a corporation decides that it is going to perform an IPO, it will first
hire an investment bank to facilitate the sale of its shares to the public. This
process is commonly called "underwriting"; the bank's role as the underwriter
varies according to the method of underwriting agreed upon, but its primary
function remains the same.
In accordance with the Securities Act of 1933, the corporation will file a
registration statement with the SEBI. The registration statement must fully
disclose all material information to the SEBI, including a description of the
corporation, detailed financial statements, biographical information on insiders,
and the number of shares owned by each insider. After filing, the corporation
must wait for the SEBI to investigate the registration statement and approve of
the full disclosure.
During this period while the SEBI investigates the corporation's filings,
the underwriter will try to increase demand for the corporation's stock. Many
investment banks will print "tombstone" advertisements that offer "bare-bones"
information to prospective investors. The underwriter will also issue a
preliminary prospectus, or "red herring", to potential investors. These red
herrings include much of the information contained in the registration
statement, but are incomplete and subject to change. An official summary of the
corporation, or prospectus, must be issued either before or along with the actual
stock offering.
After the SEBI approves of the corporation's full disclosure, the
corporation and the underwriter decide on the price and date of the IPO; the IPO
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FIRM COMMITEMENT
A lending institution's promise to enter into a loan agreement with a specific
entity within a certain period of time is called firm commitment.
An underwriter's agreement to assume all inventory risk and purchase all
securities directly from the issuer for sale to the public at the price specified.
BEST EFFORT
An agreement an underwriter makes to act as an agent between an issuing
company and investors.
In a best efforts agreement, the underwriter agrees to use all efforts to sell as
much of an issue as possible to the public. The underwriter can purchase only
the amount required to fulfill its client's demand or the entire issue. However, if
the underwriter is unable to sell all securities, it is not responsible for any
unsold inventory.
Best effort agreements are used mainly for securities with higher risk, such as
unseasoned offerings.
BOUGHT DEAL
A bought deal occurs when an underwriter, such as an investment bank or a
syndicate, purchases securities from an issuer before selling them to the public.
The investment bank (or underwriter) acts as principal rather than agent and
thus actually "goes long" in the security. The bank negotiates a price with the
issuer (usually at a discount to the current market price, if applicable).
The advantage of the bought deal from the issuer's perspective is that they do
not have to worry about financing risk (the risk that the financing can only be
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done at a discount too steep to market price.) This is in contrast to a fullymarketed offering, where the underwriters have to "market" the offering to
prospective buyers, only after which the price is set.
The advantages of the bought deal from the underwriter's perspective include:
Bought deals are usually priced at a larger discount to market than fully
marketed deals, and thus may be easier to sell; and
The issuer/client may only be willing to do a deal if it is bought (as it eliminates
execution or market risk.)
The disadvantage of the bought deal from the underwriter's perspective is that if
it cannot sell the securities, it must hold them. This is usually the result of the
market price falling below the issue price, which means the underwriter loses
money. The underwriter also uses up its capital, which would probably
otherwise be put to better use (given sell-side investment banks are not usually
in the business of buying new issues of securities.)
SELF DISTRIBUTION OF STOCK
Self distribution of stock is a type of IPO, or initial public offering. In this
offering, the company selling stocks will offer its shares directly to the public
and cut out the need for an underwriter. These types of IPOs save the company
money because it doesn't have to sell stock at a discounted price to the
underwriters. This can be a difficult way to purchase shares in IPOs.
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FINANCIAL MARKET
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DEFINITION
Financial markets means:
1. Organizations that facilitate the trade in financial products. I.e. Stock
exchanges facilitate the trade in stocks, bonds and warrants.
2. The coming together of buyers and sellers to trade financial products. I.e.
stocks and shares are traded between buyers and sellers in a number of ways
including: the use of stock exchanges; directly between buyers and sellers etc.
PRIMARY MARKET
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The primary is that part of the capital markets that deals with the issuance of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done
through a syndicate of securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock issue, this sale is an
initial public offering (IPO). Dealers earn a commission that is built into the
price of the security offering, though it can be found in the prospectus. Features
Of Primary Market are:1. This is the market for new long term capital. The primary market is the
market where the securities are sold for the first time. Therefore it is also called
New Issue Market (NIM).
2. In a primary issue, the securities are issued by the company directly to
investors.
3. The company receives the money and issue new security certificates to the
investors.
4. Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
5. The primary market performs the crucial function of facilitating capital
formation in the economy.
6. The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new
issue market may be raising capital for converting private capital into public
capital; this is known as going public.
