Relationship Between Demand and Initial Performance in Indian IPO Market

Relationship between demand and initial performance in Indian IPO market
RESEARCH PROJECT
On
“R e l a t i o n s h i p b e t w e e n D e m a n d a n d I n i t i a l
Performance in Indian IPO Market”
Submitted in partial fulfillment of the requirement for MBA
Degree of Bangalore University
BY
Sriraj Sudhakaran
Registration Number
04XQCM6097
Under the guidance of
Prof.B.V.Rudramurthy
M.P.Birla Institute of Management

Associate Bharatiya Vidya Bhavan
Bangalore-560001
M. P. Birla Institute of Management 1

CHAPTER CONTENTS PAGE NO.

ABSTRACT
1. INTRODUCTION: 3
¾ THOEORETICAL CONSIDERATIONS 6
¾ INDIAN IPO MARKET 9
2.
LITERATURE REVIEW: 17
3.
RESEARCH METHODOLOGY:
¾ OBJECTIVE OF STUDY 32
¾ ASSUMPTIONS 32
¾ DATA AND SAMPLE OF DATA 33
¾ METHODOLOGY 36
¾ LIMITAION OF STUDY 37
4. DATA ANALYSIS:
¾ INITIAL RETURN. 39
¾ DEMAND FOR SCRIPS 48
¾ REGRESSION MODEL. 49
¾ ABNORMAL RETURNS 51
5. CONCLUSION: 54
REFERENCES: 56

Chapter 1
INTRODUCTION

INTRODUCTION
Initial public offerings (IPO’s) of common stock, on

average, earn abnormally high initial returns in general as per the
studies by Ibbotson (1975), Ritter (1984), Loughran, et al (1994)]. It is
also well known that IPO firms significantly under perform the market
in the long run (three to five years) following the offering date
[Aggarwal and Rivoli (1990), Loughran and Ritter (1995, 1997), and
Brav and Gompers (1997)]. This IPO return anomaly is observed in
stock markets around the world. According to Ritter (1991), the
relationship between the long-run underperformance to the short-run
under pricing phenomenon is an unresolved mystery in the IPO
literature. Although these puzzling occurrences have prompted
substantial research to investigate the causes of IPO under pricing, we
know very little about why some IPO’s are under priced while others
are not. Moreover, little attention has been paid to the long-run
differences between those IPO’s that are under- or over-priced [one
exception is Mill and Reilly (1987)]. In this study I am trying to find
whether there exits any relationship between demand for new issues of
shares (Initial public offering) and the short term return obtained after
listing

IPO under pricing in the sense of abnormal short run returns on

IPO’s has been found in nearly every country in the world (Loughran et
al., 1994). This suggests that IPO under pricing may be the outcome of
basic problems of information and uncertainty in the IPO process, and is
unlikely to be figment of institutional peculiarities of any one market.
Relatively little work has been done so far on IPO under pricing in India
Aggarwal, 1994, Krishnamurthy and Kumar, 1994
The primary market in India is unique by world standards in

many ways it has been shaped by an unusual history of regulation, the
institutional details of how IPO’s take place are singular, the sheer size
and scope of the primary market is enormous and the large scale direct
participation in the primary market by millions of retail investors is
unlike hat in any other country in the world.

Relationship between demand and initial performance in initial IPO market
THEORETICAL CONSIDERATION
Going public marks an important watershed in the life of a

young company. It provides access to public equity capital and so may
lower the cost of funding the company’s operations and investments. It
also provides a venue for trading the company’s shares, enabling its
existing shareholders to diversify their investments and to crystallize
their capital gains from backing the company – an important
consideration for venture capitalists. The act of going public itself
shines a spotlight on the company, and the attendant publicity may
bring indirect benefits, such as attracting a different caliber of manager.
At the same time, the company acquires new obligations in the form of
transparency and disclosure requirements, and becomes accountable to a
larger group of relatively anonymous shareholders who will tend to vote
with their feet (by selling the shares) rather than assist the company’s
decision-makers in the way a venture capitalist might.
DEFINITION
An Initial Public Offering (IPO) is a corporation's first sale of

common shares to public investors. Typically, a company hires an
underwriter, am investment bank, to underwrite (handle) the offering
and a legal firm to assist in drafting the prospectus. The sale of stock is
overseen by financial regulators and where relevant by a stock
exchange. It is usually a requirement that disclosure of the financial
situation and prospects of a company be made to prospective investors

Methods of IPO’s
Corporate may raise capital in the primary market by way of an

initial public offer, rights issue or private placement. An Initial Public
Offer (IPO) is the selling of securities to the public in the primary
market. This Initial Public Offering can be made through the fixed price
method, book building method or a combination of both.
Fixed price offering
The traditional method of doing IPO’s is the fixed price

offering. Here, the issuer and the merchant banker agree on an "issue
price" - e.g. Rs.100. Then you and I have the choice of filling in an
application form at this price and subscribing to the issue.
Extensive research has revealed that the fixed price offering is

a poor way of doing IPO’s. Fixed price offerings, all over the world,
suffer from `IPO under pricing'. In India, on average, the fixed-price
seems to be around 50% below the price at first listing; i.e. the issuer
obtains 50% lower issue proceeds as compared to what might have been
the case. This average masks a steady stream of dubious IPO’s who get
an issue price, which is much higher than the price at first listing. Hence
fixed price offerings are weak in two directions: dubious issues get
overpriced and good issues get under priced, with a prevalence of under
pricing on average.

Book building process
Book Building is basically a capital issuance process used in
Initial Public Offer (IPO), which aids price and demand discovery. It is a
process used for marketing a public offer of equity shares of a company.
It is a mechanism where, during the period for which the book for the
IPO is open, bids are collected from investors at various prices, which
are above or equal to the floor price. The process aims at tapping both
wholesale and retail investors. The offer/issue price is then determined
after the bid closing date based on certain evaluation criteria .
Features Fixed Price process Book Building process
Pricing Price at which the securities Price at which securities will be offered
are offered /allotted is known /allotted is not known in advance to the
in advance to the investor. investor. Only an indicative price range
is known.
Demand Demand for the securities Demand for the securities offered can
offered is known only after the be known everyday as the book is built.
closure of the issue
Payment Payment if made at the time Payment only after allocation.

of subscription wherein refund
is given after allocation.

INDIAN IPO MARKET
The Indian primary market has come a long way particularly in

the last decade after deregulation of the Indian economy in FY92. Both
the primary and secondary markets have had their fair share of reforms,
structural cum policy changes time to time. The most commendable being
the dismantling of the Controller of Capital Issues (CCI) and introduction
of the free pricing mechanism (which permits the companies to price the
issues). This changed the whole facet of Initial Public Offering (IPO)
market. Free pricing mechanism allowed good corporate to raise money
from the primary market at the right price, which was denied earlier.
However, the decontrol was, to some extent, misused by corporate to
overprice issues.
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.

