Professional Documents
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Impact of Ipo's Over Indian Capital Market
Impact of Ipo's Over Indian Capital Market
ON
CAPITAL MARKET”
(SESSION 2007-09)
1
PREFACE
Looking at the complexities of the situation, students are required to work in a dissertation
project, which form part of the MBA programs conducted by most of the students of GITM,
MD University during the working on project undertake a practical universities and institute
imparting management education or theoretical project in order to analyze, interpret and report
on one or more management problem and situation.
The research project on IMPACT of IPO’s over Capital Market of India is an overview of the
Govt. regulations and provides a brief idea to investors in concern with the investment in
Primary Market.
It is helped that the activity carried out with dedication will open up new vistas for the budding
managers as well as grooms them to broadly share the responsibilities in future.
VINOD
2
GUIDE CERTIFICATE
I take great pleasure in certifying that project entitled “IMPACT of IPO’s Over Indian
Capital Market” has been completed by VINOD as partial fulfillment for degree of
MBA, under my supervision and guidance. The work speaks about the sincere effort
of candidate and thinks it is a quite satisfactory, should be accepted for evaluation
(This has not been submitted for award of any degree or other similar title or prizes.)
Project Guide
3
DECLARATION
Forwarded By
Director of Institute
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ACKNOWLEDGEMENT
It is not until you undertake a project like this one that you realize how massive efforts it really
is, or how much you must rely upon the selfless efforts and goodwill of others. I got an
opportunity to learn and experience ethics and environment of bank.
I wish to express my deep sense of gratitude to my guide Ms. Sachita Yadav , Lecturer in
Dept. of MBA GITM, GURGAON who in his benevolent guidance has enabled me to
accomplish my project .He has been a great source of inspiration all the way. Without his keen
interest, incessant, encouragement and invaluable suggestions this report couldn’t have attained
its present shape with zeal and enthusiasm.
My sincere thanks to all other faculty members and all the persons who are associated with this
project for their assistance. Several persons have made their valuable contribution to this work.
At this point, I also take the opportunity to thanks Mr. Anil Agarwal, HOD, department of
MBA, GITM, and GURGAON for providing their constant support and valuable feedback to
help me conduct the project, owing to the fact that I was new to the organization.
VINOD
5
TABLE OF CONTENTS
PARTICULARS
Title page 1
Preface 2
Guide Certificate 3
Declaration 4
Acknowledgement 5
Functionaries of IPO
Pricing of issue
Performance of an IPO
6
5. FINDINGS & RECOMMENDATIONS 78-83
6. CONCLUSION 84-86
APPENDIXES 87-91
• Bibliography
• Questionnaire
7
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Introduction to the Project
The project which I have taken is “IMPACT of IPO’s over Indian Capital Market”. In
this I have studied that how an IPO is brought it into the market and how it gets listed into the
market. It also stated that what are functionaries and eligibility norms for an IPO to come into
the existence. The IMPACT of IPO’s over Capital Market is an analysis of various IPO’s which
have a great contribution in the development or growth of the Capital Market. It also explains
the preferences of Investors about investments in stock market. What is the criterion of investor
to choosing a particular IPO to invest and what the factors are that affects investor’s decision?
The primary market provides the channel for sale of new securities. Primary
Market provides opportunity to issuers of securities, Government as well as corporate, to raise
resources to meet their requirements of investment and/or discharge some obligation. They may
issue the securities at face value, or at a discount/premium and
These securities may take a variety of forms such as equity, debt etc. They may issue the
securities in domestic market and/or international market.
In this year Initial Public Offerings (IPO’s) have increased somewhat. IPO’s provide an
easy way to increase initial investor’s wealth and to raise cash for future expansion of the
company. This was particularly noticeable in the technology related stocks in 1990s. In many
cases there were clear indications that IPO’s would not reach profitability in the foreseeable
future. However investors, anxious not to miss the boat, would invest in these offerings on the
expectation of capital gain as a result of an increase in the stock prices. This euphoria created a
hot market condition fuelling an increase in the stock prices until such a time that market
sentiment changed. IPO’s can be highly volatile and risky for investors but they can also
provide a very higher return if the proper investment strategy is implemented. The IPO risk are
two-fold, first is the short-term market fluctuation, second is the risk associated with a change
in market perception. Once market perception and investor expectation changes, price would
begin to decline precipitously.
This present study tries to find out the types of information, which are important for
assessing an IPO by small investors and in somehow others also. This presents study also
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evaluates the effectiveness of the methods, strategies, and tools available to small investors to
process the information for assessment of the IPO.
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the underwriter and company attempt to hype and build up interest for the issue. They go on a
road show - also known as the "dog and pony show" - where the big institutional investors are
courted. As the effective date approaches, the underwriter and company sit down and decide on
the price. This isn't an easy decision: it depends on the company, the success of the road show,
and most importantly, current market conditions. Of course, it's in both parties' interest to get as
much as possible.
Finally, the securities are sold on the stock market and the money is collected from investors.
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SIGNIFICANCE OF STUDY
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Financial and Capital Markets
A financial market is a place where financial instruments are exchanged. Financial
market can be classified on the basis of the nature of instruments exchanged in the economy.
Such instruments can broadly divided in two parts i.e. claim instruments and currency
instruments. The subdivision of the major markets is shown in the following figure:
Financial Market
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Securities Market:
Securities are financial instruments that have been created to represent a legal obligation
to pay a sum in future in return for the current receipts of value and the security market is a
place or system where these securities are exchanged. Security market can be further
divided into domestic and foreign market.
1. Domestic Market:
Domestic market control exclusively to firms registered in a country. The country’s
regulatory authority such as RBI and SEBI regulated the functioning of money market and
capital market in domestic market.
2. Foreign Market:
Due to globalization each nation also allows firms registered outside the country to
participate in its economic activities for business expansion. These firms are controlled by
the foreign segments.
3. Capital Market:
Capital market claims both long term fixed claim securities and equity claim securities.
Capital market composed all marketable securities which taken place into the market for the
trading purposes.
4. Money Market:
Money markets are short-term debt instruments market. Debt is a fixed income security
and represents the borrowings of a market player.
5. Forex Market:
The foreign exchange market is an international currency exchange market. It caters to
the need of international mobility of funds. It exchanges the currency of one country to
another country.
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6. Spot Market:
Spot market denotes the current trading price of financial instruments. In the context of
time, the spot market may range between one day, two days, or a week.
7. Derivative Market:
The derivative market is a future market. Trade takes place here with the intention to
settle it at a later date. The derivative market has forward, future, options or other derivative
instruments trading.
Capital Market
Capital Market is one of the most important segments of the Indian Financial System. It is
the market available to the Companies for meeting their requirements of long-term funds. It
refers to all the facilities and the institutional arrangements for borrowing and lending funds. In
other words, it is concerned with the raising of money capital through long term investments.
The demand for long term capital comes predominantly from private sector manufacturing
industries, agriculture, and trade and Government agencies. While the supply of funds for the
Capital Market comes largely from individuals and corporate savings, banks, insurance
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Indian Capital Market is divided in further two parts:
• Industrial Securities Market – It refers to the market which deals in the equities and
Primary Market is the door-way of corporate to enter in the Capital Market new issues /
fresh / subsequent securities. It deals with the issue of new securities in terms of Equity shares,
Preference shares, Debt Instruments, Central and state government projects, various public
sector industrial units and post trusts etc. Primary market consists issue of securities to public
which is popularly known as “Initial Public Offers” comes into the existence first time and
fresh.
Regulatory Framework
In India Capital Market is regulated by the Capital Market division and Department of
Securities and Exchange Board of India Act, 1992 is regulatory authority established under
( SEBI Act 1992 ) in order to protect the investors interest in securities as well as for the
development of Capital Market. Some other laws are Securities Contracts (Regulation
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Act) 1956 and Depositories Act 1996. SEBI has a direct control on the securities of the
corporate because it is necessary to be registered under the SEBI Act, governed by the
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ISSUES IN PRIMARY MARKET
FINANCIALS OF IPO’s
Primarily, issues can be classified as a Public, Rights or preferential issues (also known as
private placements). While public and rights issues involve a detailed procedure, private
placements or preferential issues are relatively simpler. The classification of issues is illustrated
below:
Public issues can be further classified into Initial Public offerings and further public offerings.
In a public offering, the issuer makes an offer for new investors to enter its shareholding
family. The issuer company makes detailed disclosures as per the DIP guidelines in its offer
document and offers it for subscription. The significant features and figure are showed below:
Issues
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Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of
securities or an offer for sale of its existing securities or both for the first time to the public.
This paves way for listing and trading of the issuer’s securities.
A follow on public offering (FPO) is when an already listed company makes either a fresh
issue of securities to the public or an offer for sale to the public, through an offer document. An
offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing
obligations.
Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its
existing shareholders as on a record date. The rights are normally offered in a particular ratio to
the number of securities held prior to the issue. This route is best suited for companies who
would like to raise capital without diluting stake of its existing shareholders unless they do not
intend to subscribe to their entitlements.
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Functionaries of an IPO
The functionaries in IPO are those concerned with the formation of joint stock
companies and the issue of their securities to the public. Public issue is essentially an exercise
involving active participation of number agencies.
The promoter, as a principal representative of the company, which is making the public
issue, should be clear in his mind about the number of agencies involved and their respective
roles in the entire exercise so as to be able to coordinate effectively the efforts of these
agencies. These functionaries are:
Manager
s
To
The
Promote Issue Registra
r r
Govt. /
Statutor
Financia y
l Agencie
s
IPO
Publicity Bankers
Advertis
Brokers
ing
Others
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ELIGIBILITY NORMS FOR MAKING THESE ISSUES
SEBI has laid down eligibility norms for entities accessing the primary market through public
issues. There is no eligibility norm for a listed company making a rights issue, as it is an offer
made to the existing shareholders who are expected to know their company. The main entry
norms for companies making a public issue (IPO or FPO) are summarized as under:
Entry Norm I (EN I): The Company shall meet the following requirements:
(a) Net Tangible Assets of at least Rs. 3 crores for 3 full years.
(d) If change in name, at least 50% revenue for preceding 1 year should be from the new
activity.
(e) The issue size does not exceed 5 times the pre- issue net worth
To provide sufficient flexibility and also to ensure that genuine companies do not suffer on
account of rigidity of the parameters, SEBI has provided two other alternative routes to
company not satisfying any of the above conditions, for accessing the primary Market, as
under:
(a) Issue shall be through book building route, with at least 50% to be mandatory allotted to
the Qualified Institutional Buyers (QIBs).
(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a
compulsory market-making for at least 2 years OR
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Entry Norm III (EN III):
(a) The “project” is appraised and participated to the extent of 15% by FIs/Scheduled
Commercial Banks of which at least 10% comes from the appraiser(s).
(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a
compulsory market-making for at least 2 years.
In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the
criteria of having at least 1000 prospective allotters in its issue
SEBI (DIP) guidelines have provided certain exemptions from the eligibility norms. The
following are eligible for exemption from entry norms.
(c) An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS
or a bank which was earlier a PFI and not less than 5% of the project cost is financed by
any of these institutions.
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SEBI’S ROLE IN AN ISSUE
Any company making a public issue or a listed company making a rights issue of value of more
than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The
company can proceed further on the issue only after getting observations from SEBI. The
validity period of SEBI’s observation letter is three months only i.e. the company has to open
its issue within three months period
SEBI does not recommend any issue nor does take any responsibility either for the financial
soundness of any scheme or the project for which the issue is proposed to be made or for the
correctness of the statements made or opinions expressed in the offer document.
It is to be distinctly understood that submission of offer document to SEBI should not in any
way be deemed or construed that the same has been cleared or approved by SEBI. The Lead
manager certifies that the disclosures made in the offer document are generally adequate and
are in conformity with SEBI guidelines for disclosures and investor protection in force for the
time being. This requirement is to facilitate investors to take an informed decision for making
investment in the proposed issue.
The investors should make an informed decision purely by themselves based on the contents
disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and
should in no way be construed as a guarantee for the funds that the investor proposes to invest
through the issue. However, the investors are generally advised to study all the material facts
pertaining to the issue including the risk factors before considering any investment. They are
strongly warned against any ‘tips’ or news through unofficial means.
“DIP” guidelines
The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor
protection) guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been
carried out in the same in line with the market dynamics and requirements. In 2000, SEBI
issued “Securities and Exchange Board of India (Disclosure and Investor Protection)
Guidelines, 2000” which is compilation of all circulars organized in chapter forms. These
guidelines and amendments thereon are issued by SEBI India under section 11 of the Securities
and Exchange Board of India Act, 1992. SEBI (Disclosure and investor protection) guidelines
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2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances
buy the companies.
The Merchant Banker are the specialized intermediaries who are required to do due diligence
and ensure that all the requirements of DIP are complied with while submitting the draft offer
document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms
of SEBI (Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker
is also placed on the website for public comments. Officials of SEBI at various levels examine
the compliance with DIP guidelines and ensure that all necessary material information is
disclosed in the draft offer documents.
Central Listing Authority (CLA) & role of SEBI in the processing of Offer documents for
an issue:
The Central Listing Authority’s (CLA) functions have been detailed under Regulation 8 of
SEBI (Central Listing Authority) Regulations, 2003 (CLA
Regulations) issued on August 21, 2003 and amended up to October 14, 2003.
In brief, it covers processing applications for letter precedent to listing from applicants; to make
recommendations to the Board on issues pertaining to the protection of the interest of the
investors in securities and development and regulation of the securities market, including the
listing agreements, listing conditions and disclosures to be made in offer documents; and; to
undertake any other functions as may be delegated to it by the Board from time to time.
SEBI as the regulator of the securities market examines all the policy matters pertaining to
issues and will continue to do so even during the existence of the CLA.
“Offer document” means Prospectus in case of a public issue or offer for sale and Letter of
Offer in case of a rights issue which is filed Registrar of Companies (ROC) and Stock
Exchanges. An offer document covers all the relevant information to help an investor to make
his/her investment decision.
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“Draft Offer document” means the offer document in draft stage. The draft offer documents
are filed with SEBI, at least 21 days prior to the filing of the Offer Document with ROC/ SEs.
SEBI may specifies changes, if any, in the draft Offer Document and the issuer or the Lead
Merchant banker shall carry out such changes in the draft offer document before filing the
Offer Document with ROC/SEs. The Draft Offer document is available on the SEBI website
for public comments for a period of 21 days from the filing of the Draft Offer Document with
SEBI.
“Red Herring Prospectus” is a prospectus which does not have details of either price or
number of shares being offered or the amount of issue. This is used in book building issues
only. In the case of book-built issues, it is a process of price discovery and the price cannot be
determined until the bidding process is completed. Hence, such details are not shown in the
Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only
on completion of the bidding process, the details of the final price are included in the offer
document. The offer document filed thereafter with ROC is called a prospectus.
“Lock-in”
“Lock-in” indicates a freeze on the shares. SEBI (DIP) Guidelines have stipulated lock-in
requirements on shares of promoters mainly to ensure that the promoters or main persons, who
are controlling the company, shall continue to hold some minimum percentage in the company
after the public issue.
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“Promoter” definition
The promoter has been defined as a person or persons who are in over-all control of the
company, who are instrumental in the formulation of a plan or programmed pursuant to which
the securities are offered to the public and those named in the prospectus as promoters(s). It
may be noted that a director / officer of the issuer company or person, if they are acting as such
merely in their professional capacity are not be included in the definition of a promoter.
'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any spouse
of that person, or any parent, brother, sister or child of the person or of the spouse). In case
promoter is a company, a subsidiary or holding company of that company; any company in
which the promoter holds 10% or more of the equity capital or which holds 10% or more of the
equity capital of the Promoter; any company in which a group of individuals or companies or
combinations thereof who holds 20% or more of the equity capital in that company also holds
20% or more of the equity capital of the issuer company. In case the promoter is an individual,
any company in which 10% or more of the share capital is held by the promoter or an
immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or
more of his immediate relative is a member; any company in which a company specified in (i)
above, holds 10% or more, of the share capital; any HUF or firm in which the aggregate share
of the promoter and his immediate relatives is equal to or more than 10% of the total, and all
persons whose shareholding is aggregated for the purpose of disclosing in the prospectus
"shareholding of the promoter group"
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Pricing Of an Issue
Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines
have provided that the issuer in consultation with Merchant Banker shall decide the price.
There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation.
The company and merchant banker are however required to give full disclosures of the
parameters which they had considered while deciding the issue price. There are two types of
issues one where company and LM fix a price (called fixed price) and other, where the
company and LM stipulate a floor price or a price band and leave it to market forces to
determine the final price (price discovery through book building process).
An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in
the offer document where the issuer discloses in detail about the qualitative and quantitative
factors justifying the issue price. The Issuer company can mention a price band of 20% (cap in
the price band should not be more than 20% of the floor price) in the Draft offer documents
filed with SEBI and actual price can be determined at a later date before filing of the final offer
document with SEBI/Rocs.
The Process:
• The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.
• The Issuer specifies the number of securities to be issued and the price band for orders.
• The Issuer also appoints syndicate members with whom orders can be placed by the
investors.
• Investors place their order with a syndicate member who inputs the orders into the
'electronic book'. This process is called 'bidding' and is similar to open auction.
• A Book should remain open for a minimum of 5 days.
• Bids cannot be entered less than the floor price.
• Bids can be revised by the bidder before the issue closes.
