“Valuation of issue prices of Indian IPOs and the impact of mis-valuation on its performance” Is it beneficial to deal in primary market (IPO) or Secondary market?






4 Pricing of IPO 4.3 Limitations Analysis of IPO 4.2 IPO Scams 6.NO 1 2 3 PARTICULAR Preface Executive summary Introduction to report 3.5 Principal steps in IPO 4.1 Objective of the Report 3.2 Significances 4.3 Disadvantages 4.6 Measures to Prevent Scams 7 Track Records for 2010 .3 Cases for IPO Scam 6.6 Analyzing an IPOs investment 4.5 Operational Deficiencies 6.1 Introduction of IPO 4.1 IPO activity in Indian stock market 6.4 Salient Features of IPO Scams 6.2 Research Methodology 3.TABLE OF CONTENT SR.7 IPO investment Strategy PAGE NO 4 5 6 Short run and long run performance Indian Scenario 6.

2 Investor vs..2 Ipo overpricing Introduction to secondary market and Primary market 8.2 Risk Factor in Secondary Market 8.1.2 Returns from Market Track Record and Performance in Financial year 2009-2010 7.1 IPOs: What's Beyond the Noise? 7.1 Risk Factors in Market 8.1 Risk Factor IN IPO 8.3 Case Study on India Bulls 7.1 Secondary market more rewarding than IPOs 8.4 Performance on Capital Market 7.7.3 Observation of secondary market and primary market 8.2Case study on ARSS infrastructure 7.4. trading Conclusion Bibliography Annexure 8 9 10 11 Preface .

Executive summary .

the increase of prices of the equities can be enjoyed in the way . good. This change presents a constant challenge for a publication devoted to the capital markets. New products and services are created everyday and they impact consumers.e. product. financial service provider’s delivery systems and regulations. Introduction to Report Change is the only constant in today’s capital markets. It is a speculative market i.e.3. raw material at the prevailing price rate for immediate settlement. The exchange of equities will not be in physical. The equity trading is the buying and selling of equities i.

When there is the monetary flow in the transactions.1 Objective of the report: To study in detail about – • • • To know the process of Valuation of IPOs To understand the Impact of mis-valuation on its performance To know are there any changes in IPOs before and after recession? . Online trading is a reality with much better transparency than the previous system. 3. The Indian primary market has come a long way particularly in the last decade after deregulation of the Indian economy in 1991-92.of profit or loss. This changed the whole facet of Initial Public Offering (IPO) market. We have SEBI which Has a better grip over the market nuisance that was there in the past. the emotional feeling will be impact on this activity. structural cum policy changes time to time. the scenario has changed for the better. But in last ten years or so. The exchanges are the free market where forces that influences price are brought together in open auction. The most commendable being the dismantling of the Controller of Capital Issues (CCI) and introduction of the free pricing mechanism. The equities are traded in the exchanges. Both the primary and secondary markets have had their fair share of reforms.

3. Secondary sources. The scope of the study. Magazines. Personals • Data Collection Primary sources .Study from books Analysis of IPOs of various sectors Search from Various investor sites. The data is collected from various sources like Internet. performance tracker and basis of allotment. Some of the information’s being confidential was not included in the study. by and large is very vast. The study was conducted in short span of eighteen weeks. Therefore an attempt is made to cover as much as possible included in the study.• • • • To understand the Benefits to investor from IPOs or dealing in secondary market To know regulatory consideration with IPO Methods of IPO process To do detail study of IPO ratings. documents. which is an integral part. 3. News paper.3 • Limitations The study is not proposed to be an expert study as it was done by a student for the purpose of a partial fulfillment of the course in the Finance training.Surveys to various broking firms and analysis on the same Study through investors from questionnaire. in completion and reward of MBA.2 Research Methodology The research is exploratory research. During my project I would not be able to track performance of IPO already listed of every sector. so the findings cannot be generalized for all times. . It is very difficult to satisfy all the areas.

In other words. file the right legal documents and follow the reporting rules of jurisdiction such as Indian Companies Act 1956. Analysis of IPO 4. It usually isn't possible to buy shares in a private company. When a company sells its stock publicly. which is followed by the listing of a company’s shares on a stock exchange. Compared to the costs of borrowing large sums of money for ten years or more.4. the costs of an initial public offering are small. it can borrow cash or sell stock to raise needed funds. with an intention to raise new capital.1 Introduction Initial pubic Offering The first public offering of equity shares or convertible securities by a company. is known as an ‘Initial Public Offering’." . there is also the possibility for appreciation of the share price due to market factors not directly related to the company. One can approach the owners about investing. A company going for an IPO stands to make a lot of money from the sale of its shares which it tries to anticipate how to use for further expansion and development. Anybody can go out and incorporate a company: just put in some money. Often "going public" is the best choice for a growing business. A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. on the other hand. but they're not obligated to sell you anything. it refers to the first sale of a company’s common shares to investors on a public stock exchange. Public companies. The most important objective of an IPO is to raise capital for the company. The company is not required to repay the capital and the new shareholders get a right to future profits distributed by the company. When a privately held corporation needs additional capital. Companies fall into two broad categories: Private and Public. It helps a company to tap a wide range of investors who would provide large volumes of capital to the company for future growth and development. This is why doing an IPO is also referred to as "going public. The capital raised never has to be repaid. have sold at least a portion of themselves to the public and trade on a stock exchange.

 Going public can also boost a company’s reputation which in turn. companies go public to raise and to provide liquidity for their shareholders. Thus. Typically. But there can be other benefits. it is important to consider the positive and negative effects that going public may have on their mind.  As long as there is market demand. public companies can usually get better rates when they issue debt. a public company can always issue more stock.Why go public?? Before deciding whether one should complete an IPO. mergers and acquisitions are easier to do because stock can be issued as part of the deal. .  Trading in the open markets means liquidity. Going public raises cash and usually a lot of it being publicly traded also opens many financial doors:  Because of the increased scrutiny. which help to attract top talent. can help the company to expand in the marketplace. This makes it possible to implement things like employee stock ownership plans.

there is also the possibility for appreciation of the share price due to market factors not directly related to the company. if successful. This is discussed in detail as follows: SIGNIFICANCE TO THE COMPANY: When a privately held corporation needs additional capital. it can borrow cash or sell stock to raise needed funds. The significance of investing in IPO can be studied from 2 viewpoints – for the company and for the investors.  The capital raised never has to be repaid. But then investment also comes with an advantage for both the company and the investors.4.  When a company sells its stock publicly. "Going Public" is the best choice for a growing business for the following reasons:  The costs of an initial public offering are small as compared to the costs of borrowing large sums of money for ten years or more.2 SIGNIFICANCE OF IPO Investing in IPO has its own set of advantages and disadvantages. . Or else. higher the returns. it can even result in a higher rate of return. The rule is: Higher the risk. The company issues an IPO with its own set of management objectives and the investor looks for investment keeping in mind his own objectives. Where on one hand. high element of risk is involved. Both have a lot of risk involved. it may decide to “go public”.

The ‘speculative investors’ are interested only in the short-term potential rather than long-term gains. It allows a company to tap a wide pool of investors to provide it with large volumes of capital for future growth. This is seen as a good opportunity by ‘speculative investors’ looking to notch out some short-term profit. SIGNIFICANCE TO THE SHAREHOLDERS: The investors often see IPO as an easy way to make money. . One of the most attractive features of an IPO is that the shares offered are usually priced very low and the company’s stock prices can increase significantly during the day the shares are offered.

Apart from such enormous costs.  A continuing expenditure has to be incurred after the setting up of an IPO by the parent company. prove to be some major drawbacks related to the launch of IPO’s.3 Disadvantages It is true that IPO raises huge capital for the issuing company. But.  A lot of expenses have to be incurred in the form of legal fees.  Shareholders have ownership in the company. Setting up an IPO does not always lead to an improvement in the economic performance of the company.  Besides. printing costs and accounting fees. the expenses become a routine in every activity involved.  Some companies hire experts to do the needful to ensure a hassle-free execution of the task. They have their individual demands to be met as they own a certain percentage of stakes in the company. After the IPO is introduced.  Such factors include the rules and regulations involved to set up public offerings and this entire process on the other hand involve a number of complexities which sometime require the services of experts in relevant fields. The primary owners of the company or the people holding maximum authority in the company cannot take decisions all by themselves once an IPO has been launched and shareholders have been formed. The shareholders have an active participation in every decision that is being taken even if they do not hold 50 percent share of the company. there are other factors as well that should be taken into consideration by the company while introducing an IPO. The launch of IPO also brings about shareholders of the company. . it is also necessary to make certain investments. All these aspects. the CEO of the company would have to spend a lot of time in handling the SEC regulation experts to do the same. if not handled with efficiency.4. in order to launch an Initial Public Offering (IPO). which are connected to the registering of an IPO. Such expenses might cost hundreds of US dollars.

The pricing of an IPO is a delicate balancing act as the investment firms try to strike a balance between the company and the investors. it should be high enough to raise sufficient capital for the company. The underwriter is legally allowed to support the price of a newly issued stock by either buying them in the market or by selling them short. company management meets with their investment bank to choose the final offering price and size. IPO PRICING DIFFERENCES: . The investment bank tries to fix an appropriate price for the IPO depending upon the demand expected and the capital requirements of the company. The lead underwriter has the responsibility to ensure smooth trading of the company’s stock. There are many factors that need to be considered while pricing an IPO and an attempt should be made to reach an IPO price that is low enough to generate interest in the market and at the same time.4.4 Pricing of an IPO The pricing of an IPO is a very critical aspect and has a direct impact on the success or failure of the IPO issue. PROCESS: Once the final prospectus is printed and distributed to investors. The process for determining an optimal price for the IPO involves the underwriters arranging share purchase commitments from leading institutional investors.

or in other words. This might result in significant gains for investors who have been allocated shares at the offering price. then it is likely to become difficult for the underwriters to fulfill their commitment to sell shares. These pricing disparities occur mostly when an IPO is considered “hot”. If the stock is offered at a higher price than what the market is willing to pay. under pricing also results in loss of significant amount of capital that could have been raised had the shares been offered at the higher price OVERPRICING: The pricing of an IPO at more than its market value is referred to as ‘Overpricing’. Historically. UNDERPRICING: The pricing of an IPO at less than its market value is referred to as ‘Underpricing’. when it appeals to a large number of investors. However. even if the underwriters are successful in . Furthermore. that there is a large difference between the price at the time of issue of an Initial Public Offering (IPO) and the price when they start trading in the secondary market. IPO’s have always been ‘underpriced’. during the early hours of trading. This imbalance between demand and supply causes a dramatic rise in the price of each share in the first day itself. Even “overpricing” of shares is not as healthy option. An IPO is “hot” when the demand for it far exceeds the supply. In other words. Underpriced IPO helps to generate additional interest in the stock when it first becomes publicly traded.It is generally noted. it is the difference between the offer price and the price of the first trade.

even more of its value. then it is likely to lose its marketability and hence.selling all the issued shares and the stock falls in value on the first day itself of trading. Type of issues .