Methods of issuing securities in the Primary Market
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Major secondary investment firms include: Alp Invest Partners, Coller Capital,
HarbourVest Partners, Landmark Partners, Lexington Partners and Paul Capital
Partners as well as smaller firms including Adams Street Partners, Newbury
Partners, Pantheon Ventures, Partners Group, Pomona Capital and VCFA
Group.
Additionally major investment banking firms, including Credit Suisse, Deutsche
Bank, Goldman Sachs, Lehman Brothers and Morgan Stanley have active
secondary investment programs and other institutional investors typically have
appetite for secondary interests.
Advisors to secondary market sellers include investments banks (Credit Suisse,
Lehman Brothers, Morgan Stanley, and UBS), dedicated boutique firms
(Cogent Partners and Fid equity), electronic exchanges (NYPPE), as well as
established fund placement agents (Campbell Lutyens, Probitas Partners and
Triago).
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IPO METHODOLOGY
IPOs generally involve one or more investment banks as "underwriters." The
company offering its shares, called the "issuer," enters a contract with a lead
underwriter to sell its shares to the public. The underwriter then approaches
investors with offers to sell these shares. Investment banks help companies and
governments raise money by issuing and selling securities in the capital markets
(both equity and debt), as well as providing advice on transactions such as
mergers and acquisitions.
A majority of investment banks also offer strategic advisory services for
mergers, acquisitions, divestiture or other financial services for clients, such as
the trading of derivatives, fixed income, foreign exchange, commodity, and
equity securities.
When a company wants to go public, the first thing it does is hire an investment
bank.
A company could theoretically sell its shares on its own, but realistically, an
investment bank is required. Underwriting is the process of raising money by
either debt or equity (in this case we are referring to equity). Underwriters are
middlemen between companies and the investing public. The biggest
underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston,
Lehman Brothers and Morgan Stanley. The company and the investment bank
will first meet to negotiate the deal.
Items usually discussed include the amount of money a company will raise, the
type of securities to be issued and all the details in the underwriting agreement.
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STEPS
While many investment banks and brokerage firms reserve IPOs for their
richest clients, self distribution IPO transactions are done by the company
selling stock and are available to anyone who has knowledge of them. Broker
should keep you aware of any self distribution IPOs.
Build contacts and relationships with local businesses. Often we can only
participate in self distribution of stock IPOs if you have insider knowledge of
the company. It's true that IPOs are listed on small stock exchanges, but that
only tells you about the stock's price, not about its availability.
Help out these businesses when they are looking for venture capital. Before a
company goes public, it often has to do several rounds of fund-raising through
venture capitalists. If you can invest in companies this way, you'll likely have
advance knowledge of a self distribution IPO, should one happen.
Find out who to talk to about buying these stocks. In a self distribution IPO, you
have to buy the stock directly from the company, not from an underwriter. The
company's financial officers should be able to tell you how many stocks are
available and for what price.
Buy stocks through the company and then hold on to them for the required time.
In addition to the federal law that prohibits disclosing IPO gains for 40 days,
most IPOs require that you hold on to the stocks for 60 to 90 days. This rule
stops investors from selling stocks shortly after the company goes public and
the stock price rises.
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27
Underwriters
Stock Brokers and Sub Brokers
Depositories
Merchant Bankers
They play the most vital role amongst all intermediaries. They assist the
company right from preparing prospectus to the listing of securities at the stock
exchanges. Merchant Bankers have to satisfy themselves about the correctness
and propriety of all the information provided in the prospectus. It is mandatory
for them to carry due diligence for all the information provided in the
prospectus and they must issue a certificate to this effect to SEBI.A Company
may appoint more than one Merchant Banker provided Inter-Se Allocation of
Responsibilities between the Merchant Bankers are properly structured.
Underwriters
Underwriters are those intermediaries who underwrite the securities offered to
the public. In case there is under subscription (in short, the company does not
receive good response from public and amount received from is less than the
issue size), underwriters subscribe to the unsubscribed amount so that the issue
is successful.
Registrar & Share Transfer Agents
They are the person who processes and prepares the basis of allotment of shares
to public based on the applications received from the public. They are the
persons who handle dispatches of shares certificates and refund orders to the
public.
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IFCI Venture Capital Funds Ltd. (IVCF) was originally set up by IFCI as a
Society by the name of Risk Capital Foundation (RCF) in 1975 to provide
institutional support to first generation professionals and technocrats setting up
their own ventures in the medium scale sector, under the Risk Capital Scheme.
