Research Proposal on

PRICE PERFORMANCE OF IPOS IN INDIAN STOCK MARKET

Name Enrollment No: 1 !!""#$ %%%

M&A Sem ' I( S)&MITTED TO

*A+S)K,-A- (AD,AR INSTIT)TE OF MANA.EMENT ST)DIES /*(IMS0 *AMNA.AR

AFFI-ITED TO: .)*ARAT TEC,NO-O.ICA- )NI(ERSIT+ /.T)0

INTROD)CTION OF IPO:
An initial public offering is the sale of a companys stock to the public for the first time. The primary impetus for an IPO is generally either to raise capital or to offer an exit strategy to some of the firms existing owners, but a number of other motivations an consi erations also influence a firms ecision to go public. This un erpricing we observe. !tart"up companies rarely have the resources, history, or cre ibility to con uct an IPO. In fact, firms in the most incipient stage of evelopment generally rely entirely on personal loans, savings, family, an frien s for their initial financing. #ven as a company begins to evelop an show some signs of promise, it will rarely attempt a public offering$ instea , it will look to angel investors or venture capital. Angel investors are wealthy in ivi uals, often prior entrepreneurs, who will provi e financing in exchange for e%uity in the company. &enture capital comes from firms rather than in ivi uals, but the principle is the same' investors offer financing in return for a stake in the company. (oth angel investors an venture capital firms fre%uently take an active role in the company, a vising management on the most of issues it faces. The initial investors are naturally hesitant to provi e all the fun ing upfront, an ifferent private e%uity investors target companies at ifferent stages of growth. Thus, successful companies will typically un ergo multiple roun s of financing an will evelop a base of investors that inten ecision process illuminates a firms goals in issuing an IPO, which are important to evaluate the potential reasons for the

to eventually li%ui ate their stakes. )hen investors eci e it is time to cash in on their investment, they have three choices' sell their e%uity to a larger or later"stage investment firm, sell the company to a larger company looking to make an ac%uisition, or sell their e%uity in an initial public offering of the company. !imilarly, when an *IPO"rea y+ company re%uires a itional financing, it has multiple options' pursue further e%uity financing from the private market, issue ebt, or con uct an IPO. !o what prompts investors an the company to go with the IPO option, In a ition to provi e an imme iate capital influx an mechanism

through which existing owners can cash in on their investment, there are other a vantages of going public. !ince the expectation is that a li%ui aftermarket will evelop following the offering, firms con ucting an IPO can expect to be in a position to raise a itional capital relatively easily an on favorable terms following the initial offering. The increase li%ui ity also makes it possible for public companies to offer stock"base incentives an compensation, which can help them attract an retain top employees an improve employee pro uctivity. Tra ing on an exchange also makes mergers an ac%uisitions easier since stock can be issue as part of the eal. -ue to increase visibility, companies going public may also experience an increase in prestige, which can improve their cre ibility with suppliers an customers, resulting in better cre it terms an more pricing leverage. #ven the increase scrutiny of public companies is not all ba since it usually allows the company to issue ebt at lower rates. The history of IPO mechanism can be trace back to perio of ..I regime i.e. .ontroller of .apital Issues. Prior to nineties all the public issues have to take the permission of ....I. The latter etermines all

other aspects of the issue. The office of ....I. was abolishe .In /001 after the formation of !#(I uring /002. !#(I was honore to regulate all aspects of .apital market, inclu ing primary market an a vance IPOs. IPO market has un ergone a change with an intro uction of fixe price regime an has further with implementation of (ook (uil ing process as a result of 3alegam .ommittee which was set up in/004.

ISS)ES 1 PRO&-EMS OF T,E SECTOR

ISS)ES 1 PRO&-EMS OF T,E SECTOR

/5 6i%ui ity .risis 25 6ack of Innovation 15 Ina e%uate 7esearches 85 .onventional Patten of Investment 45 Poor 7isk 3anagement 95 Increase .ompetition

RESEARC, PRO&-EM

RE(IE2 OF -ITERAT)RE:
/5 6owry an !chwert :2;;;5 analy<e the aggregate IPO market activity an also have examine the initial returns at the firm level. The research also stu ies strong cycles in the number of IPOs by calculating the average initial returns reali<e by investors from /09; to /00=.The statistical measures being use in the stu y are mean, me ian, stan ar eviation an auto"correlations. The results show that IPOs cycles occurs an has subse%uent effect on returns an un erperformance. The stu y also shows that clustering of IPOs happens in the market an is also associate with pre ictably ifferent initial returns. An also the information about the value of an IPO which is being available uring registration perio has an effect on the prices an offering ecisions of other firms.

25 Alware< an >on<ale< :2;;/5 analy<e all the IPOs in !panish market uring /0?="/00=, with a sample of 49 firms to provi e evi ence on initial un erpricing an long run un erperformance of IPOs. They have use (uy an @ol 7eturns :(@75, .alen ar time portfolios an the epen s Aama an Arench three factor 3o el for their analysis. The results of stu y show that the existence of long run un erperformance when (@7 are use an upon the metho ology use . There exists long run un erperformance not when mean calen ar time returns are employe . !econ ly the stu y also shows that neither the characteristics of IPO i.e. IPOs si<e, un erwriters reputation nor those of the firm in the

year prior to going public have a statistically significant influence on the stock return of the firm three or five years after going public. 15 >ompers an 6erner :2;;/5 analy<e the performance of nearly 199/

IPOs in the Bnite !tates from /014 to /0=4 for 4 years. The stu y consi ers a Pre"CA!-AD perio . The results isplay the evi ence of un erperformance when event time buy an hol abnormal returns are use . @owever the un erperformance isappears when cumulative abnormal returns are use . The stu y also in icates that the initial returns of recent IPOs containe information on the markets valuation of future IPOs.