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

etc. called the floor price. The price that you can suggest is subject to a certain minimum price level. If you bid at the cut-off price and the price is revised upwards.  Book Building is a good concept and represents a capital market which is in the process of maturing. do not worry. as in Biocon. you do not run the risk of not getting an allotment because you have bid at a lower price. This way. The price discovery is made depending on the demand for the stock. A price band of Rs 270 to Rs 315 means that you can apply at a floor price of Rs 270 and a ceiling of Rs 315. the floor price fixed for the Maruti's initial public offering was Rs 115.• Earliness of bids. In some cases.  The book runner the company concludes the final price at which it is willing to issue the stock and allocation of securities. as a retail investor.  Allocation of securities is made to the successful bidders. For instance. you can just agree to pick up the shares at the final price fixed. the price band (minimum and maximum price) at which you can apply is specified. That is. have the option of applying at the cut-off price. Book-building is all about letting the company know the price at which you are willing to buy the stock and getting an allotment at a price that a majority of the investors are willing to pay. then the managers to the offer may reduce the number of shares allotted to keep it within the . the issue size gets frozen based on the price per share discovered through the book building process. If you are not still very comfortable fixing a price. You. the numbers of shares are fixed. which means that the price you are willing to pay should be at or above Rs 115.  Generally.

say. Fifty per cent of the offer is for qualified institutional investors. banks or insurance companies. bids are received for six lakh shares. But if the bids from this category are received are only for 40. The final price is the equilibrium price or the highest price at which all the shares on offer can be sold smoothly. For instance. If you do not get allotment. the amount in excess of the final price is refunded if you get allotment.000 shares. Consider this illustration: An offer is made for two lakh shares and is oversubscribed by times. you will not get allotment. then 10. • QIBs can be mutual funds. around 50. Qualified Institutional Bidders (QIB) is specified under the regulation and allotment to this class is made at the discretion of the company based on certain criteria. How are shares allocated? • As per regulations. then that portion can be allocated among the other two categories at the discretion of the management. that is. you can demand interest at 15 per cent per annum on the money due. the retail portion is not adequately subscribed. foreign institutional investors. known as the cut-off price is arrived at. How is the price fixed? All the applications received till the last date is analyzed and a final offer price.000 shares can be allocated either to the QIBs or non-institutional investors. If your price is higher than the final price. The minimum allotment is 100 shares. If you do not get your money or allotment in a month's time.000 shares (or generally 25 per cent of the offer) are reserved for retail investors. 1. in an offer for two lakh shares. If your price is less than the final price. If any of these categories is under-subscribed.payment already made. at least 25 per cent of the shares on offer should be set aside for retail investors.500 applicants have applied for 100 . • The allotment of shares is made on a pro-rata basis. you should get your full refund of your money in 15 days after the final allotment is made. You can get the application forms from the nearest offices of the lead managers to the offer or from the corporate or the registered office of the company.

Category B will be allotted 33.000) divided by the minimum lot size (100). • Shares allotted to each applicant in category A should be 33 shares (100*1/3). • In category B. and 200 applicants have bid for 500 shares each. As.300 shares in a similar manner. This will give you an idea of the demand for the stock and a chance to change your mind. After seeing the response. • The shares are listed and trading commences within seven working days of finalization of the basis of allotment. all investors who applied for 100 shares will fall in category A and those for 500 shares in category B and so on. the price bid for and the response form various categories in the Web sites of stock exchanges. Therefore. • The final allotment is made by drawing a lot from each category. if you feel you have bid at a higher or a lower price. That is. You can check the daily status of the bids received. That is. In the above illustration.000 (100*1500*1/3). . If you are lucky you may get allotment in the final draw. Therefore. shares applied by each applicant in the category multiplied by the oversubscription ratio. the number of shares applied for (100)* number of applications received (1500)* oversubscription ratio (1/3). you can always change the bid price and submit a revision form. 500 applicants will get 100 shares each in category A — total shares allotted to the category (50. 167 applicants out of 200 (33300/200) would get an allotment of 200 shares each in category B. each applicant should be allotted 167 shares (500/3). • The total number of shares to be allotted in category A will be 50. The shares would be allotted in the following manner: • Shares are segregated into various categories depending on the number of shares applied for. But it is rounded off to 200 shares each. the minimum allotment lot is 100 shares. it is rounded off to the nearest minimum lot.shares each.

the issuer and the merchant banker agree on an "issue price" . can we just ask the market to pick the price at the IPO? Imagine a process where an issuer only releases a prospectus. This average masks a steady stream of dubious IPOs who get an issue price which is much higher than the price at first listing.• The traditional method of doing IPOs is the fixed price offering. This would yield a price. No issuer knows the true price of his shares. the design adopted was still riddled with flaws. with a prevalence of under pricing on average. Then one has the choice of filling in an application form at this price and subscribing to the issue. with no price indicated. Fixed price offerings. it is only the market that knows this price. Hence fixed price offerings are weak in two directions: dubious issues get overpriced and good issues get underpriced. announces the number of shares that are up for sale. .g. the issuer obtains 50% lower issue proceeds as compared to what might have been the case. Rs. Such a procedure should innately obtain an issue price which is very close to the price at first listing -. i. Here. on average. What is needed is a way to engage in serious price discovery in setting the price at the IPO. Extensive research has revealed that the fixed price offering is a poor way of doing IPOs. all over the world.100. and we can do much better. there had been issue from Hughes Software Solutions which was a milestone in our growth from fixed price offerings to true price discovery IPOs. While the HSS issue has many positive and fascinating features. suffer from `IPO under pricing'.e. People from all over India would bid to buy shares in prices and quantities that they think fit. in India. In India. the fixed-price seems to be around 50% below the price at first listing. In that case. no merchant banker knows the true price of the shares.e.the hallmark of a healthy IPO market. Recently.

they have to be made. it will. Any company making a public issue is required to file the draft offer document with the Securities and Exchange Board of India. not have the details of the price or the number of shares being offered or the amount of issue. it is filed with the Registrar of Companies or the Stock Exchange. you can check it out on the SEBI Web site. During this period. where the details of the final price are known only after bidding is concluded. • Red Herring Prospectus is just like the above. except that it will have all the information as a draft offer document. • The Draft Offer Document is the offer document in the draft stage.Documents Required: • A company coming out with a public issue has to come out with an Offer Document/ Prospectus. It must be filed with SEBI at least 21 days before the company files it with the ROC/ Stock Exchange. the market regulator. Once the changes are made. however. It will tell you why the company is coming is out with a public issue. • An offer document is the document that contains all the information you need about the company. Players: • • • • Co-managers and advisors Underwriters Lead managers Bankers . • If SEBI demands any changes. its financials and how the issue will be priced. That is because the Red Herring Prospectus is used in book building issues only.

 Appointment of lead managers: the lead manager is the merchant banker who orchestrates the issue in consultation of the company. .• • • Brokers and principal brokers Registrars Stock exchanges 4.5 PRINCIPAL STEPS IN AN IPO  Approval of BOD: Approval of BOD is required for raising capital from the public.

must be filed with the registrar of companies. the company can proceed with its public issue. • Printing and dispatch of prospectus: After the prospectus is filed with the registrar of companies. All the companies seeking to make a public issue have to file their offer document with SEBI. The quantity in which prospectus is printed should be sufficient to meet requirements. with the required documents as per the companies act 1956. registrar. the company should print the prospectus. • Filing of the prospectus with the registrar of the companies: once the prospectus have been approved by the concerned stock exchanges and the consent obtained from the bankers. the prospectus signed by the directors. If SEBI or public does not communicate its observations within 21 days from the filing of the offer document. auditors. Appointment of other intermediaries: - Co-managers and advisors Underwriters Bankers Brokers and principal brokers Registrars • Filing the prospectus with SEBI: The prospectus or the offer document communicates information about the company and the proposed security issue to the investing public. They should be sending to the stock exchanges and brokers so they receive them at least 21 days before the first announcement is made in the news papers. . underwriters and others.

• Allotment of shares: Proportionate system of allotment is to be followed. This must be published at least 10 days before the opening of the subscription list. • Establishing the liability of the underwriters: If the issue is undersubscribed. and the banks where the applications can be made. when it would close. • Promotion of the issue: The promotional campaign typically commences with the filing of the prospectus with the registrar of the companies and ends with the release of the statutory announcement of the issue. • Processing of applications: Scrutinizing of the applications is done. the liability of the underwriters has to be established. • Statutory announcement: The issue must be made after seeking approval of the stock exchange. During the period the subscription is kept open. . the bankers will collect the applications on behalf of the company.• Filing of initial listing application: Within 10 days of filing the prospectus. the initial listing application must be made to the concerned stock exchanges with the listing fees. • Collections of applications: The Statutory announcement specifies when the subscription would open.

3. • Allotment is the process whereby those who apply are given (allotted) shares. Qualified Institutional Buyers: Mutual funds and Foreign Institutional Investors. • Bids are then invited for the shares. Each investor states how many shares s/he wants and what s/he is willing to pay for those shares (depending on the price band). 2.• Listing of the issue: The detail listing application should be submitted to the concerned stock exchange along with the listing agreement and the listing fee. three classes of investors can bid for the shares: 1. Book building is the process of price discovery (Basic concept) • The company does not come out with a fixed price for its shares. it indicates a price band that mentions the lowest (referred to as the floor) and the highest (the cap) prices at which a share can be sold. The bids are first allotted to the different categories and the over-subscription (more shares applied for than shares available) in each category is determined. we will explain the process in detail. The allotment formalities should be completed within 30 days. The actual price is then discovered based on these bids. Retail investors: Anyone who bids for shares under Rs 50. Retail investors and high net worth individuals get allotments on a proportional basis. instead. • According to the book building process. As we continue with the series. High net worth individuals and employees of the company.000 is a retail investor. .

That is why there is no way you can be sure of getting an allotment. a retail investor has applied for five shares in an issue.Sometimes. Since that isn't possible. allotments are made on the basis of a lottery Example 2: Say.Example 1: Assuming you are a retail investor and have applied for 200 shares in the issue. . and the retail category has been over-subscribed 10 times. the over-subscription is huge or the issue is priced so high that you can't really bid for too many shares before the Rs 50.000 limit is reached. The investors are then selected by lottery and the issue allotted on a proportional basis. and the issue is over-subscribed five times in the retail category. you qualify to get 40 shares (200 shares/5). it may then be decided that every 1 in 2 retail investors will get allotment. The investor is entitled to half a share. In such cases.

For this. whether it is long-term capital growth or short-term capital gains.4. the investor must do a proper analysis of the risks to be taken and the returns expected.  SPECULATOR: . For this he needs to evaluate the company's growth plan. He must be clear about the benefits he hope to derive from the investment. earnings and potential for retained earnings. but all the same it is not considered as the best way of investing for the investor. The potential investors and their objectives could be categorized as:  INCOME INVESTOR: An ‘income investor’ is the one who is looking for steadily rising profits that will be distributed to shareholders regularly.  GROWTH INVESTOR: A ‘growth investor’ is the one who is looking for potential steady increase in profits that are reinvested for further expansion. Before investing.6 ANALYSING AN IPO INVESTMENT POTENTIAL INVESTORS AND THEIR OBJECTIVES: Initial Public Offering is a cheap way of raising capital. he needs to examine the company's potential for profits and its dividend policy. The investor must be clear about the objective he has for investing.

For this he needs to look for potential of an early market breakthrough or discovery that will send the price up quickly with little care about a rapid decline. The unpredictable nature of IPO’s and volatility of the stock market adds greatly to the risk factor. INVESTOR RESEARCH: It is imperative to properly analyze the IPO the investor is planning to invest into. before investing.A ‘speculator’ looks for short-term capital gains. it is advisable that the investor does his homework. So. He needs to do a thorough research at his end and try to figure out if the objective of the company match his own personal objectives or not. The investor should know about the following:  • • • • • BUSINESS OPERATIONS: What are the objectives of the business? What are its management policies? What is the scope for growth? What is the turnover of the labor force? Would the company have long-term stability? FINANCIAL OPERATIONS: • • What is the company’s credit history? What is the company’s liquidity position? .

This is because there is limited information and research on IPOs.7 IPO INVESTMENT STRATEGIES Investing in IPOs is much different than investing in seasoned stocks. Company’s ability to pay-off its debts. Other investment options could also be considered depending upon the objective of the investor. And immediately following the offering. .• • • • Are there any defaults on debts? Company’s expenditure in comparison to competitors. research opinions emanating from the underwriters are invariably positive. What are the projected earnings of the company  • • • • • MARKETING OPERATIONS: Who are the potential investors? What is the scope for success of the IPO? What is the appeal of the IPO for the other investors? What are the products and services offered by the company? Who are the strongest competitors of the company? • 4. There are some of the strategies that can be considered before investing in the IPO:  UNDERSTAND THE WORKING OF IPO: The first and foremost step is to understand the working of an IPO and the basics of an investment process. prior to the offering.

 INVESTIGATE BEFORE INVESTING: The prospectus of the company can serve as a good option for finding all the details of the company. the demand for it and any offer being planned by a competitor. . It gives out the objectives and principles of the management and will also cover the risks. It is therefore. essential to measure the risks and take the decision accordingly. the company offering it.  KNOW YOUR BROKER: This is a crucial step as the broker would be the one who would majorly handle your money. Do not take a risk greater than your capacity.  INVEST AT YOUR OWN RISK: Finally after the homework is done and the big step needs to be taken all that can be suggested is to ‘invest at your own risk’. IPO allocations are controlled by underwriters. GATHER KNOWLEDGE: It would be beneficial to gather as much knowledge as possible about the IPO market. The first step to getting IPO allocations is getting a broker who underwrites a lot of deals.  MEASURE THE RISK INVOLVED: IPO investments have a high degree of risk involved.