• On the close of the book building period the 'book runner evaluates the bids on the basis
of the evaluation criteria which may include -
o Price Aggression
o Investor quality
o Earliness of bids, etc.
• The book runner and the company conclude the final price at which it is willing to issue
the stock and allocation of securities.
• Generally, the number of shares is fixed; the issue size gets frozen based on the price
per share discovered through the book building process.
• Allocation of securities is made to the successful bidders.
• Book Building is a good concept and represents a capital market which is in the process
of maturing.
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Rules governing book building is covered in Chapter XI of the Securities and Exchange Board
of India (Disclosure and Investor Protection) Guidelines 2000.
• BSE offers the book building services through the Book Building software that runs on
the BSE Private network.
• This system is one of the largest electronic book building networks anywhere spanning
over 350 Indian cities through over 7000 Trader Work Stations via eased lines, VSATs
and Campus LANS
• The software is operated through book-runners of the issue and by the syndicate
member brokers. Through this book, the syndicate member brokers on behalf of
themselves or their clients' place orders.
• Bids are placed electronically through syndicate members and the information is
collected on line real-time until the bid date ends.
• In order to maintain transparency, the software gives visual graphs displaying price v/s
quantity on the terminals.
Corporate may raise capital in the primary market by way of an initial public offer, rights issue
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or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in
the primary market. This Initial Public Offering can be made through the fixed price method,
book building method or a combination of both.
In case the issuer chooses to issue securities through the book building route then as per SEBI
guidelines, an issuer company can issue securities in the following manner:
a. 100% of the net offer to the public through the book building route.
b. 75% of the net offer to the public through the book building process and 25% through
the fixed price portion.
Difference between shares offered through book building and offer of shares through
normal public issue:
Price Band
The red herring prospectus may contain either the floor price for the securities or a price band
within which the investors can bid. The spread between the floor and the cap of the price band
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shall not be more than 20%. In other words, it means that the cap should not be more than
120% of the floor price.
The price band can have a revision and such a revision in the price band shall be widely
disseminated by informing the stock exchanges, by issuing press release and also indicating the
change on the relevant website and the terminals of the syndicate members. In case the price
band is revised, the bidding period shall be extended for a further period of three days, subject
to the total bidding period not exceeding thirteen days.
It may be understood that the regulatory mechanism does not play a role in setting the price for
issues. It is up to the company to decide on the price or the price band, in consultation with
Merchant Bankers.
The basis of issue price is disclosed in the offer document. The issuer is required to disclose in
detail about the qualitative and quantitative factors justifying the issue price.
A company making an issue to public can reserve some shares on “allotment on firm basis” for
some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment
to the investor is on firm basis. DIP guidelines provide for maximum % of shares which can be
reserved on firm basis. The shares to be allotted on “firm allotment category” can be issued at a
price different from the price at which the net offer to the public is made provided that the price
at which the security is being offered to the applicants in firm allotment category is higher than
the price at which securities are offered to public.
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Preference While Doing the Allotment
The allotment to the Qualified Institutional Buyers (QIBs) is on a discretionary basis. The
discretion is left to the Merchant Bankers who first disclose the parameters of judgment in the
Red Herring Prospectus.
There are no objective conditions stipulated as per the DIP Guidelines. The Merchant Bankers
are free to set their criteria and mention the same in the Red Herring Prospectus.
Who is eligible for reservation and how much? (QIBs, NIBs, etc.)
A book built issue under entry Norm II shall offer not less than 50% to the QIBs and not less
than 25% to the retail investors. The rest may be allotted to the Non Institutional buyers or
High Net Worth individuals.
Retail individual investor’ means an investor who applies or bids for securities of or for a value
of not more than Rs.50,000.He can bid in a book-built issue for a value not more than
Rs.50,000.
Any bid made in excess of this will be considered in the HNI category.
“Online Bidding”
A company proposing to issue capital to public through the on-line system of the stock
exchange for offer of securities can do so if it complies with the requirements under Chapter
11A of DIP Guidelines. The appointment of various intermediaries by the issuer includes a
prerequisite that such members/registrars have the required facilities to accommodate such an
online issue process. An investor may place his bids through the online terminals offered by
some of the brokers.
Demat Account
As per the requirement, all the public issues of size in excess of Rs.10 crore, are too made
compulsorily in the demat mode. Thus, if an investor chooses to apply for an issue that is being
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made in a compulsory demat mode, he has to have a demat account and has the responsibility
to put the correct DP ID and Client ID details in the bid/application forms.
The investor can change or revise the quantity or price in the bid using the form for
changing/revising the bid that is available along with the application form. However, the entire
process of changing of revising the bids shall be completed within the date of closure of the
issue.
The investor is entitled to receive a Confirmatory Allotment Note (CAN) in case he has been
allotted shares within 15 days from the date of closure of the issue. The registrar has to ensure
that the demat credit or refund as applicable is completed within 15 days of the closure of the
issue.
Presently, in issues made through book building, Issuers and merchant bankers are required to
ensure online display of the demand and bids during the bidding period. This is the Open book
system of book building. Here, the investor can be guided by the movements of the bids during
the period in which the bid is kept open.
Under closed book building, the book is not made public and the bidders will have to take a call
on the price at which they intend to make a bid without having any information on the bids
submitted by other bidders.
Hard underwriting
Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage.
The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares
are not subscribed by investors, the issue is devolved on underwriters and they have to bring in
the amount by subscribing to the shares. The underwriter bears a risk which is much higher in
soft underwriting.
Soft underwriting
Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the
pricing process is complete. He then, immediately places those shares with institutional players.
The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft
underwriter has the option to invoke a force Majeure (acts of God) clause in case there are
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certain factors beyond the control that can affect the underwriter’s ability to place the shares
with the buyers.
In Book building issue, the issuer is required to indicate either the price band or a floor price in
the red herring prospectus. The actual discovered issue price can be any price in the price band
or any price above the floor price. This issue price is called “Cut off price”. This is decided by
the issuer and LM after considering the book and investors’ appetite for the stock. SEBI (DIP)
guidelines permit only retail individual investors to have an option of applying at cut off price.
Differential pricing
Pricing of an issue where one category is offered shares at a price different from the other
category is called differential pricing. In DIP Guidelines differential pricing is allowed only if
the securities to applicants in the firm allotment category are at a price higher than the price at
which the net offer to the public is made. The net offer to the public means the offer made to
the Indian public and does not include firm allotments or reservations or promoters’
contributions.
After the closure of the issue, the bids received are aggregated under different categories i.e.,
firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail,
etc. The oversubscription ratios are then calculated for each of the categories as against the
shares reserved for each of the categories in the offer document. Within each of these
categories, the bids are then segregated into different buckets based on the number of shares
applied for. The oversubscription ratio is then applied to the number of shares applied for and
the number of shares to be allotted for applicants in each of the buckets is determined.Then, the
number of successful allot tees is determined. This process is followed in case of proportionate
allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead
manager.
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PERFORMANCE OF AN IPO
Any analyst can refer to a company's fundamentals without actually saying anything
meaningful. So what fundamentals are, how and why they are analyzed, and why fundamental
analysis is often a great starting point to picking good companies.
The Theory
The goal of analyzing a company's Performance is to find a stock's 'intrinsic value', a term for
what you believe a stock is really worth--as opposed to the value at which it is being traded in
the marketplace. If the intrinsic value is more than the current share price, analysis is showing
that the stock is worth more than its price and that it makes sense to buy the stock.
Although there are many different methods of finding the intrinsic value, the premise behind all
the strategies is the same: a company is worth the sum of its discounted cash flows. This means
that a company is worth all of its future profits added together. And these future profits must be
'discounted' to account for the time value of money, that is, the force by which the $1 one
receive in a year's time is worth less than $1 one receive today.
The idea behind intrinsic value equaling future profits makes sense if one thinks about how a
business provides value for its owner(s). If a small business, the worth of that business is the
money one can take from the company year after year (not the growth of the stock). And one
can take something out of the company only if you have something left over after you pay for
supplies and salaries, reinvest in new equipment, and so on. A business is all about profits,
which is the basis of intrinsic value.
If the value arrived at through DCF analysis is lower then the current cost of the investment, the
opportunity may be a good one.
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Basic Formula:
DCF models are powerful but they do have shortcomings. DCF is merely a mechanical
valuation tool. Small changes in inputs can result in large changes in the value of a company.
Instead of trying to project the cash flows to infinity, a terminal value approach is taken in the
valuation. A simple annuity is used to estimate the terminal value past 10. This is done because
as time goes on, it is harder to come to a realistic estimate of the cash flows.
One of the assumptions of the discounted cash flow theory is that people are rational, that
nobody would buy a business for more than its future discounted cash flows. Since a stock
represents ownership in a company, this assumption applies to the stock market. But still stocks
exhibit volatile movements. It doesn't make sense for a stock's price to fluctuate so much when
the intrinsic value isn't changing by the minute.