85 7itter an )elch :2;;25 examine three main aspects i.e. why firms go public, why they rewar first ay investors with consi erable un erpricing an how IPOs perform in the long run. The stu y explains the E6ife cycle theories an theoretical an E3arket timing theories. This stu y presents both long run empirical evi ence for short run an

un erperformance of IPOs an shows that the un erpricing is sensitive to metho ology an to the time perio being chosen. !econ , Aama"Arench 3ultifactor regressions coul pro uce o 45 !ingh :2;;15 has reporte that results. the internationally observable

phenomenon of IPO market is characteri<e by pervasive un erpricing in the short run an un erperformance in the long run. In ian investors get very high returns up to a perio of six months an thereafter the returns eclines. The long"term investors, who continue to hol their investments for a perio of twoFthree years, experiences negative returns.

95 Pastor an &eronesi :2;;15 analy<e IPOs from the perio Gan /09; to -ec 2;;2 an observe /9 IPO waves an use regression analysis for analy<ing IPO performance. The researchers have use 3arket 7eturns :3HT5, 3arket &olatility :3&O65, an Aggregate 3I( ratio an time series analysis. The stu y presents a theoretical framework on ifferent aspects such as IPO waves, Optimal IPO timing, an run un erperformance of IPOs. IPO valuations. #mpirical evi ence shows that the results are inconsistent with the long

=5 Ganakiramanan :2;;=5 has examine the perio

the evi ence of the long run

un erperformance in the In ian market using the ata set of firms over of 2;;;";2, by using .AP3 an three factor mo els as benchmarks. The researcher has taken a sample of //9 companies from various in ustries. The sample of the stu y consists of //9 IPOs issue by companies in the In ian market uring the perio from 2;;; to2;;/. The aftermarket performance is taken for five years. The stu y uses various metho s to ascertain the performance because of the sensitivity of the results to the choice of benchmarks, so as to eluci ate the possibility that the magnitu e of the performance is benchmark epen ent. The researcher has use total return, market a Juste abnormal return for short run as well as for long run. The stu y employs the basic capital asset pricing mo el :.AP35, the Aama an Arench three factor mo el an the average return mo el. The results for the three factor mo el imply a greater positive return as compare to the .AP3 in the long run. The results epict that the three factor mo el may

be better suite for explaining long"run un erperformance. The long term performance of these companies shows that investment in In ian IPOs provi es positive abnormal return by the en of 9; ays. The abnormal return is greater for investment in smaller companies to investment in larger companies. ?5 Hhurshe , et al. :2;;?5 has examine the timing an subscription pattern of ifferent groups of investors vi<. retail investors, DI(s, CIIs. Authors have ivi e the stu y into two parts, the Pre"listing perio an Post"listing perio un erpricing. The sample perio for the stu y is 3arch /000 to 3arch 2;;? an the sample si<e is 210 IPOs. The authors have use escriptive analysis, correlation techni%ues an multivariate by the regression. The results in icate that subscription level of non"institutional investors an retail investors is significantly influence subscription pattern of %ualifie institutional buyers. 3oreover, the

fin ings show that the transparency of the book"buil ing process in In ian IPOs helps to nullify the winners curse problem for the non" institutional an retail investors. 05 !ingh an Humar :2;;?5 have analy<e short an long run un erpricing of IPOs in the In ian .apital markets by looking at affecting them. The stu y propose oversubscription variables along with age an ifferent factors a mo el of un erpricing taking issue si<e. They have

performe in ustry wise analysis from the time perio of Gan. 2;;9 to Oct.2;;9 by taking //9 IPOs. The stu y shows that In ian .apital markets are foun to follow in ustry specific waves. The sectors which are performing well are more un erprice in short run as well as perform well in long run.

O&*ECTI(ES OF T,E ST)D+

/. To examine the role of merchant banking in promoting capital market in In ia. 2. To stu y the rules an regulations of !#(I for merchant bankers as issue 3anagers. 1. To evaluate the performance of the merchant bankers. 8. To stu y the marketing aspects of the merchant bankers relating to the issue. 4. To stu y the effectiveness of pricing of the Eissues :as etermine by issuing .ompany an the merchant banker5. 9. To make appropriate recommen ations to merchant bankers for improving Their performance

STATEMENT OF ,+POT,ESIS
,":

,1:

SAMP-E DESI.N
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-3m3tat3ons o4 the st567

The followings are the limitations of the present stu y'
/.

The stu y is base on secon ary ata. !o, the limitations of secon ary ata may also creep in an have an impact on the present stu y also.
limitations oftheaveragethatisbeingimpacte bytheextremevalues calculation whileexamining cannotbe

2. The

avoi e inreturn

theperformanceforannuali<e raw not be prices

returns an annuali<e marketa Juste rawreturns. 1. The non"availability of ata of prices for few companies which coul consi ere forthis analysis purpose. 8. Thevolatilityan thechangingmarketcon itions,which ohaveanimpactonthe oftheshares an thus thereturns generate thereof,coul notbeavoi e . 4. Theotherlimitationofthisstu ywas theshortageoftimeforcompletingsuchavast topic, uetowhichthesampleoflimite companies onC!#has beentaken.