Short run and long run performance Sample and Research Methodology The sample in this study includes all the new equity issues offered through book building route on the National Stock Exchange (NSE) from 1999 till May2007. Thereafter the monthly adjusted closing prices (adjusted for dividends. For the listing day and the next day (second day) we collected the opening price and closing price of the IPO from the NSE's web site. those exclusions we were left with a sample of 156 IPOs (see Appendix) for the short run analysis. As in other .666. Over this period these sample companies raised a sum of Rs 56. stock splits and bonus issues if any) were obtained for the same from Capitaline database.com)however we have excluded the entire offer for sale issues. follow on public offers. The entire list of public offers made through NSE are available on their web site (www.95 Cr.5.nseindia. In this study we examined the price performance of the IPOs both in the short-run as well as in the long-run where short-run means the behavior of initial return sup on listing.

If Rm. These returns measure whether an investor gained (or lost) by buying the shares during the IPO at the offer price and selling at the prevailing price on the opening day. As there is a lag between the offer day and listing day (varying from) the price observed in the market on the listing day may be different from the offer price as a result of the overall market movements. Now the market returns will be deducted from the IPO's returns and the resultant returns are called as excess returns: E R = R. IPO long run performance is gauged by examining the returns beyond the second day of their listing at monthly intervals till May 2007 subject to a maximum of 60months. is the opening/closing price of stock 'i' at time 't' and O. if R. If R. is positive one can infer that the issue is under-priced. called as offer-to-close return. is positive it means the market on the whole has moved up. we also computed market adjusted returns of the IPOs for the same period. Following Barry and Jennings (1993) we extend the short-run analysis by examining offer-to-open returns which will give a fair idea of how much the IPO gained or lost up on opening trades and an intra day return on the listing day defined as the open-to-close returns on the listing day.is the offer price of the i`'stock. . is negative it may be inferred that the issue is over-priced and if R„ is zero it means the issue is aptly priced. We estimate simple returns as well as market adjusted returns to capture the market movements during the period between offer closures to listing. Therefore for those listed in January 2000monthly returns will be observed till December 2004encompassing 60 monthly returns however for a stock listed in May 2006 we could analyze its performance for a maximum of one year.Rm. Simple returns are computed as Where P. . This adjustment is made first by computing the returns on the market index (Nifty) during the same period Where It is the Nifty index closing/opening value on day 't' and lo is the closing level of Nifty on the last day of the !PO offering. We also analyze the next day (second day) returns in a similar manner with reference to the first day's closing price. if it is negative it may be considered that there is a decline in the over all market and if it is equal to zero it may be concluded that market remained unchanged during the interval between IPO offering to its listing.studies on this theme we computed the return realized over the period from the offering of the shares to the first trading day on NSE.

indicates that the issue is over-priced and it is equal to zero it may be concluded that the issue is fairly priced. is the closing index value on the listing day to is the closing index value on the last day of the IPO's offer Average IPO returns upon listing and on the next day . is the closing price’t’ months of the i’ IPO after its listing P. Long run performance IPO performance in the long run is examined by using two measures buy and hold market adjusted returns (BHAR) and monthly market adjusted returns (MMAR) Computed as follows: Where P.. o is the offer price of the i'h IPO I is the closing Nifty index value’t’ months after listing I. is positive one can infer that the issue is under-priced after adjusting for the market movements in the intervening period and a negative value for ER...If ER. is the closing price of the of the i'hIPO on its listing day P.

Long run performance of IPO based on offer price .

However we again caution that the present study suffers from a small sample limitation particularly in the time frame after twenty four months. We make this inference at the risk of sounding a little arbitrary but the same may be confirmed or otherwise by an empirical examination by further studies with a sample that pans both the regimes. One can also note that the decrease in under pricing in the short-run and over performance in the long run has decreased probably due to the introduction of book building process as that is an important change that the public issue process has witnessed from the early nineties to the present study however the same may be confirmed by empirical examination.After market performance of IPO  IPOs have given higher returns compared to the negative returns reported from other     countries.fixed price regime as well as book building . From our analysis it may be observed that IPOs generated positive returns even after two years of listing but subsequently they under-perform. An important finding from this study is the amount of over performance in the shortrun and the quantum of underperformance in the long run have come down significantly compared with that reported in earlier mentioned studies. Our inference is based on the logic that the earlier studies that documented under pricing have examined a sample of IPOs that were issued following the fixed price route while the present study's sample comprises IPOs that were issued only through the book building route hence we attribute the reduction in under pricing to the process of book building.

which includes public issues. The effects of these structural changes are apparent from the trends in the resources raised from primary market. merchant bankers. SEBI was assigned the role of monitoring and regulating the working of stockbrokers. The government realized the need for a regulated environment and started to promote its necessity in capital markets. This changed the whole facet of Initial Public Offering (IPO) market. However. The Growth observed during the first half of the 90s is mostly attributed to the financial liberalization of the economy. structural cum policy changes time to time. constitution of SEBI under the new security and regulation act and relaxation in pricing of capital issues played an important role in such upsurge. It has seen a steep rise in the initial years of the post liberalization. which was denied earlier. rights issues. Capital market reforms like abolition of the office of controller of capital issues (CCI). IPOs: Changing Trend The Indian primary market has come a long way particularly in the last decade after deregulation of the Indian economy in FY92. portfolio managers.6. The most commendable being the dismantling of the Controller of Capital Issues (CCI) and introduction of the free pricing mechanism (which permits the companies to price the issues). the decontrol was. Spearheading this was the establishment of The Securities and Exchange Board of India (SEBI) which became active in 1992. Free pricing mechanism allowed good corporate to raise money from the primary market at the right price. to some extent. private placements and overseas issues. bankers to an issue.1 IPO activity in Indian stock market IPO market in India has seen many ups and down during the last decade. misused by corporate to overprice issues. . and other intermediaries who are associated with stock markets. Indian Scenario 6. Both the primary and secondary markets have had their fair share of reforms.

5% -24. 2 % 4 0 3 .8 347.1 1 6 .8 11.6 188.4% 47. 2 Rights Issues 121.0% 44.8 115.7 61.7 Placement 79.3 26.6% .The Primary market 'Cycle' (Rs bn) FY93 FY94 FY95 FY96 FY97 FY98 FY99 F Y 0 0 1 5 9 .1 144.0 3 9 .0 6.2% . 0 Public Issues 134.4 65.3% 31.1 182.7% 10.9 6 0 326.9 78.1% 5 5 80. 2 Private 18.8 122.5% 60.3 104. 43.9 251.8 25.2% -56.5 (% y-o-y growth) 40.6 157.4% 231.6% -22.9 249.0 181.3% . 9 .6 129.4% 0 % Overseas Issues 7.7 56.6% 26.1 115. 0 % 36.5 79.9% -13.6 20.9% -27.7% 1 0 18.

2% -1. The total fund mobilized during FY96 came down by 40% as the proceeds from public.4 477. the bourses started to show signs of recovery after the securities scam in FY92. The trend continued in 1995 backed by robust industrial production and higher gross domestic product growth.6% 1540. Software stock valuations soared through the roof.5 69.8% 0 .1% 17.3% 44. 2 Total 282. But. IPO market had another impressive year. 0 % 6 1 8 .7 558.9 334. This boom in the secondary market caught on to the .4% .0% 40. But during the latter half of FY98. 22. markets witnessed the boom in software stocks.7 8 959.1 613. then South East Asian crises came.3% 120.7% 67. 47% and 67% respectively.7% -80. Public issue proceeds moved up to Rs 249 bn. notably the finance companies. Buoyed by the business scenario most of the manufacturing companies went for huge capacity expansions and diversification. Though total funds mobilized during FY94 went up from Rs 135 bn in FY93 to Rs 188 bn in FY94. which resulted in reduced exposure towards developing economies like India. The impact of this was visible as excess capacity cramped margins and many companies went into the red. which hit the trade and economic growth. That is the reason why both proceeds from private placement as well as overseas markets moved up sharply by 60% and 121% respectively in FY97. FIIs shifted their portfolio. which shot up by 959% from Rs 8 bn in FY93 to Rs 80 bn in FY94.9 346. a growth of a 32% compared to FY94. a number of companies started to cash in on the buoyant primary market. as the domestic companies went on for overseas issues (GDR. rights and overseas issues fell by 27%. The Sensex also touched a new high during the same period due to the improved economic environment. FCCBs and ECBs). there was a sharp increase in funds raised through overseas issues. Public issues started drying up. So.0 501. Besides.4% 8 % It is evident that during 1992-94. The market remained flat. as investors preferred to put money in banks rather than investing in shares.1% 3.

As a result. Other notable norms include the lock-in period norms for promoters as well as mutual funds in the issuing company. For instance. The private placement market witnessed a surge in mobilizations. Moreover. funds mobilized from primary market remained flat (1%). proceeds from private placements started to fall after SEBI announced new regulations. funds mobilized via overseas issues witnessed a 1. Though these measures did prevent the investors from fraudulent practices. Television–18 got a tremendous response while public issue from Ajanta Pharma just managed to sail through. The IPO market has come a long way since the boom of FY94. Also. They received tremendous response from investors with over-subscription rates ranging anywhere between 20 times-55 times the issue size. proceeds from private placement showed a sharp rise of 60% to Rs 403 bn. which were enacted to safeguard investors and to bring transparency in the system. The total receipts via private placement fell by 28% in FY99. More than 50% of new issues were from software companies in FY99.primary market as well. some bond issues received good responses which include bond issue from Indian Oil Corporation and Hindustan Petroleum Corporation Limited. However lots have to be done since the market seems to be heading the same direction as it way during the early nineties . Besides. these companies got listed at huge premiums to their offer price. Though private placement receipts fell during FY00. which triggered interest among investors. which zoomed in to cash in on this new economy boom. teams and institutional backing were overtaken by companies. Since inception. Companies with good track record. This was largely due to promoter’s shoring up their stakes in companies. the role that market regulator SEBI has played in reforming primary market is commendable. where qualified institutional investors (QIBs) where allowed to subscribe 60% of the issue.500% jump since Indian companies went for American Depository Receipts (ADR) issues. as the primary markets for both equity and debt turned bearish. the first one being. Though public issue receipts showed 10% YoY growth in FY00. Infosys. The primary market moved in tandem with secondary markets. non-financial public sector undertakings and government companies remained absent from public issue market. Subsequently. Stringent norms have been imposed as and when required. established software companies preferred the private placement route for raising funds in FY00. However. companies opted for the low cost option of private placements. however. Pre-issue requirements of issuing company and Lead Managers. For the second consecutive year. in light of the takeover code taking a more concrete shape. project appraisal route as an alternative to the profit track record route was replaced by book-building route. filing due-diligence report at the time of filing of draft-prospectus and post-issue obligations of revealing the allotment basis are some of the regulatory measures. the quality of new issues. seemed to be deteriorating. Further.

. This is expected to continue as long as unscrupulous companies who do not have any infrastructure facilities. 2008.253 crores • India is being lauded as the savior of the ailing global IPO market with $3. Reliance Power attracted $27. only five issues in the first half of the current year managed to get more than 5 times over-subscription compared to 30 last year. 2008. The proposed IPO was to fund the development of its six power projects across the country. Nevertheless. Added to the woe. • On January 15. revenue model. • According to Thomson Financial. the regulators role is commendable and it can be anticipated that the regulatory environment will only improve in the coming years.5 times the stock on offer. continue to raise money from the markets. equivalent to 10. Besides. thereby. recent statistics also indicate that the average size of public issues have shrinked to Rs 100 m in FY01.when non-banking financial institutions tamed the primary market.3 billion worth of proceeds from eight deals.676 crores Rs 24.994 crores Rs 52. creating India's IPO record. This makes India the largest IPO market in the world so far this year. Its upper cut off price was Rs.5 billion of bids on the first day of its IPO. 450. manpower. the bulk of the volumes came from the biggest IPO deal so far this year — Reliance Power's $3 billion IPO on January 21. After 2002 till 2008 FINANCIAL YEAR 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 AMOUNT RAISED THROUHG IPO Rs 1039 crores Rs 17807 crores Rs 21432 crores Rs 23.