The fact is that many people do not view stocks as a representation of discounted cash flows,
but as trading vehicles. They don’t care what the cash flows are if they can sell the stock to
somebody else for more than what you paid for it. Cynics of this approach have labeled it the
"greater fool theory," since the profit on a trade is not determined by a company's value, but
about speculating whether one can sell to some other investor (the fool). On the other hand, a
trader would say that investors relying solely on fundamentals are leaving themselves at the
mercy of the market instead of observing its trends and tendencies.
This debate demonstrates the general difference between a technical and fundamental investor.
A follower of technical analysis is guided not by value, but by the trends in the market often
represented in charts. Both fundamental and technical analysis has limitations. The answer is
neither. As we mentioned in the introduction, every strategy has its own merits. In general,
fundamental is thought of as a long-term strategy, while technical is used more for short-term
strategies.
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Putting Theory into Practice
The idea of discounting cash flows seems okay in theory, but implementing it in real life is
difficult. One of the most obvious challenges is determining how far into the future one should
forecast cash flows. It's hard enough to predict next year's profits, so it is difficult for one to
predict the course of the next 10 years. What if a company goes out of business? What if a
company survives for hundreds of years? All of these uncertainties and possibilities explain
why there are many different models devised for discounting cash flows, but none completely
escapes the complications posed by the uncertainty of the future.
Qualitative Analysis
Fundamental analysis has a very wide scope. Valuing a company involves not only crunching
numbers and predicting cash flows but also looking at the general, more subjective qualities of
a company.
Management
The backbone of any successful company is strong management. The people at the top
ultimately make the strategic decisions and therefore serve as a crucial factor determining the
fate of the company. To assess the strength of management, investors can simply ask the
standard five W's: who, where, what, when, and why.
Who?
One should do some research, and find out who is running the company. Among other things,
one should know who the company's CEO, CFO, COO, and CIO are. Then one can move onto
the next question.
Where?
One need to find out where these people come from, specifically, their educational and
employment backgrounds. One should find out if these backgrounds make the people suitable
for directing the company in its industry. A management team consisting of people who come
from completely unrelated industries should raise questions. If the CEO of a newly-formed
mining company previously worked in the healthcare industry, small investors should find out
whether he or she has the necessary qualities to lead a mining company to success.
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What and When?
It is necessary to know what the management philosophy is. In other words, in what style do
these people intend to manage the company? Some managers are more personable, promoting
an open, transparent, and flexible way of running the business. Other management philosophies
are more rigid and less adaptable, valuing policy and established logic above all in the decision-
making process. One can discern the style of management by looking at its past actions. One
should ask himself if he agrees with this philosophy, and if he can see it working for the
company, given its size and the nature of its business.
Once one knows the style of the managers, it is now time to find out when this team took over
the company. Jack Welch, for example, was CEO of General Electric for over 20 years. His
long tenure is a good indication that he was a successful and profitable manager; otherwise, the
shareholders and the board of directors wouldn't have kept him around. If a company is doing
poorly, one of the first actions taken is management restructuring, which is change in
management due to poor results. If one sees a company continually changing managers, it may
be a sign to invest elsewhere.
At the same time, although restructuring is often brought on by poor management, it doesn't
automatically mean the company is doomed. For example, Chrysler Corporation was on the
brink of bankruptcy when Lee Iacocca, the new CEO, came in and installed a new management
team that renewed Chrysler's status as a major player in the auto industry. So, management
restructuring may be a positive sign, showing that a struggling company is making efforts to
improve its outlook and is about to see a change for the better.
Why?
A final factor to investigate is why these people have become managers. One should Look at
the manager's employment history, and try to see if these reasons are clear. Does this person
have the qualities needed to make someone a good manager for this company? Has he or she
been hired because of past successes and achievements, or has he or she acquired the position
through questionable means, such as self-appointment after inheriting the company?
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Know What a Company Does and How it Makes Money
A second important factor to consider when analyzing a company's qualitative factors is its
product(s) or service(s). How does this company make money? What is the company's business
model?
Knowing how a company's activities will be profitable is fundamental to determining the worth
of an investment. One of the biggest lessons taught by the dotcom bust of the late '90s is that
not understanding a business model can have dire consequences. Many people had no idea how
the dotcom companies were making money, or why they were trading so high. In fact, these
companies weren't making any money; it's just that their growth potential was thought to be
enormous. This led to overzealous buying based on a herd mentality, which in turn led to a
market crash. But not everyone lost money when the bubble burst: Warren Buffet didn't invest
in high-tech primarily because he didn't understand it. Although he was ostracized for this
during the bubble, it saved him billions of dollars in the ensuing dotcom fallout. One needs a
solid understanding of how a company actually generates revenue in order to evaluate whether
management is making the right decisions.
Industry/Competition
Aside from having a general understanding of what a company does, one should analyze the
characteristics of its industry, such as its growth potential. A mediocre company in a great
industry can provide a solid return, while a mediocre company in a poor industry will likely to
cause loss.
Market share is another important factor. One should look at how Microsoft thoroughly
dominates the market for operating systems. Anyone trying to enter this market faces huge
obstacles because Microsoft can take advantage of economies of scale. This does not mean that
a company in a near monopoly situation is guaranteed to remain on top, but one should be
careful about a risky venture.
Barriers against entry into a market can also give a company a significant qualitative advantage.
If compared, for instance, the restaurant industry to the automobile or pharmaceuticals
industries. Anybody can open up a restaurant because the skill level and capital required are
very low. The automobile and pharmaceuticals industries, on the other hand, have massive
barriers to entry: large capital expenditures, exclusive distribution channels, government
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regulation, patents, and so on. The harder it is for competition to enter an industry, the greater
the advantage for existing firms.
Brand Name
A valuable brand reflects years of product development and marketing. For example the most
popular brand name in the world: Coca-Cola. Many estimate that the intangible value of Coke's
brand name is in the billions of dollars! Massive corporations such as Proctor and Gamble rely
on hundreds of popular brand names like Tide, Head & Shoulders. Having a portfolio of brands
diversifies risk because the good performance of one brand can compensate for the lower
performance of another.
Assessing a company from a qualitative standpoint and determining whether one should invest
in it are as important as looking at sales and earnings. This strategy may be one of the simplest,
but it is also one of the most effective ways to evaluate a potential investment.
Technical Analysis
Technical analysis is the polar opposite of fundamental analysis, which is the basis of every
method explored so far in this tutorial. Technical analysts, or technicians, select stocks by
analyzing statistics generated by past market activity, prices, and volumes. Sometimes also
known as chartists, technical analysts look at the past charts of prices and different indicators to
make inferences about the future movement of a stock's price.
Chart analysis (also called technical analysis) is the study of market action, using price charts,
to forecast future price direction. The cornerstone of the technical philosophy is the belief that
all factors that influence market price--fundamental information, political events, natural
disasters, and psychological factors--are quickly discounted in market activity. In other words,
the impact of these external factors will quickly show up in some form of price movement,
either up or down.
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The most important assumptions that all technical analysis techniques are based upon can be
summarized as follows:
1. Prices already reflect, or 'discount', relevant information. In other words, markets are
efficient.
Technical analysis has become popular over the past several years, as more and more people
believe that the historical performance of a stock is a strong indication of future performance.
The use of past performance should not come as a big surprise. People using fundamental
analysis have always looked at the past performance by comparing fiscal data from previous
quarters and years to determine future growth. The difference lies in the technical analyst's
belief that securities move with very predictable trends and patterns. These trends continue
until something happens to change the trend, and until this change occurs, price levels are
predictable.
Pure technical analysts couldn't care less about the elusive intrinsic value of a company or any
other factors that preoccupy fundamental analysts, such as managements, business models, or
competition. Technicians are concerned with the trends implied by past data, charts, and
indicators and they often make a lot of money trading companies they know almost nothing
about.
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Technical Analysis as a Long-Term Strategy
Technical analysts are usually very active in their trades, holding positions for short periods in
order to capitalize on fluctuations in price, whether up or down. A technical analyst may go
short or long on a stock, depending on what direction the data is saying the price will move. If a
stock does not perform the way a technician thought it would, he or she wastes little time
deciding whether to exit his or her position, using stop loss orders to mitigate losses. Whereas a
value investor must exercise a lot of patience and wait for the market to correct it’s under
valuation of a company, the technician must possess a great deal of trading agility and know
how to get in and out of positions with speed.
Among the most important concepts in technical analysis are support and resistance. These are
the levels at which technicians expect a stock to start increasing after a decline (support), or to
begin decreasing after an increase (resistance). Trades are generally entered around these
important levels because they indicate the way in which a stock will bounce. They will enter
into a long position if they feel a support level has been hit, or enter into a short position if they
feel a resistance level has been struck.
Technicians have hundreds of indicators and chart patterns to use for picking stocks. However,
it is important to note that no one indicator or chart pattern is infallible or absolute; the
technician must interpret indicators and patterns, and this process is more subjective than
formulaic.