It is evident that during 1992-94, the bourses started to show signs

of recovery after the securities scam in FY92. The Sensex also touched a
new high during the same period due to the improved economic
environment. Though total funds mobilised during FY94 went up from
Rs 135 bn in FY93 to Rs 188 bn in FY94, a number of companies started
to cash in on the buoyant primary market, notably the finance companies.
Besides, as the domestic companies went on for overseas issues (GDR,
FCCBs and ECBs), there was a sharp increase in funds raised through
overseas issues, which shot up by 959% from Rs 8 bn in FY93 to Rs 80
bn in FY94. The trend continued in 1995 backed by robust industrial
production and higher gross domestic product growth. IPO market had
another impressive year. Public issue proceeds moved up to Rs 249 bn, a
growth of a 32% compared to FY94.
Buoyed by the business scenario most of the manufacturing

companies went for huge capacity expansions and diversification. The
impact of this was visible as excess capacity cramped margins and many
companies went into the red. Public issues started drying up. The total
fund mobilised during FY96 came down by 40% as the proceeds from
public, rights and overseas issues fell by 27%, 47% and 67%
respectively. That is the reason why both proceeds from private
placement as well as overseas markets moved up sharply by 60% and
121% respectively in FY97. But, then came the South East Asian crises,
which hit the trade and economic growth. So, FIIs shifted their portfolio,
which resulted in reduced exposure towards developing economies like
India. The market remained flat, as investors preferred to put money in
banks rather than investing in shares.

But during the latter half of FY98, markets witnessed the boom in
software stocks. Software stock valuations soared through the roof. This
boom in the secondary market caught on to the primary market as well.
More than 50% of new issues were from software companies in FY99.
They received tremendous response from investors with over-
subscription rates ranging anywhere between 20 times-55 times the issue
size. Subsequently, these companies got listed at huge premiums to their
offer price, which triggered interest among investors. The private
placement market witnessed a surge in mobilizations. This was largely
due to promoter’s shoring up their stakes in companies, in light of the
takeover code taking a more concrete shape. Also, as the primary markets
for both equity and debt turned bearish, companies opted for the low cost
option of private placements.
Since inception, the role that market regulator SEBI has played
in reforming primary market is commendable. Stringent norms have been
imposed as and when required. Pre-issue requirements of issuing
company and Lead Managers, filing due-diligence report at the time of
filing of draft-prospectus and post-issue obligations of revealing the
allotment basis are some of the regulatory measures, which were enacted
to safeguard investors and to bring transparency in the system. Other
notable norms include the lock-in period norms for promoters as well as
mutual funds in the issuing company. Besides, project appraisal route as
an alternative to the profit track record route was replaced by book-
building route, where qualified institutional investors (QIBs) where
allowed to subscribe 60% of the issue.

Though these measures did prevent the investors from

fraudulent practices, the quality of new issues, however, seemed to be
deteriorating. Companies with good track record, teams and institutional
backing were overtaken by companies, which zoomed in to cash in on
this new economy boom.
Though public issue receipts showed 10% YoY growth in FY00,

funds mobilised from primary market remained flat (1%). The primary
market moved in tandem with secondary markets. For instance,
Television–18 got a tremendous response while public issue from Ajanta
Pharma just managed to sail through. Further, established software
companies preferred the private placement route for raising funds in
FY00. As a result, proceeds from private placement showed a sharp rise
of 60% to Rs 403 bn. For the second consecutive year, non-financial
public sector undertakings and government companies remained absent
from public issue market. Though private placement receipts fell during
FY00, some bond issues received good responses which include bond
issue from Indian Oil Corporation and Hindustan Petroleum Corporation
Limited.
The IPO market has come a long way since the boom of FY94.
However lot has to be done since the market seems to be heading the same
direction as it way during the early nineties when non-banking financial
institutions tamed the primary market. Besides, recent statistics also
indicate that the average size of public issues have shrinked to Rs 100 m in
FY01. Added to the woe, only five issues in the first half of the current
year managed to get more than 5 times over-subscription compared to 30
last year. This is expected to continue as long as unscrupulous companies
who do not have any infrastructure facilities, manpower, revenue model,
continue to raise money from the markets.

Trends in Indian IPO market
1) Waning response:
Investor response to new offerings is cooling off from red-hot to

lukewarm. A majority of the book-built offers of 2004 attracted
subscriptions for well over 10 times the offer size. Particularly fancied
ones, such as Indoco Remedies and Bharti Shipyard, attracted bids for 60
and 72 times the offer size!
Compared to this, the tally for 2005 is unimpressive. Only five of

the 10 new companies that launched IPO’s in 2005 attracted even double-
digit subscription numbers; with a majority of the recent ones drawing
bids for 5-7 times the offer size. However, reasonably priced offers with
good credentials defied this trend. Gokaldas Exports and Gateway
Distriparks attracted subscriptions of 46 and 28 times respectively in
their book-built offers.
An over-subscription of 5-7 times indicates that while investors are

not yet giving IPO’s the short shrift, their appetite is certainly waning.
This is especially because subscription numbers for the retail and high-
net-worth category are usually inflated. Investors typically put in bids for
several times their actual requirement to improve the chances of securing
allotment.

2) Aggressive bidding continues:
Though the extent of over-subscription to IPO’s is on the wane,

the majority of individual investors who participate in the offers appear
to bid quite aggressively.
The lion's share of the bids is made either at the cut-off price or at
upper end of the price band. This indicates that a good number of
investors are either unsure how to bid or bid aggressively so that they are
certain of securing allotment.
Eight of the 10 book-built offers made in 2005 received 90 per cent of

the bids at the upper end of the price band or the cut-off price. Nor has
the asking price for an IPO influenced bidding patterns. The Shoppers'
Stop IPO, which valued the stock at about 40 times its earnings at the
upper end of the price band, attracted 92 per cent of the bids at this price
.
During the course of a book-built offer, responses from institutional
investors usually come in early; they are also more likely to bid at in-
between points in the price band.
Bids from individuals (both retail and high net-worth) usually seem to
come in at the last minute, the majority being at the cutoff price or at the
higher end of the price band. However, in some of the recent offers, such
as Shoppers' Stop, India Infoline and Allsec Technologies, the company
has taken the cue from institutional bids, to fix the offer price at a mid-
way point or at the lower end of the price band.

3) Inconsistent listing gains:
Given an ambitious asking price and reduced demand from

investors for the new shares, not many of the recently listed stocks soared
on their debut. The recent crop of offers has an inconsistent record of
delivering gains on listing. Four of the six book-built IPO’s since March
closed below the offer price on the day of listing. Allsec Technologies,
Shringar Cinema, 3I Infotech and Jaiprakash Hydro Power listed below
the offer price, while India Infoline listed barely above. Only Gokaldas
Exports and Gateway Distriparks generated high listing gains reminiscent
of 2004; this can probably be attributed to their moderate pricing.
4) Changing investor profile
However, there could be healthy aspects to the recent trends in

book-built IPO’s. In a trend that began with the Jet Airways offer and has
become well-established since April, institutional investors such as
mutual funds, FIIs and venture capital funds have replaced non-
institutional investors (read high net-worth investors), as the largest
category of bidders in recent offers.
In some of the recent IPO’s, institutions accounted for a dominant

proportion of the bids. About 70 per cent of the bids for the India
Infoline offer, 85 per cent of the bids for Allsec Technologies and 48 per
cent of the bids for the Shoppers' Stop IPO came from institutions. This
trend is likely to gain strength, after the recent changes in SEBI
regulations relating to book-built offers.