Of the Rs. According to the industry body Assocham.7% same time last year. given that global IPOs declined 36. about Rs. According to the Ernst & Young report.6 billion is estimated to be the second largest IPO in the world so far this year. at $1.34. compared to just 3. "Globalization . Realty firms picked up around 42.Global IPO Trend Report 2007" India was the fifth largest market in the world in terms of the number of IPOs and the seventh largest in terms of the proceeds for the year • It was the real estate sector which took the maximum advantage of the bullish stock market trends in 2007. • The Indian capital market has performed quite well in 2007.591 crores was raised by the realty firms. Public issue calendar wise Summary . 119 crores raised in the primary market in the period starting from January 1. behind Reliance Power's $3 billion IPO. Significant. It raised US$8. • Thomson Financial data reveals that India accounts for 49.• Emaar MGF’s IPO.1% of global IPO precedes at the moment. real estate players raised the maximum amount of funds from the capital market through IPOs last year.3 billion through 95 Initial Public Offers (IPOs).14. 2007 to mid-December.1% over the last one year.7% of the total funds generated through IPOs.

During 2007-2008 the share market witnessed its highest number of IPOs in past one decade.FINANCIAL YEAR WISE SUMMARY As shown in the table during the economic boom there were much more IPOs. .

financiers and bank employees.6.2 IPO Scams IPO Scams are well structured game played by the absolute opportunists consisting of intermediaries. who make a lot of money by controlling shares Meant for retail investors in Initial Public Offer (IPO). as per the statement of the Securities .

including ICICI Bank. IL&FS and Motilal Oswal. Karvy Securities • 12 DPs can’t open fresh demat accounts. it added. including HDFC Bank. This was not followed. Each of the fictitious application was of small value so as to be eligible for allotment under the retail category. SEBI conducted investigations in respect of all the IPOs from January 2003 to December 2005. SEBI has barred brokerage firms like Karvy Stockbroking and IndiaBulls from the market. revealed violations of serious nature by several key operators. The Securities and Exchange Board of India (SEBI).CAUSES · Two of the most common factors of the major IPO scams in India were the tacit consent of the banks and the poor surveillance techniques. Central Bank. concerned depository participants and the depositories. The two major IPO scams in the Indian Capital market were the Harshad Mehta scam in the year 1992 and the Ketan Parekh scam in loopholes in the Indian capital 2001. In the last few years. 15 more under scrutiny. IDBI Bank. The findings of investigations. SEBI's Order fallout: 24 entities banned from primary and secondary market.Stanchart • 85 Financiers barred from the market.Exchange Board of India. It has also directed HDFC Bank and IDBI Bank not to open new demat accounts for share transactions. the capital market watchdog. IPO SCAMS . . In its order. their financiers. these fictitious beneficiaries transferred these shares to their principals who in turn transferred the shares to their financiers. they cracked down on some of the top brokerage firms and banks for their alleged involvement in an initial public offering (IPO) scam. After the allotment. · Numerous dematerialized accounts and bank accounts had been opened under false names and the IPO applications were made in non existing names. ING Vysya Bank. SEBI said certain entities had cornered shares reserved for retail applicants in the name of fictitious entities in the initial public offerings of Yes Bank and Infrastructure Development Finance Company (IDFC). prima facie. · The Depository Participants must be provided the proof of identity and proof of address as a routine check for the opening demat accounts. the capital market in India went through a rapid transformation. Citibank. including IndiaBulls. The IPO Scams opened up the latent market. The increased use of information technology and the integration of financial markets have stepped up the risk profile of the capital market.

600 shares to various entities in seven off-market transactions on July 11 .250 each. By applying for small lots (1.050 shares. CASE The modus operandi adopted in manipulating the YES Bank Ltd (YBL)'s initial public offering (IPO) allotment involved opening of over 7. the chief culprits identified by SEBI were Ms Roopalben Panchal and Sugandh Estates and Investments Pvt Ltd. Each of these accounts applications were made for 1.3 Cases for IPO Scam YES BANK Ltd.The financiers in turn sold most of these shares on the first day of listing. 2005. Of the 13 erring entities. While Ms Panchal opened 6.500 benami dematerialized accounts. paying application money of Rs 47.315 benami accounts.315 benami DP accounts. 31. The IPO of YBL opened on June 15. 6. In order to get an allotment of 9. 31.050 shares through each accounts). It was observed that Ms Panchal had transferred 9. another entity Sugandh opened 1. The shares allotted in IPO to the benamis of Ms Panchal and Sugandh would have otherwise gone to genuine retail applicants. 2005 and its shares were listed on the BSE and the NSE on July 12.600 . These accounts were with the National Securities Depository Ltd (NSDL) through Karvy Stockbroking Ltd (Karvy-DP). they misused the retail allotment quota stipulated for IPOs.a day prior to the listing and commencement of trading on the stock exchanges. thereby realizing the windfall gain of the price difference between IPO price and the listing price.

A similar modus operandi was adopted by Sugandh. HDFC Bank. DSP Merrill Lynch Ltd and SBI Capital Markets Ltd in identifying and weeding out the benami applications.315 dematerialized accounts aggregating 1.050 shares. There are three more addresses of locations in Ahmedabad. it was suspected that Ms Panchal must have made multiple applications or that other applicants were acting as a front for her. Ms Panchal would have had to apply for crores of shares involving many crores of rupees in application money. According to SEBI findings. which received 150 shares each from 1. Thus. of the above 6. Curiously. the SEBI order said. This is the second such incident. SEBI order said: "further probe is required for examining the systemic fault. And she did not receive any allotment in the IPO.000 dematerialized accounts to corner large number of shares of the company. ING Vysya Bank and Vijay Bank in opening the bank accounts of these benami entities and apparently funding them. Indian Overseas Bank. and the lead managers Kotak Mahindra Capital Company Ltd.250. 97.shares. Ms Panchal had applied for only 1. 47. as per the dematerialized account data furnished by NSDL. if any. However. all these account holders have their bank accounts with Bharat Overseas Bank Ltd. which have been linked to Ms Panchal.050 shares in the YES Bank IPO. All the 6. On July 6.807 dematerialized accounts with Karvy-DP and "strangely". Ms Panchal's name did not appear in the list of top 100 public issue allots tees.250 YBL shares.315 entities have their bank accounts with Bharat Overseas Bank and demat accounts with Karvy-DP. Ms Panchal received 150 shares each from 6.315 allotted through off-market transactions aggregating 9. Karvy Computer Shares P Ltd. Ms Panchal and her associates (real or fictitious) have attempted to corner the maximum possible number of shares in the IPO allotment.e.250 shares in off market transactions.70 crores on the day of the listing of YES Bank shares SEBI unearths another IPO scam in IDFC SEBI on Thursday 12th Jan 06 unearthed yet another abuse of IPO norms in the IDFC's initial public offering (IPO) where a few investors opened over 14. paying the application money of Rs 47.315 entities as many as 6.221 entities have a same address in Ahmedabad. Ms Panchal and others booked profits to the tune of about Rs 1. Ahmedabad. By applying for the maximum possible number of shares per applicant while being categorized as retail applicant and by putting in large number of applications in the lot of 1. after a similar such violations were detected in the YES Bank's IPO. of the registrar Karvy-RTI i. This tantamount to an abuse of IPO allotment process. ." Reference is being made to the RBI to examine the role of BOB. SEBI said in IDFC's IPO too four investors opened as many as 14.

MARUTI Case Fictitious Demat A/c’s opened in 2003 itself `First IPO in which key players took part was Maruti' The Charges DPs have been accused by SEBI of not fully implementing the `maker-checker' concept. and appointing themselves as the second holder. The evidence against Karvy DP has stemmed from the fact that almost all the demat accounts which served as conduits for these master account holders were held with . Anantharaman said. scanning of officials' signatures. Manojdev Seksaria from doing any kind of transactions in the securities market." the SEBI order by its Whole-time Director Mr. though the numbers of fictitious demat accounts were not very high then. G. data entry errors. Karvy-DP. in June 2003. Purshottam Ghanshyam Budhwani and Mr.. Another 35 firms were also barred from participating in the IPOs in the future. which was also named in the YES Bank IPO case. has not adhered to `Know-your-Client' norms. Mr. the interim order from Securities and Exchange Board of India has said. "It is seen that one branch manager has on the same date signed as authorized signatory of different branches of the bank. some of the documents collected by CDSL during the course of inspection show that Karvy-DP has obtained letters purportedly issued by the banks' concerned such as BOB as proof of identity and proof of address of the person for the purpose of opening dematerialized accounts. and not in the last year as was earlier believed. as per the reports of inspection submitted by NSDL and CDSL on the DP. Also.According to SEBI. Description Some of the demat accounts that were used to manipulate allotments in the initial public offer of Yes Bank and IDFC were opened during 2003. till further orders. Ms Roopalben Nareshbhai Panchal (who was also named in the YES Bank IPO scam). till further directions. Sugandh Estates & Investments P Ltd. The first IPO in which the key operators have participated was that of Maruti Udyog Ltd. This raises a doubt as to the authenticity of the bank documents obtained by Karvy-DP for opening dematerialized accounts. SEBI's investigations have now pegged that a "total of 24 key operators have indulged in abusive practices in respect of 21 IPOs". SEBI also banned four investors (in whose names the multiple accounts were opened) viz. the SEBI order said.

Depository participants have been accused by SEBI of not fully implementing the `maker-checker' concept. This shows that there are inter-linkages amongst the master account holders as well as between groups of master account holders and their principals. Inter-linkages The master account holders were found to have made off-market transfer of the IPO shares to various common groups of entities who appear to be their principals. The regulator also pulled up NSDL and CDSL for `grave management lapses'. SEBI bars Karvy. Persons involved in the scam have collected proofs of identity and addresses from groups of persons and used this to open bogus bank accounts. ING Vysya Bank and Motilal Oswal Securities from opening fresh demat accounts. These 24 operators have 34 demat accounts. Description . Exchanges are to submit a report on this within a month. IDBI Bank.Karvy DP. of which 16 demat accounts are held with Karvy DP. With some of the DPs also acting as brokers. Due Diligence Not Taken The market regulator's investigations have pointed out that. according to the order. scanning of officials' signatures and appointing themselves as the second holder. the order said. while opening demat accounts the depository participants were not exercising due diligence. 23 other entities Alleged involvement in IPO allotment scam In the dock Ban on several entities including HDFC Bank. stock exchanges have been advised to examine the role and involvement of brokers and sub-brokers by way of participation in IPOs either directly or indirectly and their dealings in the shares subsequent to listing. It is seen that some of the master account holders have also made off-market transfers amongst themselves. data entry errors.

Karvy DP and Pratik DP prima facie do not appear to be fit to deal in securities market as SEBI-registered intermediaries. Pratik DP and IndiaBulls Securities. SEBI said the other business groups of Karvy appear to have acted in concert in the gamut of IPO manipulations. "The promoters of NSDL and CDSL are directed to take all appropriate actions including revamping of management which clearly has allowed matters to come to such a sorry pass. ING Vysya Bank and Motilal Oswal Securities from opening fresh demat accounts. Karvy Computer Share PVT Ltd. SEBI has also barred several entities including HDFC Bank. The order. 2 others fined . SEBI. IPO scam: HDFC Bank. It asked NSDL to conduct inspection on whether all the demat account holders are genuine. Bank Paribas and IndusInd Bank had more than 500 demat account holders sharing the common address. to be treated as a `show-cause notice'. Analysts felt the SEBI order was akin to capital punishment for the entities involved in the securities market scam. Karvy Investor Services and Karvy Consultants not to undertake fresh business as registrar to the issue and share transfer agent. NSDL. the capital market regulator has banned 24 entities from buying and selling securities till further orders. Whole-Time Member. ICICI Bank. G Anantharaman. for their alleged involvement in the IPO allotment scam. IDBI Bank.SEBI on Thursday 27th April 2006 came down heavily on stock market intermediaries by banning several entities including Karvy group of companies. The findings revealed "contributory negligence" on the part of the depositories and their managements. "I further direct Karvy Stock Broking Ltd. Appropriate quasi-judicial proceedings are being initiated against the two DPs. CDSL pulled up The regulator also pulled up NSDL and CDSL for `grave management lapses'. has given 15 days time to the parties named for filing objections. NSDL has also been asked to check whether the Know Your Customer norms of SEBI have been duly complied with and take action against suspect accounts on verification." the order said." Mr. Citibank. Common address SEBI also said 15 Depository Participants at National Securities Depository Ltd (NSDL) including Kotak Securities. "In view of the detailed findings. In an interim order issued today after the second round of investigations. said." the 252-page order issued late in the evening said.