Technical analysis is unlike any other stock picking strategy--it has its own set of concepts, and
it relies on a completely different set of criteria than any strategy employing fundamental
analysis. However, regardless of its analytical approach, mastering technical analysis requires
discipline and savvy, just like any other strategy.
Some technical analysts claim they can be extremely accurate a majority of the time. There are
many instances of investors successfully trading securities with only the knowledge of its chart
and without even understanding what the company does. Technical analysis is a terrific tool,
but most agree that it is much more effective when combined with fundamental analysis.
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TYPES OF INFORMATION REQUIRED TO ASSESS A COMPANY’S IPO
The Initial Public Offering or IPO market as it is known, received a new lease of life in FY04-
05. With high profile issues like, NTPC and TCS opening at more than 3 and 10 times their
issue price respectively, investors are flocking to the IPO market like never before. Companies,
which had earlier shied away from the capital market, are now returning with a vengeance to
satiate the appetite of investors.
But one shouldn’t just jump for an IPO as soon as it is announced. Here an attempt has been
made to outline some issues that experts’ advice investors should look at before them making
investment decision.
Adequate research is, without a doubt, the most effective way to identify and stay away from
the IPO disasters waiting to happen. The prospectus, which contains nearly all aspects of a
company's business and game plan, is the first place any investor interested in purchasing a new
issue should look.
Before investing in an IPO, small investors are suggested by experts to run a check on the
following factors:
Second-tier investment banks -- Investment banks hired by a company to handle an IPO must
do a fair amount of due diligence, so it's always comforting when the names on the front of a
prospectus are well-known and well-regarded. Of course, even the best banks take out some
turkeys. Plus, a number of small regional banks have solid reputations.
The Lead Managers act as a catalyst as they attempt to bring in some credibility to the offer and
their accountability is also very high. It is to be remembered that the lead managers’ credibility
could act only as an indicator to the proposed issue, but does not assure success. There have
been poor issues from good merchant bankers in the past.
For the purpose of security, one can look for category one lead managers for judging the
quality of the issue that includes DSP Merrill Lynch, HSBC Securities and Kotak Mahindra
among others.
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Promoter holding in the company--- participation from financial institutions or a venture
capital firm
Issues where post-issue promoters’ holding is more than 80% may indicate a lack of liquidity in
the stock since there are fewer shareholders trading fewer shares.
One should be careful of companies that have issued shares on a preferential basis to promoters
in high proportion, so as to increase their stake in the company. Also small investors should
find out if this is an offer for sale or a genuine Initial Public Offering. In case of offer for sale,
the issuing company may not benefit totally.
Small investors should look for companies in which venture capital firms or financial
institutions have participation or substantial interest. Also look for the shareholding pattern.
This would indicate the risk profile of the company and the expectation of the institution from
the company. In case of institution, look for nationalized banks and all India level financial
institution such as ICICI, IFCI IDBI etc.
Small investors should be careful of companies whose cost of project and means of finance
have not been appraised by banks or financial institutions.
Selling stockholders -- It's usually a bad sign when a large number of shares in an IPO come
from selling stockholders, meaning pre-offering investors who are cashing out. Not only does it
mean that the company won't receive the money from the sale of those shares, but it also should
make one wonder why investors would want to sell their shares so quickly if a company's
prospects are strong. In fact, investors usually prefer that management retain a sizable stake in
the firm after the offering is completed. The number of selling stockholders is found in a
section called "The Offering," while management's total stake can be found in "Principal and
Selling Stockholders."
If the major portion of fund mobilized is being invested in land, buildings (the so-called green
field issues), small investors should be careful.
If the company is utilizing a portion of issue proceeds towards retiring high-cost debts, it would
benefit the company in terms of lower interest outflow and therefore higher profitability. Also
check the proportion of money that is being invested in new projects that it is venturing into.
This would give some judgment on the estimated profitability of the company.
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If a company plans majority of the money to pay off debt or dole out a huge dividend to pre-
IPO investors, watch out. That means people buying shares in the IPO are in essence paying for
the company's past, not its future. Also be careful when a company says it's allocating most of
the money for general corporate purposes. It's comforting if a company has more specific ideas
about where your money will be invested -- acquisitions, advertising, capital formation,
research and development, etc. Found in "Use of Proceeds
Which sector does the company operate? What is the growth prospect of the company vis-
à-vis the sector?
The growth of the company in proportion to the growth of the market in which it operates has
to be seen. Also small investors should look out for its market share or the projected market
share vis-à-vis domestic competition. For example, figures of global software market or Indian
software market do not indicate the exact future growth potential of the company since it is
inclusive of all products and services. Export projection of the sector need not necessarily
reflect the export potential of the company. See what the company is exporting and export
income as a percentage of sales.
Each sector has its own internal and external factors that influence the operation of the
company. For example, software sector is vulnerable to high employee turnover.
Promoter’s experience
Whether the promoters have previous experience in transforming organizations from the grass
root level in the same industry to a successful business? What is the experience they have in the
sector the company is operating in or any other sector. Promoter experience is very crucial.
Also small investors should check out the profitability of any subsidiary or affiliate company in
which promoters has a stake or substantial interest. This would enable them to ascertain the
management’s efficiency in terms of managing organizations.
Small investors should check for litigations against the promoters, nature of litigation and the
promoter’s extent of liability, if any.
Declining revenue -- If revenue for a company's most recent fiscal year is down from the year-
ago period, it may be time to run as far away as possible. Revenue for companies looking to go
public should be growing rather significantly. Even slowing revenue growth is a warning sign.
At the very least, read a company's explanation for the revenue slowdown, found later in the
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prospectus. Revenue totals can be found in "Summary Consolidated Financial Data" or
"Selected Consolidated Financial Data." The explanation behind the results is found in
"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Declining margins -- Along the same lines as declining revenue, declining operating margins
are not a good sign. It means the company is becoming less and less profitable. However, if a
company is in a fast-changing, highly competitive industry, it may need to sacrifice
profitability for market share and brand equity. Again, read the explanation behind the
shrinking margins. Margin totals found in "Summary Consolidated Financial Data" or
"Selected Consolidated Financial Data." Explanation behind results can be found in
"Management's Discussion and Analysis of Financial Condition and Results of Operations."
Working capital deficit -- This is when a company's liabilities, or debts, are greater than its
assets. This is not uncommon for a new issue, but it should be explained and should disappear
on an "as adjusted" basis after the completion of the offering. Details can be found in
"Summary Consolidated Financial Data" and an explanation is in "Liquidity and Capital
Resources."
Other financial red flags -- A number of other problems can be found on a company's balance
sheet or income statement. Things such as inventories or accounts receivable rising more
rapidly than revenue, high interest expenses, or extraordinary charges should be explained.
Found in "Selected Consolidated Financial Data" with more detail in the "Index to
Consolidated Financial Statements."
Over-reliance on one customer -- A clear danger sign. Several IPO’s have imploded after the
companies announced they were losing one of their major customers. Of course, like all of
these warning signs, there are exceptions. Found in "Risk Factors."
Supplier reliance -- A company can be too reliant on its suppliers as well as its customers.
Make sure a firm can switch from one supplier to another rather easily. Suppliers that double as
competitors are another danger. Found in "Risk Factors."
Competition -- Given that monopolies are illegal, competition will always be there, but you
better watch out if some well-run, well-capitalized firms are on the list. One name that jumps
quickly to mind: Microsoft. Found in "Risk Factors" and "Business."
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Other risk factors -- Patent disputes, heavy indebtedness, and litigation are just some of the
other more dangerous risks. Read the entire "Risk Factor" section carefully, but don't get overly
discouraged.
Too-small pie -- No matter how effective a company is at selling widgets, there needs to be
enough people willing to buy those widgets at high-enough prices. A company's target market
should be large and rapidly growing. This information can be found in the "Business" section.
Declining valuation -- Pre-offering an IPO be priced so they get a huge return on their initial
investment, often as much as 10 times. You can find out what those original investors paid on
average for their shares in the section entitled "Dilution." Compare that to the offering price. If
the two prices are close, then one can bet pre-IPO investors at one point were too optimistic
about the valuation for the company. While it may seem like a good deal to buy a company for
about the same price as earlier investors, there's a reason for the lower valuation. On very rare
occasions, IPO investors can actually pay less on average than the company's pre-offering
backers
Will the money invested yield maximum returns? Are the profit projections achievable?
What is the sales growth projected by the company vis-à-vis others in the sector and the
industry growth rate? If the market is growing at 20%, it does not mean that the company
would grow by 20%. Let’s take a hypothetical example. X Company manufactures paints.
Assume that the market is growing at 12% per annum. If sales of the company grew by, let’s
say 6%, it means that the company is growing at the rate of 0.5 x the industry growth. This
would help small investors in ascertaining growth potential of the company.