Since May, companies have been required to trim the proportion of

the offer set aside for non-institutional bidders from 25 to 15 per cent;
and peg up the reservation for retail investors from 25 per cent to 35 per
cent in book-built offers.
5) Blessing in disguise
The changing profile of investors in IPO’s is a healthy trend, both

for the companies who tap the capital market and for investors seeking to
invest through IPO’s. For one, institutional investors may be in a better
position to take advantage of the book-building process to help in fair
price discovery during the offer. This is because institutions may find it
less difficult than individual investors to assess the prospects for
companies that hail from a diverse range of offbeat businesses, which
have been tapping the market in recent times.
Second, as institutional investors are less likely to invest with an

eye on short-term listing gains, sizeable institutional holdings in a stock
may lead to more stable trends in stock prices after listing. This has been
borne out by some of the recently listed stocks such as India Infoline and
Shringar Cinema, which have made significant gains post-listing.
The absence of phenomenal gains on the day of listing could also

turn out to be a blessing in disguise. After the recent experience, fewer
investors are likely to bid for an IPO with the intention of making a quick
gain on listing. This could create more space in book-built offers for
serious bidders, who plan to stay with the company for the long term.

Chapter 2
LETRATURE REVIEW

Literature review:
1) Sumit Agarwal, Chunlin Liu, S. Ghon Rhee
“Investors demand for IPO’s and after market performance: Evidence from
Hong Kong stock market” - [University of Hawaii’s financial working papers 2003.]
In this study the author is trying to determine the relationship

between investors demand prior to offering and aftermarket performance
of IPO firms. The data for this study is obtained from two sources: the
Stock Exchange of Hong Kong (SEHK) and the Pacific-Basin Capital
Markets (PACAP) Research Center of the University of Rhode Island.256
IPO’s from 1993 to 1997 is used fro the study .
Methodology
The methodology used in the study is as follows,
1) Initial Returns
IRi = (Pi - Si)/ Si
IRi = Initial return for the stock
Pi = listing days adjusted closing price
Si = price at which share was issued to share holders

The following regression model is performed:
IRi = α0 + α1Ratioi + α2Sizei + α3Fundi + α4SDi + α5DIV + α6Indi + α7Yeari +εi
Where Ratio is the over-subscription ratio, Size is the natural

logarithm of the issuing firm’s market capitalization (inflation adjusted
to the 1993 value), Fund is the natural logarithm of the offering
proceeds (inflation adjusted to the 1993 value), SD is the standard
deviation of daily returns for the twenty-five days after listing, DIV is
the first annual cash dividend yield after IPO’s, Ind is a series of
industry dummy variables and Year is a series of dummy variable
indicating IPO’s year.
2) Long-Run Excess Returns
ER iT = R iT – RR iT
To assess the relationship between investor demand and IPO’s
long-run performance two regressions are performed :
ERi = β0 + β1Ratioi + β2Sizei + β3Fundi+ β4IRi+ β5DIVi+ β6Indi + β7Yeari + µ
Rp - Rf = γ0 + γ1 (Rm -Rf) + γ2 SMB + γ3 HML + η
where Rp represents the monthly return on a portfolio of IPO’s,
Rf represents the risk- free interest rate, SMB is the difference in the
returns of a value-weighted portfolio of small stocks and large stocks,

and HML is the difference in the returns of a value-weighted portfolio of
high book-to-market stocks and low book-to-market stocks. The estimate
of the intercept, γ 0, provides a test of null hypothesis that the mean
monthly abnormal return on the calendar portfolio is zero. The number of
IPO’s is not constant from month to month, thus we use weighted least
squares to account for the time-varying number of observations used to
create calendar portfolios. The calendar portfolios also are value-
weighted.
The study finds a strong relationship between investor demand
and the short- and long-run post-issue performance of IPO’s. First, he
proves that investor demand for IPO’s is positively related to the initial
returns of these firms. The returns on the first trading day indicate that
the IPO’s with high investor demand are significantly under priced, while
the IPO’s with low investor demand are overpriced. Second, finding is
that the long-run size-adjusted excess returns of IPO’s are negatively
related to the investors’ demands. This also shows that the high- demand
IPO portfolio significantly underperforms the market and the low-
demand IPO portfolio outperforms the market. Overall, the paper finds
that the IPO’s with high investor demand have large positive initial
returns but negative longer-run excess returns, while the IPO’s with low
investor demand have negative initial returns but positive longer-run
excess returns.

2) Paul McGuiness
“An examination of under pricing of initial public offering” - Journal of
Business Finance & Accounting 1992.
This study examines the level of under pricing of IPO’s for a
more recent and extensive period. It also focuses the level of under
pricing recorded, across the various issues.
Empirical methods used:
MARj,t = [ (Pj,t/Pj,t-1) - (Hj,t/Hj,t ) ]
MARj,t = Market adjusted return on stock j at period t
Pj,t = CLOSING PRICE OF STOCK J FROM INITIAL TRADING (t =I
refers to the end of first day trading)
Pjt-1 =closing price of stock j on the t-1st day of trading (when t=1, t-1 to the offering
price of the IPO shares)
Hj,t = market index at the close of trading on the T th day of trading for stock j
Hj,t-I = market index at the close of trading for stock j on the t-1 day of trading.

This equation measures the initial trading returns in the excess
market return form.The different variables and measurement used in the
study
DEPENDAND VARIABLE
UND: defined using MARj,t measure over the period between the opening of trading in
the issue and the close of trading of the first day
EXPLANATORY VARIABLE
Measure of ex-ante uncertainty
SD: Standard deviation of daily returns in the newly listed stock between the close in the
first day and the 15 th day of trading.
USES: The LN of one plus the number of different uses for fund raised by the firm from
the offering disclosed in the prospectus document to the issue.
ANA:Net asset adjusted for the net proceeds raised from issue.

Measure of advising agent quality
INV2:Categorical value accorded a value of 1 bif 2 of more investment banks are
employed to underwrite and manages an issue; coded 0 otherwise.
IQ1: Variable coded 3 if the investment banker to the issue is highly experienced’ 2 if
moderately and 1 in other cases
IQ2: variable coded 1 if any of the investment bankers to an issue are revealed to be big
bankers: coded 0 otherwise.
ACC: Variable coded 1 if the reporting accountant to an issue belong to a big 6 group
and coded 0 if not.
ACC1:Variable coded 1 if two reporting accountants are employed for an issue: coded 0
otherwise.
Measures of intrinsic firm’s value:
MCAP: market capitalization of the issuing firm at the close of the tenth day of trading.
Incidence of the secondary issue market:
SI: dummy variable coded 1 if a secondary issue of common stock is made within 12
months of IPO

Market states variables
MS; State of the market variables average percentage change in the index over
weekly intervals
Analysis
1) Correlation matrix for continuous variables
2) OLS Regression of the explanatory variables
Conclusion
The study concludes that post listing returns for the IPO indicates that
significant positive returns occur during there first day and disappear
there after. The second finding is that the incidence of secondary returns
of stock, following an IPO is significantly and positively related to initial
IPO returns. This suggests that issuing firms can significantly under price
in order to promote a subsequent issue. He also finds that the trend of
market prior to issue is positively related to IPO under pricing. So IPO
returns are relatively high in bull market than bear markets .