In January. these banks have been fined. IDBI and ING Vysya Bank for violation of Know Your Customer norms and other irregularities in relation to the recent IPO scam. HDFC Bank has been slapped with the highest penalty of Rs 25 lakh. According to an RBI release." 6. the bank was imposed a penalty of Rs 5 lakh. "for violation of regulations on KYC norms.4 Salient Features of IPO scam .Rs 10 lakh and IDBI Ltd Rs 5 lakh. for breach of prudent banking practices and for not adhering to its directives/guidelines relating to loans against shares/ IPO. ING Vysya Bank . This is the second time HDFC Bank has been fined for violation of KYC norms.The Reserve Bank of India on Monday 27th Feb 2006 fined HDFC Bank.

5 Operational deficiencies Factors that facilitated the scam . some were in fictitious names  Refunds received got credited in brokers A/Cs  Margin money provided by brokers through single cheque  Nexus between merchant banker. brokers and banks suspected 6.Modus operandi  Current account opened in the name of multiple companies on the same date in the same branch of a bank  Sole person authorized to operate all these accounts who was also a Director in all the companies  Identity disguised by using different spelling for the same name in different companies  Multiple accounts opened in different banks by the same group of joint account holders  Huge funds transferred from companies accounts to the individual’s account which was invested in IPO’s  Loans/ overdrafts got sanctioned in multiple names to bypass limit imposed by RBI  Loans sanctioned to brokers violating guidelines  Multiple DP accounts opened to facilitate investment in IPO  Large number of cheques for the same value issued from a single account on the same day  Multiple large value credits received by way of transfer from other banks  Several accounts opened for funding the IPO on the request of brokers.

 Photographs not obtained  Proper introductions not obtained  Signatures not taken in the presence of bank official  Failure to independently verify the identity and address of all joint account holders  Directors identity/ address not verified  Customer Due Diligence done by a subsidiary  Objective of large number of jt. account holders opening account not ascertained  Purpose of relationship not clearly established  Customer profiling based on risk classification not done  Poor monitoring and reporting system due to inadequate appreciation of ML issues  Absence of investigation about use and sources of funds  Unsatisfactory training of personnel  No system of fixing accountability of bank officials responsible for opening of accounts and complying with KYC procedures  Ineffective monitoring and control .

high risk businesses and wire transfers etc. non-face to face transactions. It is going to be a long fight with constant need to improve and innovate new strategies.g.6. group companies. regulatory and statutory guidelines can cause severe reputational and financial damage to individual banks and the Indian banking system as a whole  It is important to understand that the risks banks run as a result of non-compliance with  Need for comprehensive operational framework implementing important aspects of KYC instructions e.  Clarity in understanding of risk classification of accounts and proper customer profiling  Ongoing monitoring of medium and high risk accounts  Enhanced due diligence in respect of accounts with beneficial ownership.  Prompt reporting of cash and suspicious transactions to Principal Officer by branches  An effective audit machinery  Good understanding of regulatory and statutory prescriptions in letter and spirit  Clear demarcation of duties and responsibilities  Violations to be dealt with sternly .6 Measures to prevent scams  An analysis of IPO scam clearly brings out the laxity on the part of banks to scrupulously implement the KYC/AML guidelines issued from time to time.  While scams may still happen despite best of preventive measures.  Documentation procedure for opening of all types of customer accounts. It also raises serious concerns about the integrity of the systems & systemic risks. it should not undermine the efforts being made to insulate the financial sector from money laundering.

14 down Rs 50.10 481.45 322.00 100.00 544.05 135.80 62.15 51.00 286.65 70.60 182.4% of the issues.00 187.38 . The biggest loser was Euro Multivision which lost 67.97.50 106.40 21.60 47. Of the 35 issues as many as 24 or 68.65 116.33% to close at Rs 928.85 243.65 151. Closing in the negative were 11 or 31.57% ended in positive territory. Track Records for 2010 7.50 or 106.00 142. The issue was priced at Rs 33.76%. lost Rs 22.24 6 Cox and Kings 11th 330. The second biggest loser was Rishabdev Techno cables which lost 66. The second top performer was yet another century maker ARSS Infrastructure Limited which issued shares at Rs 450.7.25 Feb 1 Pipavav Shipyard 9th Oct 58.31 works 2 ARSS 3rd Mar 450.85 81.40 70.80 161.40 12.55 35.00 72.86.95 Dec 7 Man 11th 252.28 Holiday July 4 Syncom 15th 75.81% of its issue price of Rs 75.00 112.20 225. and gained Rs 478.65 45.33 Infrastructure 3 Mahindra 16th 300.00 0.00 361.65 119.00 74.36 0 Infrastructure 11 Aqua Logistics 23rd 220.2 IPO Track Record and Performance in Financial year 2009-2010 IPO Track Record and Performance in Financial year 2009-2010 During the financial year 2009-2010 a total of 35 IPO’s listed.00 640.55 35.90 304.40 271.1 Recent IPO’s 7.55 Sept 1 MBL 8th Jan 180. an absolute gain of Rs 168.00 998.93 Healthcare Feb 5 Think soft Global 26th Oct 125.60 313.10 42.65 25. The issue was priced at Rs 145 and closed at Rs 313. The top gainer was Jubilant Food works Limited which gained 116. The stock closed at Rs 24.50 478.00 504.50.95 59.15 23.00 162.50 360.10 108.00 140. Name of Listing Issue High Low Close Gain/Los % Company date Price s Change 1 Jubilant Food 8th Feb 145.00 247.90 Infraconstruction Mar 8 DQ 29th 80.00 928.31 Entertainment Mar (Int) 9 Globus Spirits 23rd 100.00 103.95 45.00 543. Their performance is enumerated in the table below.25 32.65 168.00 408.40 219.03 and is currently quoting at Rs 10.00 574.80 50.25 40.

55 100.90 66.10 165.00 222.40 75.00 586.67 12.10 37.94 2.00 75.15 111.28 -31.35 195.80 195.35 128.30 -9.01 115.85 239.00 189.00 25th Nov 12th Aug 24th Feb 3rd Aug 29th June 82.90 212.90 -22.20 151.89 -54.00 82.35 6.00 540.75 49.10 68.50 96.00 56.00 -66.80 -5.60 92.00 48.85 28.20 7.00 -60.80 9.70 -32.76 30th Sept Thangamayil 19th Jewellery Feb Jindal Cotex 22nd Sept IL&FS 30th Transportation Mar Godrej Properties 5th Jan United Bank of 18th India Mar Texmo Pipes 10th Mar Den Networks 24th Nov DB Realty 24th Feb Vascon 15th Engineers Feb Hathway Cable 25th Feb NHPC 1st Sept India Bulls Power Astec Lifesciences Raj Oil Mills Emmbi Polyarns Excel Infoways Rishabdev Techno cables 1150.40 47.03 258.93 4.8 0 0 75.00 407.03 -5.00 133.25 178.88 -13.45 23.80 15.95 190.70 45.30 -24.71 3.00 .24 -50.15 11.80 15.35 0.20 30.0 0 62.25 -53.00 36.15 -2.90 1019.55 81.80 165.47 8.00 246.00 173.65 44.00 90.50 -9.00 162.85 27.90 1050.00 490.45 513.50 90.70 66.50 155.00 123.00 120.10 20.10 2.60 2.61 0.60 100.00 59.50 30.00 119.00 274.50 -14.00 270.58 8.97 6.75 39.45 240.00 85.15 20.25 -33.15 278.00 39.75 45.40 99.81 11.67 -40.00 295.2 1 3 1 4 1 5 1 6 1 7 1 8 1 9 2 0 2 1 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 9 3 0 3 1 3 2 3 3 3 4 Adani Power Infinite Computer DB Corp JSW Energy Oil India 20th Aug 3rd Feb 6th Jan 4th Jan 100.00 33.95 15.00 77.0 1374.10 446.30 207.67 -15.30 458.00 117.00 120.35 207.00 208.15 10.00 468.10 10.10 90.10 29.25 -45.10 30th Oct 45.95 25.35 81.70 20.

10 -1. REC and NMDC.8 196. Wherever promoters have priced the issue reasonably and left money on the table for investors. 2 stocks gained 100% or more 1 stock gained 80% or more but less than 100% 2 stocks gained more than 50% but less than 60% 3 stocks gained more than 40% but less than 50% 2 stocks gained more than 25% but less than 40% 6 stocks gained more than 10% but less than 25% 4 stocks gained more than 5% but less than 10% 4 stocks gained less than 5% On the negative side 4 stocks lost less than 25% 2 stocks lost more than 25% but less than 50% 5 stocks lost more than 50% but less than 67% FPO There was three follow on offers and all were from the government.5 571. The success story was REC which returned excellent returns to investors.3 5 1 2 3 Euro Multivision FPO NTPC REC Ltd NMDC 15th Oct 75. .00 80.14 -50.86 -67.90 23. NTPC has given very small returns of a mere 3% but the disappointment has been NMDC which is down 2% but the stock has fallen from a high of Rs 572 to below Rs 300.7 274.15 283.55 24.9 294. They were from NTPC.5 207 249.1 205.00 46.90 -5. they have received poor response. In conclusion let me repeat a statement which I had made about the full form of IPO – It’s Probably Overpriced.85 2. However where pricing has been expensive.99 23. there has been excellent response.95 The performance of the 35 IPO’s is as follows. I believe this should be a key factor to watch in future issues.81 19th 201 Feb 2010 8th Mar 203 2010 29th 300 Mar 2010 241. The share gave returns of almost 15% on day one of the share being available for trading and has given returns of 23% till date. It has been interesting during the year that pricing has been the key factor throughout the year. a fall of more than 47%.15 6.

.3Case study on ARSS infrastructure In the above performance we have seen that ARSS infrastructure IPO had performed well while India bull performance was very bad.7. Let’s see the case of ARSS infrastructure understand why it performed in the market well and reason for the same.



Analysis of the case Promoted by Subhash Agarwal of Bhubaneswar and his three brothers, ARSS Infrastructure Projects (AIPL) provides construction services for railway infrastructure, roads & highways and irrigation projects. Strengths • Strong unexecuted order book of Rs 2877.53 crores as on 10 January 2010 and significantly diversified order book comprising 41% railway projects, 41% road projects, 3% irrigation projects, and balance others. Moreover, orders from government and government entities amounted to 87.5% of the order book as on 10 January 2010. • Given the strong investment lined up in the country, both in the road sector as well as by the Railways including the dedicated rail freight corridor project is well positioned to capitalize on it. Weaknesses • There are a number of pending litigations against the company and/or the promoters and group companies, including a criminal case. • Has expanded its presence and pursued orders outside Orissa like Chhattisgarh, Rajasthan, Jharkhand, Haryana and Tamil Nadu. Still, contracts outside Orissa are limited. Had negative cash flow from operating activities in the fiscal ended March 2008 (FY 2008) as also nine months ended December 2009