• Are the margins projected comparable with other companies in the same sector?
• Are there any unusual costs or unusual rise in other income (recurring/non-recurring)?
Some companies show an unusual rise in their sales and net profits by 5-10 times.
Justify this by comparing the sales growth figure.
• Small investors should check the competitive scenario of the industry. If the company is
claiming that it is competing with e-enabled service providers, small investors should
check out what type of e-enabling services they provide. Addressing competition at a
macro level may reflect the exact picture.
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• How do small investors justify the price of the issue?
• The price to earnings ratio (this is price that the issue is offered upon earnings per share)
which would throw light on the pricing of the issue.
• operating margins (this is the income from operation less expenses from operation),
• Market capitalization (it is the number of share multiplied by the price at which it is
offered) with the current companies in the sector that are listed in the market.
Companies with foreign exchange earnings are entitled to certain exemptions. If the company’s
factory is in backward regions, they are entitled for subsidies as well as some tax exemptions.
Lower incidence of tax benefits companies as their cash flows are increased to that extent.
They may move the market; they may know the people who move the market (just to clarify
institutions, not individuals, move the market). Experts are not saying short-term horizons are
bad, but an individual investor should realize they are playing a tough game. It may be wise to
set a longer time frame, find good companies, let the hedge funds obsess on quarterly
fluctuations and wait for the market to recognize your good companies. Sometimes it happens
sooner that one expects!
At first glance, this fourth ingredient may sound like common sense, but far too often investors
simply do not practice the risk-mitigation tactic of avoiding big mistakes. Somewhat
instinctively, investors seem to hunt for big game – defending against losses is, well, boring.
But, if small investor can manage to avoid losses, he is really doing wonders for his average.
Small investors should balance search for high-return stocks with a vigorous effort to identify
red flags. Familiarize with the downside. This is harder because it is not as much fun as looking
for growth. After small investor has found a company he thinks can be a great investment, you
should resist the temptation to plunge ahead, and instead start to look for the company’s
potential difficulties. Develop a checklist of possible red flags and work down this list before
every investment.
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If the red flags start to pile up, small investors should have to find the discipline to let the
opportunity go, at least for the moment. One of the hardest things in investing is to find a
company, get infatuated with it, get all geared up to buy the stock and then, upon discovering a
big red flag, find that you have to take a pass.
Small investors should be very careful about daily news. Most of it is noise. They need to ask
themselves just one question about every piece of news regarding their potential investment:
how does this news impact the fundamental prospects of this business? Most of the news that
falls into their lap is suspect.
All companies issue press releases that are understandably favorable. Much of the daily
commentary that pushes through the media onto your television or newspaper is highly trendy –
commentators are finding patterns that do not really exist and turning tips into news flashes.
All good investors get conditioned to be on the prowl for new information. However, on the
flipside of this is the key skill is of tuning out noise disguised as useful information. The talking
heads on cable television can seem dazzling as they rove from analyzing biotech to financials to
transportation to technology. How can they be experts on so many subjects? Well, they aren’t.
One starts to believe in an illusion when he thinks that he really knows his companies. All good
investors want to know as much as possible about their investments, but a company is like an
onion one can never fully peel. Every piece of information is valuable and if one has it, the
odds are tilted a bit in his favor, enhancing the hedge against failure. But, remember, one
reason making an educated investment based on incomplete information.
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50
REVIEW OF EXISTING LITERATURE
India is a developing country and the growth of every country always depends on their
Market conditions into the Economy. Financial Market is the place which facilitates the transfer
of funds from surplus sectors (lenders) to deficit sectors (borrowers). Normally households
have investable funds or savings, which they lend to borrowers in the corporate and public
sectors whose requirement of funds far, exceeds their savings. A financial market consists of
investors or buyers of securities, borrower’s or seller’s of securities, intermediaries and
regulatory bodies. Financial Market always consists the Capital Market which has a productive
contribution in long-term investments.
A number of recent studies have examined the theory and evidence on IPO activity: why firms
go public, why they reward first-day investors with considerable under pricing, how
underwriters choose these first-day investors, and how IPO’s performing in the long run. Our
perspective on the literature is three-fold:
First, we believe that many IPO phenomena are not stationary. The long-run performance of
IPO’s is particularly sensitive to choice of sample period, but not necessarily how one would
expect it to be. Second, we believe research into IPO share allocation issues is the most
promising area of research in IPO’s at the moment. Third, we argue that asymmetric
information is not the primary driver of many IPO phenomena. Instead, we believe future
progress in the literature will come from non-rational and agency conflict explanations. We
describe some promising such alternatives.
Presented at the Atlanta AFA meetings on Friday, January 4, 2002. We thank Tim Loughran,
Maureen O’Hara, and Donghang Zhang for comments, and Kenneth French for supplying
factor returns. The authors maintain a more extensive bibliography of IPO-related work at
http://www.iporesources.org.. This website further contains links to many IPO-related sites and
some reasonably up-to-date information on aggregate IPO activity and IPO working papers.
The last two decades have seen an active market for initial public offerings (IPO’s) of
equity securities in the U.S. and around the world. This market activity has been accompanied
by a growing empirical and theoretical literature documenting and explaining the patterns.
Indeed, given the size of the IPO market relative to, say, the bond market, a disproportionate
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amount of attention has focused on IPO’s. But if one measures market size by the extent of
uncertainty or potential misvaluations, this attention is warranted. Bonds are rarely misvalued
by more than a few basis points, whereas the increase from the offer price of an IPO to its first
closing market price can exceed several hundred percent. Thus, a substantial amount of money
is at risk. In this article, we review some of the literature on IPO activity, pricing, and
allocations. Space constraints require us to be selective. Indeed, an entire book by Jenkinson
and Ljungqvist (2001) is devoted to IPO’s.
According to Mahesh Vyas, MD & CEO, Centre for Monitoring Indian Economy Pvt
Ltd:
'Total resources raised from the primary capital markets accounted for just 8 per cent of total
capital formation in 2006-07'
The equity markets crashed 20 per cent in January and the volatility of daily returns has trebled
since then. The Reliance Power IPO closed below its issue price on the listing day.
Consequently, at least four companies shelved their plans to raise monies through the IPO
route. Many more are believed to have done the same. Nevertheless, the investments boom
currently under way would continue unhindered. Here are the reasons why:
The primary capital market does not contribute significantly to investments in India. Total
resources raised from the primary capital markets accounted for only 8 per cent of total capital
formation in 2006-07. If we exclude the resources raised through private placement of shares
and debt raised by banks, this share would fall to less than 4 per cent.
Funds raised through the issuance of shares constitute a small proportion of the total resources
raised by companies. Funds raised through the issuance of fresh capital (face value and
premium included) accounted for about 14 per cent of the total resources raised by
manufacturing companies during the four years ended March 2007.
Banks are flush with funds and ready to provide credit. Thus, alternate sources of funds are
easily available. Between April 2007 and January 2008, commercial banks raised fresh deposits
worth Rs 509,582 crore (Rs 5,095.82 billion).
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According to CMIE's CapEx database, about 250 projects account for nearly half the total
investments on hand in the country. This includes the large power projects, steel projects,
infrastructure projects, refineries and SEZs. Only 14 of these projects have filed for an IPO.
The investments envisaged by them account for only 6 per cent of the total investment
envisaged by the 250 projects.
Evidently, in all measurable ways, the equity markets - primary and, therefore, secondary are
not important in the current investments boom. The capital markets did play a much bigger role
in investments in the mid-1990s. Resources raised from the markets accounted for 18.5 per cent
of India's capital formation in 1993-94 and 1994-95. But that boom that went bust pretty soon,
while the current one looks a lot more robust.
According to Budget 2008, India: The government realized the need for a regulated
environment and started to promote its necessity in capital markets. Spearheading this was the
establishment of The Securities and Exchange Board of India (SEBI) which became active in
1992. SEBI was assigned the role of monitoring and regulating the working of stockbrokers,
bankers to an issue, merchant bankers, portfolio managers, and other intermediaries who are
associated with stock markets. The effects of these structural changes are apparent from the
trends in the resources raised from primary market, which includes public issues, rights issues,
private placements and overseas issues
53
The Primary market 'Cycle'
(Rs bn) FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07
Public Issues 134.6 188.9 249.1 182.6 157.8 122.1 144.5 159.0
(% y-o-y growth) 40.3% 31.9% -26.7% -13.6% -22.6% 18.3% 10.0%
Rights Issues 121.6 129.1 115.7 61.3 26.6 20.0 36.1 16.2
6.2% -10.4% -47.1% -56.5% -24.7% 80.2% -55.2%
Private Placement 18.7 79.8 115.4 65.3 104.8 347.9 251.9 403.2
326.0% 44.5% -43.4% 60.4% 231.9% -27.6% 60.0%
Overseas Issues 7.5 79.9 78.8 25.7 56.8 11.0 181.0 39.9
959.2% -1.3% -67.4% 120.7% -80.6% 1540.7% -78.0%
Total 282.4 477.7 558.9 334.9 346.0 501.1 613.5 618.2
69.1% 17.0% -40.1% 3.3% 44.8% 22.4% 0.8%
Source: CMIE
54
55
OBJECTIVES OF STUDY
• To know about the role of IPO’s in the growth of Capital Market and make an analysis
on the basis of real world situations.