3) Halil Kiymaz
“The initial and aftermarket performance of IPOs in an emerging market: evidence
from Istanbul stock exchange” : Journal of Multinational Financial Management
This paper empirically analyzes the initial and after-market returns for
the Turkish initial Public offerings (IPO’s) to provide an emerging
market case of international evidence on performances of IPO’s.
Data
The population of the study consists of 168 firms listed and subsequently
traded on the ISE during the period of January 1, 1990 and December 31,
1996.
Methodology
1) Average abnormal returns (AARs)
2) After-market cumulative abnormal returns (CARs)
3) MULTIVARIATE REGRESSION MODEL

Conclusion
This paper suggests that investors purchasing IPO’s at the offer price
earn abnormal returns on initial trading day. This paper aims to provide
additional international evidence on the IPO’s by examining the Istanbul
Stock Exchange, which is considered as one of the fastest growing
emerging markets.
4) Li Li Eng
“An Analysis of Factors Affecting Investor Demand for Initial Public Offerings
in Singapore”: Multinational Finance Journal,
Introduction
This article investigates the impact of fundamentals of initial public
offering (IPO) firms on two categories of investors, large and small
investors.
Data
The sample consists of 63 initial public offerings listed on the SES Main
Board and Sesdaq from January 1993 through January 1997 .

Methodology
The following regression models are used to examine the factors affecting
large and small investors’ demand for initial public offerings :
d I y = β0 + β1E/Pi + β2Logsizei + β3B/Mi+ β4UNDPRCi+ β5OFFTYPEi + ε
AND
d I y = β0 + β1E/Pi + β2Logsizei + β3B/Mi+ β4LTGAINi+ β5OFFTYPEi + ε
Where
di,y -Application proportion for company i’s initial public offering by each
defined category of investors expressed as a percentage of the total demand; y
= small, or large investors respectively.
E/Pi- Earnings yield of company i measured by its earnings per share divided
by issue price per share.
LogSIZEi- Size of company i measured by the logarithm of its total assets.
B/Mi- Book-to-market ratio of company i measured by the book value of its
equity (including paid-in capital and reserve accounts) per share divided by
its issue price per share.

UNDPRCi -Under pricing of company i given by the closing price on the first
day of listing minus the issue price divided by the issue price.
OFFTYPEi- Issue type of company i’s initial public offering ; indicator
variable with the value one representing a Singapore dollar denominated issue
and zero for a foreign currency denominated issue.
LTGAINi- Cumulative abnormal returns over 36 months from the first month
of listing.
COCLUSION
The following were the findings of this study. First, large
investor demand is higher for issues that have higher earnings yield,
higher under pricing, but perform less well in the long-run. Small
investors take the opposite view on earnings yield, and they apply for
stocks that are under priced less but do better in the long-run. It is
expected that earnings performance would be positively related with the
long-term equilibrium prices of stocks, but an intriguing observation is a
relation in the opposite direction .

5) Wolfgang Drobetz
“Performance of Initial Public Offerings: The Evidence for Switzerland”
(University of Basel)
This article try to examine the under pricing and long-term
performance of a broad set of Swiss IPO’s from 1983 to 2000.both the
short run and long run performance is measured
Data
The data for the study was taken from of Swiss IPO’s on all
different segments of the Swiss Stock Exchanges during the 1962 to 2000
period.
Empirical methodology

TEST FOR SIGNIFICANCE: skew-adjusted t-test and the non-
parametric sign test
CONCLUSION
The study finds a fresh evidence for under pricing and long-term
performance of a broad set of Swiss IPO’s from 1983 to 2000.

Chapter 3
RESEARCH
METHODOLOGY

Objectives of the study
¾ To Determine whether there exists any relationship between investors
demand prior to IPO offering and aftermarket performance of the same
stocks on the initial days of listing
¾ To find if there is any abnormal return in the first 30 days after listing.
Assu mp tions made on the study
¾ The first assumption made in the study is that investor sentiments will
be same during the entire period of study.
¾ The investor may sell the stock at any time during the entire one
month
TYPE OF RESEARCH
The type of research used in the study is Descriptive research which is
quantitative in nature.

Data
The data used for the study are secondary data for the given period of
study, I.e. financial year 2005-06
Source of data
The data for the study is obtained from corporate databases including
prowess and capital line plus and also from the national stock exchange
website (nseindia.com).
Sample size
The data sample consists of 47 initial public offering listed in the
National stock exchange during the financial year 2005-06.Those IPO’s
which came with a follow on issue where ignored from the sample. First
30 days opening and closing prices after listing are taken to find the
average price for the day.
The following were the 47 IPO’s taken as the sample for the study

Table 1
Date of
SL NAME OF COMPANY Listing
1 Visa Steel Ltd. 17-Mar-06
2 NITCO Tiles Ltd. 21-Mar-06
3 J. K. Cement Ltd. 14-Mar-06
4 Mahindra & Mahindra Financial Services Ltd. 17-Mar-06

5 B. L. Kashyap & Sons Ltd. 17-Mar-06
6 Pratibha Industries Ltd. 16-Mar-06
7 Gitanjali Gems Ltd. 10-Mar-06
8 Sadbhav Engineering Ltd. 1-Mar-06
9 GVK Power & Infrastructure Ltd. 27-Feb-06
10 INOX Leisure Ltd. 23-Feb-06
11 Jagran Prakashan Ltd. 22-Feb-06
12 Gujrat State Petronet Ltd. 16-Feb-06
13 Entertainment Network (India) Ltd. 15-Feb-06
14 Royal Orchid Hotels Ltd. 6-Feb-06
15 Nitin Spinners Ltd. 2-Feb-06
16 Bartronics India Ltd. 12-Jan-06
17 Celebrity Fashions Ltd. 12-Jan-06
18 Educomp Solutions Ltd. 13-Jan-06
19 Punj Lloyd Ltd . 6-Jan-06
20 Tulip IT Services Ltd. 5-Jan-06
21 PVR Ltd. 4-Jan-06
22 Kernex Microsystems (I) Ltd. 20-Dec-05
23 Repro India Ltd. 22-Dec-05

24 Everest Kanto Cylinder Ltd. 15-Dec-05
25 Triveni Engineering & Industries Ltd. 13-Dec-05
26 AIA Engineering Ltd. 14-Dec-05
27 Bombay Rayon Fashions Ltd. 5-Dec-05
28 Piramyd Retail Ltd 6-Dec-05
29 Prithvi Information Solutions Ltd. 16-Nov-05
30 Bannari Amman Spinning Mills Ltd. 14-Nov-05

Date of
SL NAME OF COMPANY Listing
31 Shree Renuka Sugars Ltd. 31-Oct-05
32 Aurionpro Solutions Ltd. 25-Oct-05
33 Suzlon Energy Ltd. 19-Oct-05
34 Amar Remedies Ltd. 16-Sep-05
35 Sasken Communication Technologies Ltd. 9-Sep-05