An analysis of the company’s business and a comparison with its peers seems to indicate that the issue is very attractively priced. Investors are advised to subscribe to the issue. BUSINESS: As of January 10, 2010, the company has an order book of Rs 2,877 crores, equivalent to 4.6x its FY09 contract income. This indicates strong future revenue stream. The company has acquired the necessary equipment to execute these orders spanning over 18-24 months. ARSS has established itself as an infrastructure player through joint ventures with established partners and has developed an extensive experience in rail projects. Its revenue mix includes 46% from railways, 33% from roadwork and the balance from irrigation projects and others. However, this skews the revenue mix towards one segment. Going ahead, the share of roads is expected to increase slightly, according to the current order book. SBI is a major investor with

respectively. Some of the major projects executed so far aggregate to Rs 1.284 crores. Its revenues grew at a CAGR of 116.7 % for the period FY07. Stock Financials Over the past two years. Valuation and IPO analysis Post the issue.4 on post-IPO equity at the lower and upper price band.111 crores. On a TTM basis.97% holding in the company. Conclusion: Breaking from the recent trends of poor listing day performances.9 times on the lower and upper price band. AIPL’s revenue grew 99% to Rs 624.1 times and 12. Moreover. L&T is trading at 10. The stock gained Rs 300.3 times their FY 2009 earning.69 xs. as government spending on infrastructure is bound to increase and with an established track record of executing government orders. .61 xs to 7.38 crores in FY 2009 and net profit was up by 90% to Rs 51.9 and Rs 34.80 before ending the trading session at Rs 750. the future for ARSS looks bright. It has managed to improve its ratio of net working capital to sales from 0. The EPS for FY 2009 works out to Rs 33. which quote at PIE of 6.53 in FY08 to 0. The company has a debt of Rs 370 crores on its books.14 xs of its annualized earnings of FY10.7 times and 12.8 times and 10. Around 1. However. or 66.2 crores. valuation of the company comes to 6. the initial public offer (IPO) of ARSS Infrastructure Projects on Wednesday made a strong debut on the domestic equity bourses gaining nearly 67%. In FY09. in this segment. The fact that the company’s net worth will increase after the issue. the total income stood at Rs 628 crores with a net profit of Rs 51.43 in FY09.04 crores. This shows faster cash generation by the business. This is comparatively higher than players such as PBA Infrastructure and MSK Projects. Going ahead. The P/E works out to 12. other than L&T. orders from railways grew 89% while the company has been in this business for the past nine years. The company is expected to complete projects worth Rs 994 crores by FY10.67%. on NSE. growth in revenue will be good.57 crores shares changed hands on NSE generating a turnover of Rs 1. The shares of ARSS Infrastructure Projects which was issued at Rs 450 per equity shares got listed on the National Stock Exchange (NSE) at a premium of 40% at Rs 630 and further soared to hit an intra-day high of Rs 751.8 times their FY 2009 earning. respectively. The company has a significant presence in railway contracts and there are not many players.FY09 and profit after tax grew at a CAGR of 120 % over the same period. Thus ARSS leaves enough scope of upside for the investors. The fact that almost half of its annual profit is generated in the last quarter would further lower its pricing. the company would look at diversifying its revenue stream and also increase the share of irrigation projects apart from roads. the offer is at a discount to J Kumar Infrastructure and Tantia Construction which quotes at 13.a 7.

a part of IndiaBulls Group.2 crores shares 3.4 Case Study on India Bulls Company Details : Open Date :Oct 12. The issue and the green shoe option if exercised in full will aggregate to 390. There will also be a green shoe option of up to 50.98% of the fully diluted post issue paid-up capital of the company assuming that the green shoe option is not exercised and 19. is coming with a public issue of 339.1 crores shares Rs10 each 20.98 crores shares Close Date : Oct 15.06% of the fully diluted post issued paid-up capital assuming that the green shoe option is exercised in full. The issue will constitute 16.900. The company will be raising Rs1.98 crores shares 5.000 equity shares.700. . 529 crores at the higher price band of Rs45.7. 2009 Minimum App Lot : 10 Issue Type :Book Building Issue Price : Rs40-45 Issue details Issue opens: Issue closes: Issue size: Green shoe option: Face value: Break-up of fresh issue to public QIB's portion: Retail portion: Non-institutional portion: Price band: 12-Oct-09 15-Oct-09 33.000 equity shares of Rs10 each.4 crores shares Rs40-45 IndiaBulls Power Ltd (IPL).000 equity shares. 359 crores at the lower price band of Rs40 and Rs1.4 crores shares 10.800. 2009 Issue Size : 33.

750.86 - 177.81 Nil 57.87 14.000.67 14. IRL.750.000 8.000 mega watt (MW) Amravati Power Project (Phase–I).000 390.185.00 0 Nil 1.000 339.00 0 57. • Fund equity contribution in the company’s wholly-owned subsidiary.000 8.81 0 1.79 16.800.185.250. to part finance the construction and development of the 1.000.00 0 Nil 1.18 Nil 59.45 19.43 Nil 71.000 - 10.18 0 1.81 177.000.335MW Nasik Power Project. .00 0 71.000.97 177.00 0 1.43 Post-issue Number of % of shares share (assuming capital GSO not (assumin exercised) g GSO not exercised) 1.185.18 Post-issue Number of % of shares share (assuming capital GSO (assuming exercised in GSO full) exercised in full) 1.00 0 Nil 1.00 0 296.185.43 57. and • General corporate purposes.250.750.06 Object of the issue The net proceeds of the issue are proposed to be utilized to • Part finance the construction and development of the 1.000 296.Shareholding pattern Pre-issue Particular s Number of % of Shares Share capital IndiaBulls Real Estate Ltd Total promoter holding Promoter group Total promoter and promoter group holding LNM India Internet Centuries FIM Public (pursuant to the issue) 1.71 17.700.185.00

320MW coal-fired thermal power project in Jharkhand and a 2.Company Background IPL is a part of IndiaBulls Group. IPL is in the business of developing. which will have a combined installed capacity of 6. multiplex and power sectors. The company is presently also in the process of evaluating the establishment of a 1.615MW by September 2013 and entails a total capital outlay of over Rs31. Incorporated on October 08. constructing and operating thermal and hydro-power projects. 2007.280MW being supercritical. financial services. The company currently has five thermal power projects under development. 000 crores. retail. one of the leading Indian business houses with business interests in real estate. All the power generation capacity planned is coal based with 5.640MW coal-fired thermal power project in Chhindwara. infrastructure. Madhya Pradesh. .



construction risk.Analysis  Key positives IPL will have a combined installed capacity of 6.  Investment Negatives  No operating history.  Inability to commence operations as expected is a key risk The first power project of IndiaBulls Power – Amravati Phase 1 is scheduled to commence in September 2012.4 crores for the projects under development.615MW in Maharashtra and Chhattisgarh post the completion of these projects with lot more projects in the evaluation stage. The company has also signed memorandum of understanding (MoU) for developing coal-fired thermal power projects aggregating to 3. The difference .31. It will take the company a long time before it generates free cash flows.  High Capital Outlay funded primarily by debt – thus interest rate risk Building a Greenfield power project requires huge capital outlay. The Company currently has no power projects in operation or other revenue generating operations. This makes the company susceptible to losses in profitability in a tight fiscal policy environment on account of higher debt servicing Conclusion: IndiaBulls Power Limited the third mega power issue in the current season was expected to be different from the other two IPO’s of Adani Power and NHPC. It intends to maintain an appropriate mix of off-take arrangements. future prospects and viability can be evaluated. Any inability of the Company to effectively develop and operate its power projects could adversely affect its business prospects. This is still nearly three years away. Power projects have long gestation periods (time take to generate positive cash flow). the company will have a high gearing ratio. and it has no significant operating history from which its business. These hydroelectric projects are proposed to be run-of-the-river projects. execution risk. The company estimates that it would require Rs. So. Delay in procuring financing or licensing will impact the project closure and ultimately profitability. and industrial consumers. Approximately 25% of the project is estimated to be financed from equity and the rest from debt. The company has also signed a MoU with the government of Arunachal Pradesh for developing four hydro-power projects with an aggregate capacity of 167MW. including among others. regulatory risk. so it is difficult to estimate its future performance. The development of power projects involves various risks.960MW with the state governments of Jharkhand and Madhya Pradesh. 052. financing risk and the risk that these projects may prove to be unprofitable. including long-term power purchase agreements (PPAs). to provide a level of committed revenues and short-term PPAs to realize higher tariff rates. financial condition and results of operation. The company plans to sell its power to state-owned and private distribution companies.

82 4 Total 7387382 1 The company had issued 33.97 7 NSE 45.95 on the BSE and Rs 45. Exchang Open High Low Close Net % gain Volume Wt Avg e Change BSE 44.50 35. The high on the BSE was Rs 45.78 2937015 37.95 45. .05 on the NSE respectively.05 35.05 on the NSE. This failure of this issue to be anywhere near the issue price forget returns points out to the gross over valuation by merchant bankers and the greed of the promoters in pricing issues.90 cr shares at Rs 45 and the issue was oversubscribed almost 40 times by QIB’s.35 38. In the interest of investors and the future of IPO’s I believe it is time promoters and merchant bankers did their bit to protect the long term interest of investors and the capital markets. It turned out to be a DISASTER.30 -6.5% of their appetite one wonders where they have disappeared and why they are not buying from the market when the share is available 14% cheaper.was there but on the unexpected side. It may also be mentioned that there is a green shoe option of 15% of the issue size which can be used for price stabilization. Having received an allotment of just 2.50 and the open of Rs 45.35 -6.05 45.65 -14. The stock opened at Rs 44.89 4450366 37.00 38.70 -14.

1 IPOs: What's Beyond the Noise? The Borrowing Trap Although IPOs have the potential of giving windfall gains. the opposite could also be true. borrowing to buy IPOs could aggravate your losses.5 Conclusion 7.000 • Borrowed Cash Rs 90.000 • Own Money Rs 10.000 • Listing Price Rs 95 (fall of 5%) • Cash In Hand After Selling The Portfolio At Listing Rs 95.74 per cent Step I Applying For the IPO • Application Money Rs 1.000*0.000 . And in such cases. We assume you apply for Rs 1 lakh (the maximum limit for retail investors) in an IPO issue and borrow Rs 90.7.000 Step II Interest Of 15 Per cent Per Annum on Borrowed Money • Interest Charged (21/365*15) or 0.5.00. even a 5 per cent fall in the share prices on the listing day will erode your investment by 57.86 %) Step III IPO is listed At a Discount • Issue Price Rs 100 per share • Shares Allotted 1.86 % for 21 days (from the time you borrow the money to apply for the IPO till the IPO is listed when you sell your portfolio to return broker’s or bank’s money) • Interest Amount Rs 774 (Rs 90. In this case.000. Here’s an example to show that.

For example. Investing merely in the offering is similar to trading. a power company’s IPO has potential for higher returns. Initial oversubscription could be because of herd mentality.000 crores and was fully subscribed within an hour of opening. but it also entails higher risk compared to.64 times. if you want to invest in the company.) • Amount Left Rs 4. Don’ts • Never follow the crowd. The initial public offer (IPO) of Adani Power in July 2009 raised Rs 3. consider specific risks attached with IPO investing.000 crores after the Rs 1. Margin funding of IPOs increases your gain in case listing is good. say. a management having a successful track record of implementing projects is positive for an IPO. High initial cost reduces the return. • Don’t go by the investment banker. An investment banker fixes prices based on demand-supply mechanics rather than the actual value of the company. For example. • Why is the company raising money? Try to find out whether the company really needs money or is it only trying to capitalize on a bullish market sentiment. • Oversubscription is not an indicator of listing price. The next month was even better. It may not be wise to pay a higher price even for a good company. • Avoid loans to apply for IPOs. such as those of Wockhardt Hospital and Emaar MGF withdrew after opening. Different companies have different risk-return tradeoff. The latter is true when companies already flush with cash or with little investment opportunities in future raise money from the market. Not a single IPO hit the market during six of the 17 months between the Reliance Power . doing this would help. but the losses are also amplified in case the listing price fails (see The Borrowing Trap).000-crores Reliance Power issue back in January 2008. • Evaluate the management.774 (fall by 57. Two other IPOs in the same month raised another Rs 162 crores. The Adani IPO was the first one that rose more than Rs 1. Other than common risks involved in all businesses.614-crores IPO by Rural Electrification Corporation that closely followed the Rs 10. If there is lack of information on the company. But. Many investors could come at the same time to sell in the market. a Pharma firm. Investors seemed to be regaining some of the confidence they had lost more than a year ago. NHPC’s IPO rose over Rs 6. An example is lack of complete information on the company bringing its IPO.226 • Your Loss Rs 5.774 (borrowed cash + int. • Specific risks. Big brand IPOs. you need to take a long-term view Do's • Understand the business. • Is the price reasonable? One way to find this out is by comparing it with other companies in the same sector. amount. and 33 others shelved their plans after getting regulatory approval when the market tanked in 2008.016 crores for the company and was oversubscribed 21.Step IV Negative Returns • Money Returned to Broker/Bank Rs 90.74 %) Measured Steps The first step in IPO investing is to decide whether you want to invest in the company or just the offering. which triggers a fall.