In 1988, RCF was converted into a company, Risk Capital and Technology
Finance Corporation Ltd. (RCTC), when it also introduced the Technology
Finance and Development Scheme for financing development and
commercialisation of indigenous technology. To reflect the shift in the
companys activities, the name of RCTC was changed to IFCI Venture Capital
Funds Ltd. (IVCF) in February 2000.
Over the years, IVCF has provided financial assistance to new ventures,
supported commercialisation of new technologies, helped in widening
entrepreneurial base in the country. It is IVCF who has catalysed introduction of
concept of venture capital activity in India.
IIBI (Industrial Investment Bank of India)
The "Industrial Investment Bank of India Ltd ", is Indias only all-India public
financial institution headquartered in Kolkata.
They acquire and/or trade in varied financial instruments from term loans,
equity or debentures and bonds, structured products besides providing various
services like deferred payment guarantee, Loan Syndication, Merchant Banking
services such as Issue management, underwriting and guarantees, Project /
reconstruction / one-time-settlement consultancy/appraisal.
They have a track record of profitability since inception in 1997 till 200203.However we have serviced our outstanding debt till date.
SIDBI (Small Industries Development Bank)
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The ability of the company to make acquisitions of other companies using the
company's stock.
The ability to use stock incentive plans to attract and retain key employees.
Going public can be a part of a retirement strategy for business owners.
Simply by merging into a public company, a private corporation can increase its
value by three to five times. .
The newly created value can become part of an estate providing value not only
for the founders, but for generations to come.
It is essential that public companies, especially newly public companies,
actively maintain and manage a financial communications program.
A newly formed public company would be well-advised to invest in consulting
services, to plan and execute a strategy for building and maintaining an active
interest in your company within the financial community.
Consultants are available to assist the public corporation in providing corporate
relations services intended to increase awareness of your company on Wall
Street.
For most people, recapitalization and stock value appreciation would seem
reasons enough to be publicly owned, but there are other advantages that a
company can gain. A public company has a broader equity base, thus increasing
it's opportunities for obtaining financing for future projects. Increasing the
bottom line net worth of a company, as well as its debt to equity ratio, enables it
to borrow at lower interest rates from traditional institutions.
DISADVANTAGES
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Profit-sharing
If the firm is sitting on a highly successful venture, future success (and profit)
has to be shared with outsiders. After the typical IPO, about 40% of the
company remains with insiders, but this can vary from 1% to 88%, with 20% to
60% being comfortably normal.
Loss of Confidentiality
A major reason for firms to resist going public is the loss of confidentiality in
company operations and policies. For example, a company could be destroyed if
the company were to disclose its technology or profitability to its competitors.
Reporting and Fiduciary Responsibilities
Public companies must continuously file reports with the SEC and the exchange
they list on. They must comply with certain state securities laws ("blue sky"),
NASD and exchange guidelines. This disclosure costs money and provides
information to competitors.
Loss of Control
Outsiders are often in a position to take control of corporate management and
might even fire the entrepreneur/company founder. While there are effective
anti-takeover measures, investors are not willing to pay a high price for a
company in which poor management could not be replaced.
IPO Expenses
An IPO is a costly undertaking. A typical firm may spend about 15-25% of the
money raised on direct expenses. Even more resources are spent indirectly
(management time, disruption of business).
39
lakhs.
251 lakhs.
lakhs.
42
To meet the Working Capital requirement of Rs.222 lakhs and the issue
43
In 2001, Omaxe diversified into the real estate development business with a
focus on residential and commercial properties. As of Mar. 31, 2007 Omaxe has
completed 8 residential projects covering nearly 5.13 million sq. ft. of area.
Omaxe holds 3,255 acres of land reserve including joint ventures and
collaborations as of Mar. 31, 2007.
Omaxe Ltd. has appointed DSP Merrill Lynch Limited, Citigroup Global
Markets India Private Limited, & UBS Securities India Private Limited as the
Global Coordinators and Joint Book Running Lead Managers (JBRLMs). JM
Morgan Stanley Private Limited is the Book Running Lead Manager (BRLM)
and ICICI Securities Limited is the Co-Book Running Lead Manager
(CBRLM).
New Delhi-based Omaxe has a land bank of over 3,000 acre and at present 47
projects are under development.
The IPO of the construction firm consisting of 1,77,96,520 equity shares got
subscribed by over 68 times. The portion reserved for qualified institutional
buyers received an overwhelming response getting subscribed 95 times, while
the non-institutional buyers part witnessed a demand for over 80 times. Retail
investors portion was oversubscribed around 13 times.