36 HT Media Ltd. 1-Sep-05
Infrastructure Development Finance
37 Company Ltd. 12-Aug-05
38 Shri Ramrupai Balaji Steels Ltd. 2-Aug-05
39 IL&FS Investmart Limited 27-Jul-05
40 SPL Industries Ltd. 26-Jul-05
41 Nectar Lifesciences Limited 18-Jul-05
42 Yes Bank Ltd. 12-Jul-05
43 Provogue (India) Ltd. 7-Jul-05
44 Shoppers Stop Ltd. 23-May-05
45 Allsec Technologies Limited 9-May-05
47 Gokaldas Exports Ltd. 27-Apr-05
48 3i Infotech Ltd. 22-Apr-05
Hypothesis
H0: There is no relationship between investors demand, i.e. is the

amount of oversubscription and amount of return for the stock
H1: There exists relationship between demand and return

METHODOLOGY
The methodology is the major phase of research in which the investigator
makes a number of decisions about the methods and materials to be used
to study the research problem, basically through collection of data. The
methodological decision generally has control implications for the
validity of the study findings
The two important components used for this study are the demand and return
Return
To measure the return of the different IPO’s for the first 30 days the
following formula is used
Return = (average price – issue price)
Where, average price is the average of the days opening and closing
price. This is taken instead of the closing price because the investor may
sell the stock at any time during the days trading and so it is not possible
to find the return using the closing price for the day.
Issue price is the price at which the share is issued to the share holder.
This return is determined for the first 30 trading days of the scrip.

Demand
The times of oversubscription is taken as the demand for the share. Only
retail investors demand is taken as they will only sell there shares in 1st
month to book a profit. No institutional investor will be diluting his stock
in the initial month of listing.
Regression
In order to find the relationship between demand and initial return a
single linear equation is run for 30 trading days starting from the listing
day of each stock.
Y= a+ bx
Where demand is taken as independent variable and return as dependent
variable. ”T” test significance of 5% level is used to accept or reject the
hypothesis.
Limitations of the study
¾ The study considers only stocks listed in the national stock
exchange during the period of study.
¾ 30 days period is a very less duration to make a prediction.

Chapter 4
DATA ANALYSIS

Data analysis
1 Initial return
First step in the analysis part is determining the daily return for
each stock during the first 30 days after listing. This return is obtained
using the following formula
Return = (average price – issue price)
Average price = (opening price+ closing price)
Issue price = The price at which share is issued to the share holder
Average price is taken into consideration to find the return
because of the assumption that the investor may sell the stock at anytime
during the initial days of trading. The initial 30 days return for all the 47
scrip’s are calculated in the following table.

SL NAME OF COMPANY DAY 1 DAY 2 DAY 3 DAY 4

1 Visa Steel Ltd. -0.0018 -0.0026 -0.0254 -0.0368
2 Nitco Tiles Ltd. 0.0811 0.1085 0.1399 0.1475
3 J K Cement Ltd. 0.0659 0.0307 0.0294 0.0361
4 M & M Financial Services Ltd. 0.1439 0.1746 0.1989 0.1903
5 B L Kashyap & Sons Ltd. 0.2947 0.5017 0.5921 0.5818
6 Pratibha Industries Ltd. 0.3804 0.6140 0.8894 1.1644
7 Gitanjali Gems Ltd. -0.0318 -0.1372 -0.1383 -0.1740
8 Sadbhav Engineering Ltd. 0.4612 0.8407 0.8109 0.7357
9 G V K Power & Infrastructure Ltd. 0.1159 0.0079 -0.0088 -0.0201
10 Inox Leisure Ltd. 0.4469 0.5179 0.5356 0.4717
11 Jagran Prakashan Ltd. -0.0127 -0.1573 -0.1680 -0.1683
12 Gujarat State Petronet Ltd. 0.6102 0.4583 0.3583 0.4130
13 Entertainment Network (India) Ltd. 0.5577 0.6278 0.5562 0.5150
14 Royal Orchid Hotels Ltd. 0.4618 0.3676 0.3382 0.3485
15 Nitin Spinners Ltd. 0.3333 0.2167 0.2226 0.3190
16 Bartronics India Ltd. 0.4450 0.4893 0.6423 0.7357
17 Celebrity Fashions Ltd. 0.2922 0.2515 0.2594 0.2724
18 Educomp Solutions Ltd. 0.7562 1.4928 1.3984 1.3956
19 Punj Lloyd Ltd. 0.4389 0.5258 0.4990 0.4606
20 Tulip I T Services Ltd. 0.3908 0.5679 0.6215 0.6344
21 P V R Limited 0.2554 0.2880 0.2408 0.2338
22 Kernex Microsystems (India) Ltd. 0.0728 0.0674 0.0337 -0.0102
23 Repro India Ltd. 0.3044 0.4695 0.3817 0.3467
24 Everest Kanto Cylinder Ltd. 0.2592 0.3933 0.6475 0.6716
25 Triveni Engineering & Inds. Ltd. 0.2229 0.4073 0.3906 0.3557
26 A I A Engineering Ltd. 0.3944 0.6212 0.7125 0.7674
27 Bombay Rayon Fashions Ltd. 0.1679 0.1896 0.1739 0.1511
28 Piramyd Retail Ltd. 0.1323 0.0923 0.1090 0.1040
29 Prithvi Information Solutions Ltd. 0.1508 0.0775 0.1025 0.1069
30 Bannari Amman Spinning Mills Ltd. -0.1333 -0.0598 -0.0669 -0.0663
31 Shree Renuka Sugars Ltd. 0.0093 -0.0580 -0.0719 -0.0718
32 Aurionpro Solutions Ltd. 0.1586 0.1214 0.0631 -0.0567
33 Suzlon Energy Ltd. 0.3057 0.3215 0.2834 0.3147
34 Amar Remedies Ltd. 1.0036 1.0589 1.2018 1.2634
Sasken Communication Technologies
35 Ltd. 0.7781 0.7471 0.7433 0.7608
36 H T Media Ltd. 0.1857 0.0158 -0.0114 -0.0402
Infrastructure Development Finance Co.
37 Ltd. 0.9044 0.9728 1.0213 1.0287
38 Shri Ramrupai Balaji Steels Ltd. 0.1557 0.0625 0.0420 0.0580
39 I L & F S Investsmart Ltd. 0.5206 0.4232 0.3988 0.4262
40 S P L Industries (Shivalik Prints) Ltd. 0.2739 0.4861 0.4561 0.4468
41 Nectar Lifesciences Ltd. 0.1669 0.0867 0.0882 0.0547
42 Yes Bank Ltd. 0.4083 0.3300 0.3028 0.3122
43 Provogue (India) Ltd. 0.6565 0.6283 0.5912 0.5787
44 Shoppers' Stop Ltd. 0.5290 0.5258 0.4934 0.5016
45 Allsec Technologies Ltd. 0.0302 -0.0487 -0.0683 -0.0761
46 Gokaldas Exports Ltd. 0.3289 0.4705 0.5142 0.4946
47 3I Infotech Ltd. 0.0805 -0.0308 -0.0547 -0.0525