• To get knowledge about the investor’s Philosophy to choose a particular IPO to invest
or their awareness.
• To know how an issue comes into the market and what it contributes into the market.
• To study about the various functionaries and eligibility norms related to the IPO’s.
• To know about the various statutory norms which requires for a new issues?
• To provide another better investment alternative to retail investor, rather than other
investment instruments.
56
Research Methodology
includes not only the Research Methods but also the comparison of the logic behind the
method we use in the context of our research study and explain why we are using a particular
• Secondary Data: These are taken by existing literatures, magazines and govt.
periodicals.
The term analysis refers to the computation of certain measures along with searching
for patterns of relationship that exist among data groups.
Analysis Tools:
• Tabulation
• Graphs
Sample Size
57
STEPS FOLLOWED IN COMPLETING THE SECONDARY SOURCE
SURVEY:-
Libraries at (a) Indian Council for Applied Economic Research (ICAER), (b) Indian Institute of
Technology, (IIT) Delhi, (c) Council of scientific and industrial Research (CSIR) (d) PHD
chamber of commerce, are visited. Management / books, journals are consulted (e) Indian
journal of Finance.
Once the primary data have been collected, they are (I) edited – inspected, corrected and
modified.
Tabulation – bring similar data together and totaling them in meaningful categories.
Questionnaires are edited both in the field and later in home. Field editing took place just often
the interview.
The collected data are placed into an order. Percentages of respondents answered similarly are
calculated and placed in a table. Then this is interpreted. This involved drawing conclusion
from the gathered data. Interpretation changes the new information immerging from the
analysis into information that is pertinent or relevant to the study
58
59
Data Analysis and Interpretation
India enjoyed a major boom of IPO’s in mid 1990’s. This hot period comes to in end in
1995-56 with a fall in stock market and downstream in the economy. Investors who subscribed
at the time of boom suffered losses and the primary market comes into the stable condition in
last 1990’s. It was because of the Software’s Companies who done well in the global
competition and stock market recognizes these new economy stocks with high valuations.
There are 22 Stock Exchanges in India and the first being the Bombay Stock Exchange,
which began formal trading in 1875 and being the oldest one in the Asia. The first exchange to
be based on an open electronic limit order book was the National Stock Exchange (NSE) which
started trading debt instruments in June 1994 and equity in November 1994. Currently there are
17 India’s Stock Exchanges who have adopted open electronic limit order.
The Indian Capital Market has performed well in 2007. It has raised US $8.3 billion
through 95 Initial Public Offers (IPO’s). According to Earnest and Young Report
“Globalization-Global IPO Trend Report 2007” India was the fifth largest market in the world
in terms of the number of IPO’s and the seventh largest in terms of the proceeds for the year. It
was the real estate sector who took the maximum advantage of the bullish stock market trends
in 2007 and realty firms picked up 42.7% of their capital through IPO’s.
During current decade there have been remarkable reforms in the India Economic
scenario. Consequently NIM has made enormous progress in recent years, moving away from
fixed- price offering to price discovery through a screen-based auction for IPO’s. This has
reflected a quest to discover the price through an open fair, competitive auction, which is done
in a fully transparent way, where all investors participate in an equal setting, and the investment
bankers’ or other influences do not vitiate the allocation of shares. The increase in fund
mobilization from NIM in India has been exceptionally well. The rise in fund mobilized from
Rs. 14042 crore in 1991-92 to Rs. 114577 crore is not a small achievement from any standard.
Though some time unfair trade practices, IPO scam and political and economic instability has
deteriorated the faith of retail investor in primary market. Now they need strong IPO analysis
before investing their hard earned money. This paper is an effort to critically study the growth
trends of NIM in India: category wise and ownership wise. Paper also insight the impact of IPO
60
scam on the growth of NIM, recent effort of market regulator (SEBI) to make NIM efficient
and transparent and throw light on the appropriate way to evaluating the primary issues.
1400
1200 1145.8
1000
Rs. in Billion
788.3
800 679.9
609.9
600 499.9 528.9
483.7
423.8
400
200
0
1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07
61
Aggregate pattern on capital issues in India:
This is the study of capital issues during 1999-00 to 2005-06(7 years) with a view to
find out the fluctuation in capital issues as well as various factors for such fluctuations. This
study is made with the help of no. of issue made during 7 years as well as the total amount of
public issues. Figure shows the Aggregate pattern on Capital issues in India:
After the Kethan Parikh scam in March 2001, the no. of issues declined in 2001-02 by 29.4%.
The market came on track once again in the 2002-03 with increase in 23 percent in the total no.
of issues.
During the last seven years, the public sector has grown with an average of 61.6 % per annum
as the amount of issue is concerned. While private sector grew with 38.38 % per year.
Observations are:
• Fund Mobilization of Indian companies through debt and equity issues in the FY 2006-
07 grew only 14 percent in each of the three financial years.
• Fund rose through IPO’s in India increased by 120% and fund mobilized overseas grew
29 %.
• Indian companies have become more dependent on overseas market than domestic one
to mobilize resources.
• Indian Companies raised a record of Rs.186592 Cr. In 2006-07 through public issues or
others. In other terms the fund mobilized in 2006-07 was Rs.22826 Cr. More than the
Rs. 163766 Cr. raised in FY 2005-06.
• Private debt placements account for 45 percent of total fund mobilization. Overseas
placement account for 37 percent, while public offers including initial and follow on
offers account for a 15 percent share. Qualified Institutional Placements allowed
recently accounted for 3 percent.
65
Salaried 25
Others 10
Total 50
30
25
20
15 Series1
25
10
15
5 10
0
Businessman Salaried Others
66
25
22
20
15
15
Series1
10
7
6
5
0
< 1 lakh 1-4 lakh 4-10 10 lakh
lakh or Above
3). Investing in initial public offerings (IPO) of companies is very important for
small Investors.
Agree 32 64
Somewhat Agree 10 20
Total 50 100
6%
10% Agree
Somewhat Agree
Interpretation:
Agree 5 10
Somewhat Agree 8 16
Disagree 34 68
68
10%
Agree
16%
Somewhat Agree
Neither Agree or
6%
Disagree
68% Disagree
Interpretation:
68 % Small investors don't go for thorough study of the market before IPO investment.
5). I am completely dependent on the advice of my share broker/ experts/ friends and
relatives for investment in IPO.
Agree 40 80
Somewhat Agree 5 10
Disagree 2 4
69
6% 4%
Agree
10%
Somewhat Agree
Neither Agree or
Disagree
Disagree
80%
Interpretation:
6). Market sentiment and specific industry analysis is very important for IPO investment.
Agree 35 70
Somewhat Agree 10 20
Disagree 2 4
70
Agree
6% 4%
Somewhat Agree
20%
Neither Agree or
70% Disagree
Disagree
Interpretation:
Overwhelming majority (70%) believes that market sentiment and specific industry analysis is
very important.
7). I know the importance of fundamental analysis and technical analysis of an IPO.
Agree 32 64
Somewhat Agree 12 24
Disagree 2 4
71
Agree
8% 4%
Somewhat Agree
24%
Neither Agree or
64% Disagree
Disagree
Interpretation:
Overwhelming majority (64%) believes that fundamental analysis and technical analysis in an
IPO is important.
Agree 6 12
Somewhat Agree 4 8
Disagree 38 76
72
12%
Agree
8%
Somewhat Agree
4%
Neither Agree or
Disagree
Disagree
76%
Interpretation:
Only 12% investors are serious about doing their own research.
9). I follow the fundamental analysis and technical analysis carried out by experts before
investing in an IPO.
Agree 35 70
Somewhat Agree 5 10
Disagree 8 16
73
16%
Agree
4%
Somewhat Agree
10%
Neither Agree or
Disagree
70% Disagree
Interpretation:
Large majority (70%) follows the expert fundamental and technical analysis.
Agree 33 66
Somewhat Agree 10 20
Disagree 5 10
74
35 33
30
25
20 Series1
15
10
10
5
5 2
0
Agree Somewhat Neither Disagree
Agree Agree or
Disagree
Interpretation:
66% of investors believe that one can gain from research on IPO.