The issue constitutes 11.20 per cent of the fully diluted post-issue paid-up
capital of the company, if the green shoe option is exercised, and 10.30 per cent
if the option is not exercised. The proceeds of the issue was utilised for
payments related to land, repayment of loan and to fund the development and
construction costs of some of the company's projects.
SUN TV
Sun TV Network is a Rs 16000-crore (4 Billion $) Indian cable television
network based in Chennai, Tamil Nadu, India. Established in 1992, it offers a
plethora of television channels in 4 languages covering the whole of southern
India. It was the first fully privately owned Tamil channel in India when it
emerged in 1992. Its serials and soaps have generated the maximum TRP for
viewership all over India, making it the most popular network of channels in
India. Till 2007 coupled with the DMK-backed Karunanidhi family, it was the
largest political-media family in India till the split in November 2005.
All its channels occupy the top spots in their respective languages. Sun TV, in
Tamil is the Network's flagship and most popular channel. Being the premier
channel, Sun TV is often used to refer to the Sun TV Network in general.
46
Kalanithi Maran is the Chairman and Managing Director of media giant Sun
Network and has been given various awards including the CNBC "Business
Excellence Award" in 2005.
Sun Network also offers FM Radio Stations (93.5 FM) and has recently forayed
into the print business. In addition, it has also recently launched a DTH satellite
television service entitled Sun Direct.
Sun TV entered the capital market with the public issue of 6,889,000 equity
shares of face value of Rs 10 to be issued at a premium. The price band of Rs
730-Rs 875, implies a market capitalisation of Rs 5,037-Rs 6,037 crore.
After issue, Sun TV's CMD Kalanithi Maran will continue to retain 90 per cent
of the equity stake in the company. While 60 per cent of the shares on offer
have been reserved for QIBs, 10 per cent has been earmarked for noninstitutional investors. The remaining 30 per cent is for retail investors.
Issue opened on: April 3, 2006
Issue closed on: April 7, 2006
Price Band: Rs 730-875
REASON FOR IPO SUCCESS
Sun TV Network, for instance, got oversubscribed by 47 times and listed at a
68% premium.
The Sun conglomerate, which started out with a single Tamil channel has
steadily branched out into various other media ventures over the past decade. It
picked up Kungumam, a weekly magazine, and then bought and turned around
Dinakaran, a Tamil daily.
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Since Kalanithi Maran started his media business 13 years back, he has been
fighting against one rival: himself. Now, after years of staying almost
unchallenged in the southern region, he is setting himself up for battle in newer
markets.
He has an expanded war chest of Rs 6.03 billion which he raised through an
initial public offering (IPO) of Sun TV Ltd (STL) to pledge his new bet on
private FM broadcasting. Also in the pipeline is a direct-to-home (DTH) service
through Sun Direct TV, a privately held company.
Holding 90 per cent stake in STL, Maran is worth Rs 78.28 billion. And the
market cap of STL has hit Rs 86.98 billion in a brief span of two weeks,
enjoying a 44 per cent premium over its IPO price. In media business, only
Subhash Chandra's Zee Telefilms has a higher market cap with Rs 110.9 billion.
Advertising income was up 24.7 per cent to Rs 889 million in the first half of
the fiscal, as against Rs 713 million a year ago. This was the period when Sun's
combined audience share for all its Tamil channels (Sun TV, Sun News, KTV
and Sun Music) went up from 60 per cent in FY05 to 70 per cent in the first half
of FY06. In Kerala, the company's aggregate audience from its Malayalam
channels (Surya TV and Kiran TV) rose from 29 per cent to 34 per cent during
this period.
Analysts also expect Surya TV to put up a better show in FY06, estimating its
revenues to touch Rs 450 million. The Malayalam channel, facing stiff
competition from Asianet, was raking in close to Rs 300 million. Other channels
like KTV have also the potential to stimulate marginal growth.
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CONCLUSION
Thus we have studied about the organisation and various forms of organisations.
How the funds can be raised is studied so as to know the effective way of
accessing capital for the organisation.
The study about IPO and its methods helped us to know the different ways of
going for an IPO.
Analysis of financial markets helped to know about the various types of
markets.
The advantages and disadvantages of going for an IPO are studied.
Thus the overall knowledge about IPO is gathered.
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BIBLOIGRAPHY
www.capitalmarkets.com
www.moneycontrol.com
www.yahoofinance.com
www.wikipedia.org
www.indiaipo.com
www.sebi.gov.in
money.rediff.com
books.google.com
Basic Financial Management by I.M. Pandey
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