1 Visa Steel Ltd. -0.0263 -0.0382 -0.0583 -0.0741
2 Nitco Tiles Ltd. 0.1348 0.1344 0.1966 0.2362
3 J K Cement Ltd. 0.0302 0.0253 0.0313 0.0410
9 G V K Power & Infrastructure Ltd. -0.0179 -0.0107 -0.0095 -0.0261
10 Inox Leisure Ltd. 0.4158 0.4458 0.4906 0.5608
19 Punj Lloyd Ltd. 0.4693 0.4748 0.4443 0.4429
21 P V R Limited 0.2471 0.2289 0.2318 0.2154
22 Kernex Microsystems (India) Ltd. -0.0268 -0.0367 -0.0744 0.0144
23 Repro India Ltd. 0.3483 0.3591 0.4021 0.3861
31 Shree Renuka Sugars Ltd. -0.0672 -0.0642 0.0010 0.0551
32 Aurionpro Solutions Ltd. -0.0931 0.0153 -0.0206 -0.0267
35 Sasken Communication Technologies Ltd. 0.7334 0.7375 0.7144 0.7100
36 H T Media Ltd. -0.0412 -0.0619 -0.0847 -0.0864
37 Ltd. 1.0051 0.9669 0.9426 0.9147
42 Yes Bank Ltd. 0.4089 0.4328 0.4178 0.4044
45 Allsec Technologies Ltd. -0.0267 0.0037 0.0909 0.1309
47 3I Infotech Ltd. -0.0422 -0.0538 -0.0193 -0.0620


1 Visa Steel Ltd. -0.0842 -0.0912 -0.0754 -0.0557
2 Nitco Tiles Ltd. 0.2186 0.1957 0.1921 0.1798
3 J K Cement Ltd. 0.0725 0.1008 0.1047 0.1186
10 Inox Leisure Ltd. 0.6031 0.6042 0.6113 0.6835
19 Punj Lloyd Ltd. 0.4625 0.4847 0.4603 0.4947
21 P V R Limited 0.2004 0.1703 0.2022 0.2166
22 Kernex Microsystems (India) Ltd. 0.0989 0.0706 0.0733 0.0644
23 Repro India Ltd. 0.3662 0.3474 0.3527 0.3309
28 Piramyd Retail Ltd. -0.0025 0.0258 0.0231 0.0273
31 Shree Renuka Sugars Ltd. 0.0112 -0.0011 0.0251 0.0336
32 Aurionpro Solutions Ltd. -0.0122 0.0122 0.1303 0.1328
36 H T Media Ltd. -0.0961 -0.1058 -0.1062 -0.1133
37 Ltd. 0.9088 0.9272 0.9029 0.9243
41 Nectar Lifesciences Ltd. -0.0127 -0.0010 0.0248 0.0316
42 Yes Bank Ltd. 0.3872 0.3822 0.3783 0.4094
45 Allsec Technologies Ltd. 0.1880 0.2519 0.2459 0.2104
47 3I Infotech Ltd. -0.0620 -0.0597 -0.0240 -0.0438


1 Visa Steel Ltd. -0.0522 -0.0684 -0.0570 -0.0456
2 Nitco Tiles Ltd. 0.1735 0.1899 0.1714 0.1430
3 J K Cement Ltd. 0.1412 0.1944 0.1905 0.1914
10 Inox Leisure Ltd. 0.7483 0.8035 0.7913 0.6977
19 Punj Lloyd Ltd. 0.5267 0.5649 0.6208 0.6064
21 P V R Limited 0.2366 0.2781 0.3157 0.3177
23 Repro India Ltd. 0.3611 0.4203 0.4264 0.4226
31 Shree Renuka Sugars Ltd. 0.0160 0.0470 0.0982 0.1015
32 Aurionpro Solutions Ltd. 0.1169 0.1208 0.1256 0.0997
36 H T Media Ltd. -0.1326 -0.1532 -0.1930 -0.2273
37 Ltd. 0.9471 0.9647 0.9581 0.9875
41 Nectar Lifesciences Ltd. 0.0242 0.0305 0.0322 -0.0018
42 Yes Bank Ltd. 0.4000 0.4039 0.5067 0.5783
47 3I Infotech Ltd. -0.0458 -0.0560 -0.0543 -0.0572


1 Visa Steel Ltd. -0.0504 -0.0820 -0.0789 -0.0873
2 Nitco Tiles Ltd. 0.1613 0.1205 0.1241 0.1262
3 J K Cement Ltd. 0.1845 0.2189 0.2215 0.2262
10 Inox Leisure Ltd. 0.6979 0.7054 0.6538 0.6415
19 Punj Lloyd Ltd. 0.6210 0.6380 0.6160 0.6383
21 P V R Limited 0.2939 0.2670 0.2198 0.1683
23 Repro India Ltd. 0.3841 0.3985 0.4089 0.4095
36 H T Media Ltd. -0.2167 -0.2114 -0.2100 -0.1981
37 Ltd. 1.0449 1.1088 1.1750 1.1787
42 Yes Bank Ltd. 0.5744 0.5894 0.5844 0.5622
47 3I Infotech Ltd. -0.0525 -0.0413 -0.0258 -0.0135


1 Visa Steel Ltd. -0.0816 -0.0680 -0.0838 -0.0987
2 Nitco Tiles Ltd. 0.0866 0.0838 0.0814 0.1095
3 J K Cement Ltd. 0.1709 0.2160 0.2292 0.2370
10 Inox Leisure Ltd. 0.6442 0.6623 0.6690 0.7094
19 Punj Lloyd Ltd. 0.6689 0.6795 0.6588 0.6792
21 P V R Limited 0.1469 0.1350 0.1566 0.1691
23 Repro India Ltd. 0.4200 0.5720 0.7383 0.6542
36 H T Media Ltd. -0.1967 -0.1982 -0.1790 -0.1571
37 Ltd. 1.2015 1.2199 1.2110 12.1397
42 Yes Bank Ltd. 0.5722 0.5956 0.5800 0.5594
47 3I Infotech Ltd. -0.0017 0.0040 -0.0310 -0.0353


1 Visa Steel Ltd. -0.1307 -0.1197 -0.0877 -0.0934
2 Nitco Tiles Ltd. 0.1610 0.1632 0.2183 0.2433
3 J K Cement Ltd. 0.2368 0.2394 0.2480 0.2750
10 Inox Leisure Ltd. 0.7319 0.7492 0.7881 0.7779
15 Nitin Spinners Ltd. 0.0060 0.0131 -0.0060 -0.0345
19 Punj Lloyd Ltd. 0.6667 0.6700 0.6565 0.6181
21 P V R Limited 0.2001 0.2532 0.3003 0.2984
23 Repro India Ltd. 0.6441 0.6188 0.5805 0.5368
32 Aurionpro Solutions Ltd. -0.0017 -0.0017 0.0064 0.0103
36 H T Media Ltd. -0.1703 -0.1483 -0.1287 -0.1174
37 Ltd. 11.9331 12.2757 12.5816 12.7588
42 Yes Bank Ltd. 0.5383 0.5406 0.5283 0.5022
47 3I Infotech Ltd. -0.0308 -0.0313 -0.0422 -0.0438