or are volatile. this price used to be much lower than what the company could otherwise have got. Some market participants would have us believe that the Adani issue is the inflexion point. We found that. investors are still carrying the baggage of the pre-liberalization era. However. The percentage rose through 2007 and. So. So. the opportunity to make money at listing was much higher.54 crores.25 . the investors’ appetite for new stocks is low. hence. by 2008. Not exactly. So. But the dynamics have changed completely. Now. about half of the IPOs gave negative returns on listing. But.609. pricing suffers. the chances of success were fairly good at around 90 per cent. In 2006. of the total IPOs that hit the market. that’s a misconception. that the revival is well and truly on. The average amount of money raised in the remaining months through 26 IPOs. Some Facts In order to understand how IPO investments work. when markets are not in good shape. the continued volatility in the market is deterring them from entering in larger numbers. in 2005. while the rest managed to remain in green. was Rs 167. and that things will continue to improve here on in the IPO market. but it certainly can’t be cheap. There are a handful of IPOs lined up. what you would call a thriving IPO market. when the Controller of Capital Issues used to decide how much capital a company can raise and at what price shares should be issued. Also. and investors should always keep in mind that promoters will try to make the most of the issue. we considered all the IPOs that got listed since 2005 and the returns they gave on the day of listing—the difference between the issue price and listing price. But should you go for it? Are these upcoming IPOs the passport to riches? Why Now? The IPO drought of over a year was primarily due to bad market conditions. However. When markets are falling.96 10. Promoters have to sell equity at lower prices. promoters are looking to tap the opportunity.279. of issues 30 10 Sensex 11. In fact. Four months saw a single smallish issue each. one should invest in them. The proposition is a tempting one. an issue can be slightly mispriced. 30 per cent of the total issues posted negative listing returns. Popular Myth It is widely held that allotment in an IPO guarantees a positive return. the trend did not last very long. the IPO markets seem to be lying low--the number and volume of IPOs that hit the market in the last few months has not picked up Period Mar-06 Jun-06 No. Now.54 per cent gave negative listing returns. it’s for the company to decide at what price it wants to sell its shares. What's New? Although the jump in value of Sensex indicates that the secondary market is on its way to recovery.and the Adani Power issues. Typically. and. only 11. eight of them in June 2008 alone. as markets have made significant gains from the lows.

91 13. The Current Situation Market participants have different opinions on the IPO market.10 20.647. “The two issues are indicating that there is revival in IPO market.60 12. though the evidence that the conclusions are based on is the same.708.00 Contrary to popular belief.84 15.50 14. Further. an analysis in Value Investing and Behavioral Finance by investment expert Parag Parikh shows that if the allotment is held for a month. Enam Securities. One section is looking at the investors’ response towards the IPOs of Adani Power and NHPC. If the holding period is increased to a few years in place of a month.” However.42 13. but there is no revival in the IPO market as such. market sentiments can change dramatically.644. but most of them underperform the market index. it is riskier to buy in an IPO than from the secondary market. a section of experts don’t consider oversubscription as an indication of market revival. There is normally a lag of 21 days between issue closing and listing.461. the percentage of IPOs that give positive returns falls.44 13.286. respectively. Prime Database.800. In other words. Says Prithvi Haldea.Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Aug-09 18 15 33 21 27 19 17 13 6 1 1 1 6 12. which got oversubscribed around 21 and 24 times. To say that the frequency of IPOs need to increase IPOs on the Avail .” Haldea believes that a one-off case is not substantial-enough evidence to conclusively say that it’s the beginning of an uptrend. and during this time. “There is a revival in the primary market. This clearly diminishes the incentive to take risk by investing in an IPO.786. your chances of gain from IPOs further reduce if you hold it for a month.072. Says Srinivasan Subramanian. founder and managing director.43 9.10 14.860. a company that tracks the primary market.454.99 15.650.31 9. studies show. a larger number of IPOs give positive returns.51 17.291.493. head (investment banking).

director. The situation hasn’t changed much. and promoters want to be absolutely sure about the market conditions before they enter. “The gap indicates that retail investors are still cautious.A comparison with the past vindicates Haldea’s stand. respectively. just nine filed their offer documents with Sebi between April and mid-August this year. more than 30 companies put off their plans of entering the market even after getting Securities and Exchange Board of India’s (Sebi) approval. Any move by Sebi to increase the upfront margin could bring down the over-subscription in the institutional segment. Therefore. if you put this figure against the recent numbers. An IPO is an once-in-a-lifetime event for a company. when markets were volatile. In the recent IPOs. Although the market has risen almost 70 per cent from last year’s lows. 18 IPOs came in one quarter. At the start of the previous IPO boom in 2006. Institutional bidders have to pay only an upfront margin of 10 per cent of the total application amount. Says Vinod Wadhwani. . the institutional and retail investors subscribed over 30 times and 2-3 times their allocated portion.” Promoters still skeptical. in 2008. the current volatility and skepticism on the direction of the market in the near term is not giving the promoter enough confidence to take the plunge. Now. you will conclude that a healthy pick up in the IPO market is still some distance away. For example. the actual amount put in the application is just one-tenth of the total subscription amount. So where is the rush?” What Lies Ahead The institutional bidders and high net worth individuals (HNIs) were dominant factors behind the excitement around the recent IPOs—and they could well be the reason for the fizz to die down. Ambit Corporate Finance. Low retail confidence. on an average. The oversubscription numbers for institutional bidders does not reflect the exact amount of money chasing the IPO. in recent months. Another reason for not considering the current IPO market as the start of an uptrend is the relatively lower enthusiasm among retail participants. Says Haldea: “Though nearly 700 companies want to float IPOs.

then getting out could become even more difficult.55 35. If you don’t. a lot of noise and excess availability of information influences the decision of investors. also failed to cheer the leverage investors.00 48. Although many IPOs give positive returns on listing. A company coming to the market to raise money will typically be preceded by road shows.00 60. Also. HNIs face a unique situation that adds to the pressure to earn even higher listing gains per share.00 34. you need to be a little more careful with the track record and the price at which shares are being offered.00 13.60 21. the listing gains should be high enough to cover the interest cost as well as leave some profits in hand.00 25. The stock is still trading at a discount to the issue price.No Guarantees IPOs do not guarantee positive returns on listing. depending on the price. listing return is the percentage change from the issue price to the closing price on the day of listing Year Listing Returns (%) Negative 0-25 25-50> 50 % Of IPOs 2005 2006 2007 2008 2009* 11. from which investors had high hopes.00 28.00 29.65 20. If you are a long-term investor. “If listing gains from another 2-3 IPOs is not high. So. Cautions Jagannadham Thunuguntla. each HNI applicant is allotted fewer shares that could earn gains.00 The story behind HNI subscriptions goes like this. the listing gain per share was not high enough to cover the interest cost. it may dampen investors’ sentiments. A large portion of money from HNIs that flows into an IPO application comes through financing—a loan is taken during the application process and is returned on the day the IPO is listed.00 29. there was so much noise about grey market premium that investors started believing that the stock has a lot of upside. then the basics for investment remain the same. So. as your intention was never to hold the stock in the first place. At times.54 30. while investing in a company would mean that you would like to hold the shares allotted in the medium. at the time of listing. The portion of shares allotted to them is generally oversubscribed. in the case of Reliance Power last year. Cut the noise. For example. Also. No one even asked once whether the shares were worth the price they were being sold at. you should sell on the listing day at whatever price.” What Should You Do? There is a difference between investing in an IPO and investing in a company. However.51 0. Here. a major problem for the retail investor is to read and understand the offer . In case of Adani Power. if any. SMC Global Securities. The listing of NHPC. a lot more also give negative returns.45 27. Investing in an IPO would mean that you are there in the market for the listing gains. brand building and a lot of buzz in the press.00 19.44 16.00 20.41 10. director (merchant banking).to longterm. If you are an IPO investor. The only way to cover the cost of this loan is the listing gain—the difference between the issue price and the listing price.81 20.

7. the hype around the market is giving a sense that much more is happening than the real action on the ground can justify. evidence would suggest steering clear of it unless good. There is no IPO flood. We would strongly recommend that you should not read too much into the IPO grades. old-fashioned analysis can justify the price. To begin with. as far as the individual investor is concerned.5. The biggest flaw of grading is that it does not take pricing into account. In such a case. the retail investor will follow the grade given by rating agencies. but because the market has fallen sizeable Rather than fret over new issue pricing. Buying the right stock at the right prices is the key to investing. yet. who could be your broker or investment advisor. which runs into hundreds of pages. the focus should be on improving disclosures to help investors make informed decisions Prithvi Haldea . Even evidence from the recent past does not support the argument that a higher grade would translate into higher gains.document. a stock at 10 times earnings can be a good investment. If some are now below their offer prices. There is a high chance that. if you wish to apply for an IPO. in the absence of time and expertise. while the same company at 40 times may not be a good investment at all. Other things remaining equal.2 Ipo overpricing The bogey of IPO Overpricing All IPOs offered profitable exit windows at some point. you should go by the advice of an expert. there is no particular reason for euphoria. it’s not because they were overpriced. Finally. Reading the grades. Even if there were.

It was only on 21 September -. they list on it and are influenced by it to a large extent. was priced at Rs 1. And the collective loss on the remaining 39 issues. For instance. the share price falls to Rs 738 (on 31 May). listed on 14 March 2005. In fact. Its issue. others for several months --. The market has now fallen by over 25 per cent. the deluge of initial public offers (IPOs) and the losses to investors arising from the overpricing of new issues. On the contrary.514 before the crash. been flooding us with report on. over the past several months. it is quite encouraging. the market has crashed further. What’s more. the IPO scenario is not bad at all. Let’s take the case of Jet Airways. fell to Rs 1112 – a fall of 27 per cent fall in less than a month! Even most equity-oriented mutual funds.511 crores gain on the 85 winners. however. and all stocks. at Rs 1. or were plain greedy and did not use the exit opportunity. quoting at Rs 1. was a fraction of the Rs 25.The media has. ONGC. on which many small investors depend. have seen erosions in Their NAVS. Of the 124 IPOs floated between April 2003 and April 2006 – the period of the bull run -. and even the prices of the bluest among blue chips have taken a beating. The recent meltdown has seen such “loss” analyses in sharper focus. and analysis of. the reportage has become so exaggerated that it has lad to the proposal of rating IPOs – an untried and questionable idea.some for a few days.195 on 10 May 2006.100 and was heavily oversubscribed though most analysts felt the pricing was aggressive.more than six months after listing -. After the crash. why do we expect IPOs to quote above their offer prices at all times and against all odds? The true Picture In reality.324 crores. should overpricing be blamed? The lessons .as many as 85 were still quoting above their offer prices as on 31 May. If investors were bullish on the market or the company. only to surpass it again a few days later.383 on 26 April and continued to quote above its offer price for several months thereafter. all 124 IPOs gave investors an opportunity --. (Since then.once made. the Reliance Industries share crashed 20 per cent to Rs 953 on 31 May from Rs 1.to exit at a profit. If that’s the case. What the media seems to forget is that IPOs do not operate independent of the secondary market -.that the quoted price dipped below the offer price for the first time. have fallen). including IPOs. The share touched Rs 1.

Let the market decide Aggressive pricing is no longer possible in the new market structure. as each company is unique. This takes the IPO cycle to the second phase in which issuers start pricing reasonably. most try and sell their future (forward) earnings. who are more discerning and will not take just any price. Companies too are cautious in pricing – they have to ensure the issue sells and merchant bankers do not want issues to devolve. macroeconomic factor and company specific factor. Although some companies do price their offers based on historical earnings. Very few were for Greenfield projects from new promoters. In the first phase of an IPO cycle. most offers were from established companies. Just before the crash.Companies usually float issues in a buoyant secondary market. What needs to be ensured is that there are no malpractices. the post-listing prices of issues already made also rise. at best. That explains why the issue price PEs (based on historical earnings) of the 2004-05 IPOs ranged from 1 to 382! Until recently. most issues are under-priced. In this IPO boom. After that. as companies are generally testing the waters. Prices are now determined through an elaborate pre-issue marketing exercise. like the share prices of its peers. checking companies from committing irregularities and monitoring the end-use of issue proceeds. When the Bull Run continues. the stock becomes a regular secondary market instrument. influenced by the state of the market. IPOs got priced similarly. when the whole market was working on forward multiples. Any analysis of IPO returns should be done only at the time of listing and for a few months thereafter provided the secondary market has not crashed in the interim. Moreover. we had. So. which in turn lead to more buying of such scrip on listing. better vetting and new market dynamics. reached the initial stages of this third phase. the quality of issuers has improved due to tighter entry norms. the third phase of mild overpricing comes in. the focus has to continue on better disclosures to help investors make more informed decisions. Grading of IPOs is not the solution. but it is difficult to pin IPO pricing down to a single factor. The resulting bumper returns lead to heavy over-subscriptions in newer offers. Issuers do look for benchmarks. Issue pricing is complex as there is no single perfect method of valuation. keeping pace with market trends and with the share prices of peer companies. . thereby pushing up their price. More than half the issue has to be bought by institutional buyers. The bottom-line: IPOs have to be bought they can’t be sold. If the Bull Run persists and returns on earlier IPOs become larger still.

of course. Secondary market is term used for stock exchanges. where the offer price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). Once the bids come in. Introduction to Primary market and Secondary market: Primary and Secondary markets In the primary market securities are issued to the public and the proceeds go to the issuing company.The good news for the investors is that given the size of the secondary market crash. 8. The public can bid for the shares at any price in the band specified. Instead they follow a method called BOOK BUILDIN PROCESS. Provided. we might go back to phase one of the IPO cycle-under pricing. . the company allots its shares to the people who had applied for its shares or returns them their money. where stocks are bought and sold after they are issued to the public. In an IPO the company offloads a certain percentage of its total shares to the public at a certain price. it is by a process called the initial public offering (IPO). PRIMARY MARKET The first time that a company’s shares are issued to the public. After the offer price is fixed. the company evaluates all the bids and decides on an offer price in that range. Most IPO’S these days do not have a fixed offer price. some stability returns to the market.