Agree 34 68
Somewhat Agree 8 16
Disagree 5 10
75
40
34
35
30
25
20 Series1
15
10 8
5
5 3
0
Agree Somewhat Neither Disagree
Agree Agree or
Disagree
Interpretation:
Agree 30 60
Somewhat Agree 8 16
Disagree 8 16
76
35
30
30
25
20
Series1
15
10 8 8
4
5
0
Agree Somewhat Neither Disagree
Agree Agree or
Disagree
Interpretation:
60% of investors are prepared to learn basic analytical tools of IPO analysis
77
78
FINDINGS
2. Most Small investors don't go for thorough study of the market before IPO investment.
3. Most Small investors are dependent on expert help before IPO investment.
4. Overwhelming majority believes that market sentiment and specific industry analysis is
very important.
10. A significant percentage of investors are prepared to learn basic analytical tools of IPO
analysis.
79
Indian Exchanges Host Billion-Dollar IPO’s
The strength of India’s economy, stock market, corporate profits, energy sector, and private
equity fuel IPO’s in 2006 and 2007.
• In 2006, India’s IPO market raised US$7.23 billion, through 78 IPO’s. IPO activity has
been fairly broad-based, although energy companies dominated with more than 50%
share of funds raised.
• India’s greater number of larger deals has been driven by the growth of Indian
corporations and their need for additional capital for potential acquisitions.
The localization trend in India is evidenced by several billion-dollar IPO’s in 2006.
• In 2006, India’s largest IPO, Reliance Petroleum raised US$1.8 billion, followed by the
oil production and exploration company, Cairn Energy, which raised US$1.3 billion –-
both companies listed on domestic exchanges only.
Cross-border activity and the role of foreign capital continue to grow.
• Foreign institutional investors make up three-fourths of new funds flowing into the
market.
• Growing numbers of Indian companies are listing abroad, especially London, Singapore
and Luxembourg, primarily for higher valuations and visibility.
Enabling relatively easy access to global institutional capital, Qualified Institutional Placements
(QIPs) have enjoyed immediate popularity.
• According to analysts, QIPs are more efficient, cost- and time-effective, and investor-
and issuer-friendly.
The private equity rush into India has lead to a potential for many IPO exits.
• In 2006, private equity firms invested more than $7 billion in India.
Top global private equity funds such as Carlyle, Blackstone, Texas Pacific and Warburg
Pincus, as well as local funds, have been key drivers of the strength of Indian IPO markets.
80
RECOMMENDATIONS
Though the move to make IPO assessment mandatory has drawn some critical comments, the
need for a tool to help investors make better-informed decisions and judge the quality of issues
hitting the market is undisputed.
An IPO assessment brings four major pluses. Firstly, it improves information content through a
professional and independent assessment.
Secondly, it is relief for individual investors from information overload. Thirdly, it provides
disincentives for weak companies to come to the market in the hope of raising easy capital.
And fourthly, it brings about greater level of investor sophistication.
The public issue report, which is part of the IPO assessment will provide focused company
information to investors and will create awareness about the fundamental strengths and
weaknesses of the company.
Dissemination of fundamental information will help investors allocate resource better. The
report will be a key input in the investment decision, in a manner similar to what a credit rating
is for a debt investor.
In a situation where issues are bunched in the pursuit of optimum market timing and
disclosures are voluminous and complex, a service that analyses and interprets these
disclosures independently, quickly and in manner that facilitates a comparative study will be
extremely useful in cutting through the clutter.
The usefulness would be particularly high for small investors as it will serve as a guide on the
strengths of the company coming out with the issue.
81
Disincentives for weak companies
Given the improved quality of information content in the marketplace after the introduction of
IPO assessments, there will be a stratification of the market on fundamental lines.
In today's markets, with free pricing, it is just as easy to lose money on listing as it is to make it.
An independent and informed opinion on the fundamental quality of the company, along with
clear and concise information, will go a long way towards making the process far more
scientific. With a clear view on the quality and risk drivers of the company the investor is
getting into, he can choose the level of risk he is comfortable with.
He will then take investment decisions, which reflect his outlook on factors such as product
prices and input costs and are in line with his target portfolio composition. Such analysis is
today beyond all but the most sophisticated investors.
The assessment is not a recommendation to buy - or not buy - a stock. It is, instead, a powerful
tool to assist the investor in making up his mind about the quality of a company offered as an
IPO investment option.
The need to rate equity offerings emerges from the fact that majority of retail investors do not
read the offer document and even where they do they may not fully comprehend the
implications of all the disclosures made in the document.
Ratings from independent agencies are aimed at helping investors separate good floats from
risky ones.
82
Limitations of this Study
Investors was biased sometimes it’s not an easy for a researcher to make a productive
decisions on the basis of sample survey within a group of 50.
Time and cost constraints, which are beyond the human limitation, have also a barrier
on the study.
It’s not possible thing to include all the peoples in research because market conditions
are not stable they are changing time to time and affects the consumer preferences.
Some time it happened that the information given by the consumer not right and that
affects the research study.
83
84
CONCLUSION
• Broadly speaking, companies are either private or public. Going public means a
company is switching from private ownership to public ownership.
• Going public raises cash and provides many benefits for a company.
• The dot-com boom lowered the bar for companies to do an IPO. Many startups went
public without any profits and little more than a business plan.
• The process of underwriting involves raising money from investors by issuing new
securities.
• The road to an IPO consists mainly of putting together the formal documents for the
SEBI and selling the issue to institutional clients.
• The only way for you to get shares in an IPO is to have a frequently traded account with
one of the investment banks in the underwriting syndicate.
• Most of the strategies discussed in this report use the tools and techniques of
fundamental analysis, whose main objective is to find the worth of a company, or its
intrinsic value.
• In quantitative analysis, a company is worth the sum of its discounted cash flows. In
other words, it is worth all of its future profits added together.
• Some qualitative factors affecting the value of a company are its management, business
model, industry, and brand name.
85
• Value investors, concerned with the present, look for stocks selling at a price that is
lower than the estimated worth of the company, as reflected by its fundamentals.
• Growth investors are concerned with the future, buying companies that may be trading
higher than their intrinsic worth but show the potential to grow and one day exceed their
current valuations.
• Income investors, seeking a steady stream of income from their stocks, look for solid
companies that pay a high but sustainable dividend yield.
• This is the duty of our market regulator SEBI to come forward with the innovative and
progressive measures and avoid the malpractices and security market scam such as
Harshad Mehta, Khetan Parikh and IPO scam 2005.
86
Appendixes
Bibliography
• Securities and Exchange Board of India. 2006/07 Report. Annual Report. India : SEBI
• Fischer, Donald E.2003. “Security Analysis and Portfolio Management.” Sixth Edition,
• http://www.rediff.com/money/2008/feb/27debate.htm
• http://www.equitymaster.com/detail.asp?date=08/03/00&story=8
• http://www.livemint.com/2008/02/01234801/IPOs-in-India-buck-global-tren.html
• http://economictimes.indiatimes.com/articleshow/msid-2774868,prtpage-1.cms
• http://www.blonnet.com/2008/01/23/stories/2008012350700800.htm
• www.sebi.gov.in
• www.nseindia.com
• www.rbi.org.in
• www.blonet.com
• www.economictimes.com
87
• www.icicidirect.com
• www.investopedia.com
• Ritter, Jay R. (Spring 1998). “Initial Public Offerings” Contemporary Finance Digest
2(1), 5-30.
• Rock, K. (1986). “Why new issues are under priced” Journal of Financial Economics
15, 187-212.
Public
• Indian Journal of finance, “An Analysis of Growth trends, recent development and
88
Questionnaire
Name : ……………………………………………………………
Address : ……………………………………………………
…………………………………………………………….
Phone No. : ……………………………………………………………
Email Id : ……………………………………………………………
Tick your option for individual question.
Businessman
Salaried
Others
< 1 lakh
1-4 lakh
4-10 lakh
10 lakh or above.
89
1). Investing in initial public offerings (IPO) of companies is very important for small
investors.
[(4)—(3)—(2)—(1)]
[(4)—(3)—(2)—(1)]
3). I am completely dependent on the advice of my share broker/ experts/ friends and relatives
for investment in IPO.
[(4)—(3)—(2)—(1)]
4). Market sentiment and specific industry analysis is very important for IPO investment.
[(4)—(3)—(2)—(1)]
5). I know the importance of fundamental analysis and technical analysis of an IPO.
[(4)—(3)—(2)—(1)]
[(4)—(3)—(2)—(1)]
7). I follow the fundamental analysis and technical analysis carried out by experts before
90
investing in an IPO.
[(4)—(3)—(2)—(1)]
[(4)—(3)—(2)—(1)]
9). I am prepared to spend time and effort to be an informed investor in share market.
[(4)—(3)—(2)—(1)]
[(4)—(3)—(2)—(1)]
Date:
Place: Signature:
Declaration: This sample survey is conducted for academic purpose and your views will
be kept strictly confidential. Please fill in the questionnaire as objectively as possible.
Your cooperation is vital for the study findings.
Thank You
91