SL NAME OF COMPANY DAY 29 DAY 30

1 Visa Steel Ltd. -0.0461 -0.0447
2 Nitco Tiles Ltd. 0.2647 0.2768
3 J K Cement Ltd. 0.3166 0.2182
4 M & M Financial Services Ltd. 0.1745 0.1573
5 B L Kashyap & Sons Ltd. 1.1858 1.2096
6 Pratibha Industries Ltd. 1.9429 2.0019
7 Gitanjali Gems Ltd. -0.0987 -0.0923
8 Sadbhav Engineering Ltd. 1.0569 1.0568
9 G V K Power & Infrastructure Ltd. -0.1721 -0.1690
10 Inox Leisure Ltd. 0.7898 0.8344
11 Jagran Prakashan Ltd. -0.0898 -0.0907
12 Gujarat State Petronet Ltd. 0.3528 0.3454
13 Entertainment Network (India) Ltd. 0.3872 0.3796
14 Royal Orchid Hotels Ltd. 0.1947 0.1912
15 Nitin Spinners Ltd. -0.0643 -0.1345
16 Bartronics India Ltd. 0.4840 0.4417
17 Celebrity Fashions Ltd. 0.0749 0.0542
18 Educomp Solutions Ltd. 1.2510 1.2252
19 Punj Lloyd Ltd. 0.5760 0.5840
20 Tulip I T Services Ltd. 1.0944 1.0148
21 P V R Limited 0.2434 0.3089
22 Kernex Microsystems (India) Ltd. 0.1073 0.0873
23 Repro India Ltd. 0.4577 0.4348
24 Everest Kanto Cylinder Ltd. 1.1291 1.2788
25 Triveni Engineering & Inds. Ltd. 0.8208 0.8005
26 A I A Engineering Ltd. 0.8114 0.9952
27 Bombay Rayon Fashions Ltd. 0.5450 0.5268
28 Piramyd Retail Ltd. 0.9642 0.9310
29 Prithvi Information Solutions Ltd. 0.2864 0.2581
30 Bannari Amman Spinning Mills Ltd. -0.2017 -0.2039
31 Shree Renuka Sugars Ltd. 0.3593 0.4368
32 Aurionpro Solutions Ltd. -0.0167 -0.0150
33 Suzlon Energy Ltd. 0.6779 0.7094
34 Amar Remedies Ltd. 0.6661 0.5652
35 Sasken Communication Technologies Ltd. 0.3454 0.3007
36 H T Media Ltd. -0.1064 -0.1123
37 Ltd. 12.9294 12.8375
38 Shri Ramrupai Balaji Steels Ltd. 0.1682 0.1852
39 I L & F S Investsmart Ltd. 0.6114 0.6260
40 S P L Industries (Shivalik Prints) Ltd. 0.5061 0.4643
41 Nectar Lifesciences Ltd. 0.1482 0.1561
42 Yes Bank Ltd. 0.4672 0.4317
43 Provogue (India) Ltd. 0.2523 0.2463
44 Shoppers' Stop Ltd. 0.5072 0.5154
45 Allsec Technologies Ltd. 0.1474 0.1417
46 Gokaldas Exports Ltd. 0.5413 0.5435
47 3I Infotech Ltd. -0.0430 -0.0447

DEMAND FOR THE SCRIPS
Demand in this context mean demand for the particular share
prior to IPO. This is calculated on the basis of the times of
oversubscription of each shares at the closing date of issue. We are
taking only retailers demand for the purpose of the study by taking an
assumption that only retail traders will be interested in selling those
shares with in first month in the market. Institutional buyers always
prefer to have long term return as the amount of investment will be very
high. Table 3
TIMES OF
SL NAME OF COMPANY SUBSCRIPTION
1 Visa Steel Ltd. 1.64
2 Nitco Tiles Ltd. 2.5751
3 J K Cement Ltd. 0.94
4 M & M Financial Services Ltd. 10.13
5 B L Kashyap & Sons Ltd. 4.69
6 Pratibha Industries Ltd. 25.72
7 Gitanjali Gems Ltd. 9.39
8 Sadbhav Engineering Ltd. 23.44
9 G V K Power & Infrastructure Ltd. 13.65
10 Inox Leisure Ltd. 17.75
11 Jagran Prakashan Ltd. 5.99
12 Gujarat State Petronet Ltd. 12.69
13 Entertainment Network (India) Ltd. 15.65
14 Royal Orchid Hotels Ltd. 28.35
15 Nitin Spinners Ltd. 38.13
16 Bartronics India Ltd. 42.91
17 Celebrity Fashions Ltd. 11.72
18 Educomp Solutions Ltd. 211.52
19 Punj Lloyd Ltd. 9.78
20 Tulip I T Services Ltd. 25.94
21 P V R Limited 4.04
22 Kernex Microsystems (India) Ltd. 15.23

TIMES OF
SL NAME OF COMPANY SUBSCRIPTION
23 Repro India Ltd. 7.34
24 Everest Kanto Cylinder Ltd. 9.84
25 Triveni Engineering & Inds. Ltd. 2.01
26 A I A Engineering Ltd. 12.42
27 Bombay Rayon Fashions Ltd. 19.5
28 Piramyd Retail Ltd. 16.17
29 Prithvi Information Solutions Ltd. 16.65
30 Bannari Amman Spinning Mills Ltd. 9.94
31 Shree Renuka Sugars Ltd. 6.33
32 Aurionpro Solutions Ltd. 25.84
33 Suzlon Energy Ltd. 6.14
34 Amar Remedies Ltd. 56.39
35 Sasken Communication Technologies Ltd. 1.67
36 H T Media Ltd. 5.29
37 Ltd. 5.36
38 Shri Ramrupai Balaji Steels Ltd. 12.69
39 I L & F S Investsmart Ltd. 16.9
40 S P L Industries (Shivalik Prints) Ltd. 13.3
41 Nectar Lifesciences Ltd. 11.39
42 Yes Bank Ltd. 10.15
43 Provogue (India) Ltd. 45.43
44 Shoppers' Stop Ltd. 8.15
45 Allsec Technologies Ltd. 1.91
46 Gokaldas Exports Ltd. 14.85
47 3I Infotech Ltd. 6.8
REGRESSION MODEL
A regression line is run for every days return do determine
whether that day it has significance with demand during issue.
Regression is run for each of the 30 initial date of trading with demand.
The findings are given in below table

Table 4
DAY AFTER LISTING OF SHARE T-STAT

DAY 1 3.082
DAY 2 5.073
DAY 3 4.493
DAY 4 4.310
DAY 5 4.231
DAY 6 4.105
DAY 7 4.009
DAY 8 4.014
DAY 9 3.994
DAY 10 3.989
DAY 11 3.827
DAY 12 3.441
DAY 13 3.293
DAY 14 3.072
DAY 15 2.742
DAY 16 2.727
DAY 17 2.770
DAY 18 2.571
DAY 19 2.662
DAY 20 3.028
DAY 21 2.919
DAY 22 2.722
DAY 23 2.760
DAY 24 0.187
DAY 25 0.158
DAY 26 0.156
DAY 27 0.137
DAY 28 0.113
DAY 29 0.083
DAY 30 0.054
The significance is tested at 5 % level of significance and finding is
that out of the first 30 days, first 23 days are statistically significant at
5% confidence level.