Once a stock is listed on an exchange. stock exchanges facilitate the trading of shares for the general public. people can start trading in its shares. In a stock exchange the existing shareholders sell their shares to anyone who is willing to buy them at a price agreeable to both parties. they have to execute their transaction through authorized members of the stock exchange who are also called STOCK BROKERS.SECONDRY MARKET Once the offer price is fixed and the shares are issued to the people. Individuals cannot buy or sell shares in a stock exchange directly. .

1 Risk factor in Market 8.1. but it is highly risky and many investment advisers advise against it unless you are particularly experienced and knowledgeable.8.1 Risk Factor in Primary Market Investing in IPO is often seen as an easy way of investing. The risk factor can be attributed to the following reasons:  UNPREDICTABLE: .

The Unpredictable nature of the IPO’s is one of the major reasons that investors advise against investing in IPO’s. Shares are initially offered at a low price, but they see significant changes in their prices during the day. It might rise significantly during the day, but then it may fall steeply the next day.


No past track record of the company adds further to the dilemma of the shareholders as to whether to invest in the IPO or not. With no past track record, it becomes a difficult choice for the investors to decide whether to invest in a particular IPO or not, as there is basis to decide whether the investment will be profitable or not.


Returns from investing in IPO are not guaranteed. The Stock Market is highly volatile. Stock Market fluctuations widely affect not only the individuals and household, but the economy as a whole. The volatility of the stock market makes it difficult to predict how the shares will perform over a period of time as the profit and risk potential of the IPO depends upon the state of the stock market at that particular time. RISK ASSESSMENT: The possibility of buying stock in a promising start-up company and finding the next success story has intrigued many investors. But before taking the big step, it is essential to understand some of the challenges, basic risks and potential rewards associated with investing in an IPO. This has made Risk Assessment an important part of Investment Analysis. Higher the desired returns, higher would be the risk involved. Therefore, a thorough analysis of risk associated with the investment should be done before any consideration. For investing in an IPO, it is essential not only to know about the working of an IPO, but we also need to know about the company in which we are planning to invest. Hence, it is imperative to know:
 The fundamentals of the business  The policies and the objectives of the business

 Their products and services  Their competitors  Their share in the current market  The scope of their issue being successful

It would be highly risky to invest without having this basic knowledge about the company. There are 3 kinds of risks involved in investing in IPO:


It is important to note whether the company has sound business and management policies, which are consistent with the standard norms. Researching business risk involves examining the business model of the company.


Is this company solvent with sufficient capital to suffer short-term business setbacks? The liquidity position of the company also needs to be considered. Researching financial risk involves examining the corporation's financial statements, capital structure, and other financial data.


It would beneficial to check out the demand for the IPO in the market, i.e., the appeal of the IPO to other investors in the market. Hence, researching market risk involves examining the appeal of the corporation to current and future market conditions.

8.1.2 Risk Factor in Secondary Market
 Speculation vs. Investment: In investment the investor has long and medium term

objectives, taken the delivery of security and book profit as and when the returns are higher than his target expectations. But generally investor want short term returns and

they indulge into speculation because of which investor had to bear losses.80% speculation is done in Indian stock exchange.

 Market risk: This market is depending on industrial growth, inflation, currency

fluctuation and RBI policy which are not at all stable. As soon as any rumors in the market come market falls down .It is unexpected market so this is main risk lies in this market.

 Asymmetric information: Generally investors do not have complete information and

also equal information. They do trading depending on their friends and relatives advice .They are with lack of information and even they don’t do research for the company.

 Unpredictable market: Our Indian market directly or indirectly depends on the

international market, FIIs and FDI .Something happens in the global market affects our Indian market which is quiet unpredictable. Example subprime crisis in year 2008.

 Loopholes in government policies: Generally our stock exchange has been regulated

by SEBI but than also we can see loopholes in the market. Indirectly we had problem in corporate governance. .Example Satyam Auditor of the company had shown worn figures in the balance sheet


Now if investor really wants to o make money out of secondary

market than risk assessment is foremost step needs to be taken. Some of the basics steps would be same as mentioned above in primary market. Apart from this Following steps should be taken.
 Before buying any for long term or short term, complete technical analysis and

fundamental analysis of company should be done.

 Scrip had fluctuation than hold it. .  Credit or loan should not be taken for trading.  If you are going for short term than stop loss policy should be adopted. Investor should update herself or himself with lot of information.  Scrips are getting sick.  Scrips are underpriced than buy it.  Enough surplus funds should be having with the investor so that they can cover their losses or can hold securities for long time when market is bearish. Taking advices from analyst or broker who had experience of stock market.  Scrips are overpriced than sell it. sell immediately.

8.2 Returns from the market Return depends on the following:  Longer the maturity.  Returns would be definitely positive if investment is done with complete analysis.  Risk of loss of money is less in the case of debt investment than equity market. Here are some parameters you should evaluate:-  Promoters Is the company a family run business or is it professionally owned? Even with a family run .  The tax provision would influence the returns.  More the creditworthiness of the borrowers or agency issuing the securities lesser the risk. In case of IPOs Good investing principles demand that you study the minutes of details prior to investing in an IPO. larger the risk hence higher the return.

3 Observation for secondary market and primary market 8. The few that have delivered owe it to reasonable pricing that left money on the table for investors. With IPOs staging a comeback.3. 8. the latter is the best course. letter of credits etc. Check the assumptions the promoters are making and whether these assumptions or expectations sound feasible. . growth and margins of the previous years. if the experience of IPO investors over the past two years is anything to go by.  Business Plans Check the progress made in terms of land acquisition. A higher initial investment from the promoters will lead to a higher faith in the organization.business what are the credibility and professional qualifications of those managing the company? Do the top level managers have enough experience (of at least 5 years) in the specific type of business?  Industry Outlook The products or services of the company should have a good demand and scope for profit.  Financials Why does the company require the money? Is the company floating more equity than required? What is the debt component? Keep a track on the profits. clearances from various departments. purchase of machinery. retail investors may be pondering a key question: Should I jostle for allotments in the fancied IPOs or stick to investing in the secondary market? Well.1 Secondary market more rewarding than IPOs Four out of every five IPOs floated over the past two years have failed to keep pace with the broad market. A steady growth rate is the quality of a fundamentally sound company.

only 25 stocks notched up better returns than the index. On a listing high  The second lesson that the analysis offers is this: If the IPO delivers hefty returns on listing. and up further at 70 per cent from issue price. One such example is Zylog Systems.Four out of five IPO stocks floated in 2007 and 2008 have failed to keep pace with the broad market from their offer dates. For instance. Koutons Retail. the market lost 27 per cent.  On a related note. in comparison. have the IPOs improved their performance? We compared the performance of each to the market index (BSE-500) from the respective offer date to August 10. while the market returned 10 per cent in that time.  The last two years (straddling contrasting market conditions) have seen IPO investors rake in healthy gains on listing. These have. such as Ackruti. realty player IVR Prime is currently down 88 per cent from when it hit the market in mid-2007.  A few stocks (16 of 120) do trade higher than their listing price. In fact. Regardless of the issue quality or its pricing. not all IPOs turned out to be duds. With the market now upward-bound. today.  The figures above show that investing in initial public offers would not have delivered on a par with the secondary market. fallen steeply since. which gained 23 per cent on listing day but since crashed 41 per cent. If you were fortunate or prescient enough to pick a handful (23 in number) of outperformers. but these are among the top 20 that recorded positive returns over their issue prices. Despite the market rally repairing valuations. with a handful even doubling on their market debut. both in absolute terms as well as relative to the market. But economic conditions sent the stock market on a downhill journey which halted only recently. and are now trading at discounts of more than 15 per cent to their issue price. . Based on the returns between the closing day of the IPO and current prices. with 104 of the 120 debutants trading below their listing price. 95 of the 120 IPOs got investors lower returns than they would have garnered from an investment in the broader market. 70 of the 120 stocks had gained on close of listing day. however. Similarly. some stocks still held above issue prices during the market lows experienced last October. IPOs of 2007 and 2008 have a long way to go. Even after the almost 90 per cent rally in the broad market. In fact.  More often than not. Not keeping up  The two years between January 2007 and December 2008 saw about 120 IPOs tapping investors for funds.  For example. the latter would have been a better option. IPO stocks trailed the index by a wide margin. do cash in. Jyothy Labs lost 83 per cent from its issue date in late 2007. between investments in the primary or secondary market.  But holding on to stocks in the hope of better gains would have been a futile effort. seven of the 23 delivered returns of over 100 per cent. five out of every six IPOs have registered losses for their investors.  However. they generously rewarded investors. as most stocks slid far below their listing day prices in the subsequent months. Bang Overseas and Maytas Infra. thus. Orbit Corporation is up 44 per cent from price on close of listing day.

trading Many people confuse trading with investing. the IPO of financial services firm Religare Enterprises was priced at a valuation of 23 time’s post-issue equity.2 Investor vs. Three of the top performing IPO 8. For instance. They are not the same.Trailing IPO prices What distinguished these offers from the rest? One factor could be low pricing. at a valuation of about 18 times diluted per share earnings. despite the ups and downs of the market cycle. which was at a substantial discount to the 40-plus price multiple commanded by closest listed competitor Crisil. Relative to listed peers. which left plenty of money on the table for investors. Similarly. while competitors were trading at a multiple of 30-40 times their earnings. top IPO performer ICRA floated its offer in March 2007. Being in a unique business also helped.3. . those IPOs priced at conservative valuations appear to have done much better than others.

100 each. This approach can be dangerous. which simply means they buy shares of some company and hold onto them for a long time. Let’s consider someone who bought shares of XYZ Company at their peak value of around Rs. An investor relies mostly on Fundamental Analysis. which is the analytical method of predicting long-term prospects of a particular asset.! I don’t know about you. a form of marketing analysis that attempts to predict short term price fluctuations.000/-. He’s not generally concerned about short-term fluctuations in prices. but losing Fifty Five Thousand Rupees would be a relatively big loss for me. Many investors suffer such losses regularly.55000/. Most investors adopt a “buy and hold” approach to assets. If you can catch just two index points on an average day. Traders. Traders rely on Technical Analysis. To help make their decisions. even devastating. counting on that historical rise in market equity. those shares are worth Rs. are attempting to profit on just those short-term price fluctuations. Two years later. 65. If that investor had spent Rs. hoping that in five or ten or fifteen years the market will rebound. you can make a comfortable living as a Trader. on the other hand.650 per share at the beginning of the year 2000. in an extremely volatile market such as today’s BSE or NSE Indexes Show. . The amount of time an active trader holds onto an asset is very short: in many cases minutes. An investor is more interested in the long-term appreciation of his assets. What most investors need to remember is this: investing is not about weathering storms with your “beloved” company – it’s about making money. because he’ll ride them out over the long haul. or sometimes seconds. and they’ll recoup their losses and achieve an overall gain.The biggest difference between them is the length of time you hold onto the assets. his net loss would be Rs.

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