Abnormal return
Next phase of the study is finding is their abnormal return or not. In
this case all the above average returns are considered abnormal returns
and the finding was as follows for each of the 47 scrip’s
Table 5
DAYS OF
ABNORMAL
SL NAME OF COMPANY RETURNS
1 Visa Steel Ltd. 14
2 Nitco Tiles Ltd. 14
3 J K Cement Ltd. 17
4 M & M Financial Services Ltd. 14
5 B L Kashyap & Sons Ltd. 13
6 Pratibha Industries Ltd. 9
7 Gitanjali Gems Ltd. 19
8 Sadbhav Engineering Ltd. 13
9 G V K Power & Infrastructure Ltd. 13
10 Inox Leisure Ltd. 17
11 Jagran Prakashan Ltd. 13
12 Gujarat State Petronet Ltd. 11
13 Entertainment Network (India) Ltd. 11
14 Royal Orchid Hotels Ltd. 11
15 Nitin Spinners Ltd. 13
16 Bartronics India Ltd. 11
17 Celebrity Fashions Ltd. 14
18 Educomp Solutions Ltd. 19
19 Punj Lloyd Ltd. 16
20 Tulip I T Services Ltd. 15
21 P V R Limited 15
22 Kernex Microsystems (India) Ltd. 20
23 Repro India Ltd. 9
24 Everest Kanto Cylinder Ltd. 12
25 Triveni Engineering & Inds. Ltd. 19
26 A I A Engineering Ltd. 15
27 Bombay Rayon Fashions Ltd. 13
28 Piramyd Retail Ltd. 12
29 Prithvi Information Solutions Ltd. 13
30 Bannari Amman Spinning Mills Ltd. 15

DAYS OF
ABNORMAL
SL NAME OF COMPANY RETURNS
31 Shree Renuka Sugars Ltd. 13
32 Aurionpro Solutions Ltd. 10
33 Suzlon Energy Ltd. 17
34 Amar Remedies Ltd. 17
35 Sasken Communication Technologies Ltd. 15
36 H T Media Ltd. 15
37 Infrastructure Development Finance Co. Ltd. 7
38 Shri Ramrupai Balaji Steels Ltd. 20
39 I L & F S Investsmart Ltd. 16
40 S P L Industries (Shivalik Prints) Ltd. 15
41 Nectar Lifesciences Ltd. 13
42 Yes Bank Ltd. 14
43 Provogue (India) Ltd. 13
44 Shoppers' Stop Ltd. 15
45 Allsec Technologies Ltd. 18
46 Gokaldas Exports Ltd. 16
47 3I Infotech Ltd. 12

Chapter 5
CONCLUSION

Conclusion
Indian stock market saw an enormous amount of IPO’s during the
last financial year, with majority of them oversubscribing for more than
10 times. In this study a try was made to find whether there is any
relation between demand and return after listing.
T statistic was used to test the hypothesis and the results obtained
show a declining trend on the T-statistic from day 1 to day 23. There
exist a high level of relationship between demand and return ,hence
alternative hypothesis shall be accepted. However from day 24 to day 30
T- test values are too negligible and null hypothesis shall be accepted for
long durations.
The result of the above study undertaken shall be genaralised as
there exist a relationship between demand and return in Indian stock
market on the initial days of listing. however by passage of time
abnormal returns gets adjusted and tend to become normal return.

Also above these, an attempt was made in the study to find the
existence of abnormal returns. Average returns of these IPO’s studied
were tested with daily return and result show that at an average more
than 14 days abnormal returns are found during the period of study, i.e.
30 days and these returns get normalized in longer period
*******************

References
Rock, K., 1986, ‘Why New Issues are Underpriced,’ Journal of
Financial Economics, Vol.15, pp. 187-212.
Ritter, J., 1984, ‘The ‘Hot Issue’ Market of 1980,’ Journal of
Business, Vol. 57, pp. 215-241
McGuinness, P., 1992, ‘An Examination of the Under pricing of
Initial Public Offerings in Hong Kong: 1980-90,’ Journal of
Business Finance and Accounting, Vol. 19, pp. 165-186.
Purnanandam, A., and B. Swaminathan, 2002, ‘Are IPO’s Under
priced?’, Working paper.
Sumit Agarwal, Chunlin Liu, S. Ghon Rhee“Investors demand for
IPO’s and after market performance: Evidence from Hong Kong
stock market” - [University of Hawaii’s financial working papers
2003.]

Ritter, J., 1991, ‘The Long-Run Performance of Initial Public
Offerings,’ Journal of Finance, Vol. 46, pp. 3-27.
Aggarwal, R., Leal, R., Hernandez, L., 1993. “The aftermarket
performance of initial public offerings in Latin America”.
Financial Management Spring, 42–53.

Relationship Between Demand and Initial Performance in Indian IPO Market

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Relationship Between Demand and Initial Performance in Indian IPO Market

Uploaded by

Copyright:

Available Formats

Relationship between demand and initial performance in Indian IPO market

M.P.Birla Institute of Management

M. P. Birla Institute of Management 1

CHAPTER CONTENTS PAGE NO.

M. P. Birla Institute of Management 2

M. P. Birla Institute of Management 3

Initial public offerings (IPO’s) of common stock, on

M. P. Birla Institute of Management 4

IPO under pricing in the sense of abnormal short run returns on

The primary market in India is unique by world standards in

M. P. Birla Institute of Management 5

Going public marks an important watershed in the life of a

An Initial Public Offering (IPO) is a corporation's first sale of

M. P. Birla Institute of Management 6

Corporate may raise capital in the primary market by way of an

Fixed price offering

The traditional method of doing IPO’s is the fixed price

Extensive research has revealed that the fixed price offering is

M. P. Birla Institute of Management 7

Book building process

Book Building is basically a capital issuance process used in

process used for marketing a public offer of equity shares of a company.

wholesale and retail investors. The offer/issue price is then determined

after the bid closing date based on certain evaluation criteria .

Features Fixed Price process Book Building process

Payment Payment if made at the time Payment only after allocation.

M. P. Birla Institute of Management 8

INDIAN IPO MARKET

The Indian primary market has come a long way particularly in

The government realized the need for a regulated environment and

M. P. Birla Institute of Management 9

It is evident that during 1992-94, the bourses started to show signs

Buoyed by the business scenario most of the manufacturing

M. P. Birla Institute of Management 10

M. P. Birla Institute of Management 11

Though these measures did prevent the investors from

Though public issue receipts showed 10% YoY growth in FY00,

M. P. Birla Institute of Management 12

Trends in Indian IPO market

Investor response to new offerings is cooling off from red-hot to

Compared to this, the tally for 2005 is unimpressive. Only five of

An over-subscription of 5-7 times indicates that while investors are

M. P. Birla Institute of Management 13

2) Aggressive bidding continues:

Though the extent of over-subscription to IPO’s is on the wane,

Eight of the 10 book-built offers made in 2005 received 90 per cent of

M. P. Birla Institute of Management 14

3) Inconsistent listing gains:

Given an ambitious asking price and reduced demand from

4) Changing investor profile

However, there could be healthy aspects to the recent trends in

In some of the recent IPO’s, institutions accounted for a dominant

M. P. Birla Institute of Management 15

Since May, companies have been required to trim the proportion of

The changing profile of investors in IPO’s is a healthy trend, both

Second, as institutional investors are less likely to invest with an

The absence of phenomenal gains on the day of listing could also

M. P. Birla Institute of Management 16

M. P. Birla Institute of Management 17

1) Sumit Agarwal, Chunlin Liu, S. Ghon Rhee

In this study the author is trying to determine the relationship

The methodology used in the study is as follows,

IRi = (Pi - Si)/ Si

IRi = Initial return for the stock