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IPO PERFORMANCE IN INDIA

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 Biz & Bytes (Vol. II. Issue 2013) E-ISSN: 0976 0458, Print ISSN: 2320 897X

IPO PERFORMANCE IN INDIA

ShipraPruthy*
Pardeep Kumar**
Abstract:
IPO is a public offering issued by a private company to raise capital from general public to become a public
company. This form of capital has an advantage to the company of not repaying capital to the investor in its
lifetime. The details of the proposed offering are made available to potential investors in the form of a
‘prospectus’. A lot of money, in the tunes of crores of rupees is invested by the retail investors in the Indian capital
market through IPOs. Involvement of Such a large sum of hard-earned money of investors and the participation of
thousands of retail investors, pose a great case for study of performance of these IPOs. Also the general belief of
the investing masses is that investing in any IPO will provide better returns than investing in any of the secondary
market securities. This particular belief leads them to invest in IPOs every time they are offered regardless of their
actual valuations. We in this paper take IPOs issued in the year 2009, as a sample for assessing general
performance of Indian IPOs. The concept of Wealth Relative (WR) and Market Adjusted Abnormal Rate of Return
(MAAR) has been used to calculate short run and long run performance of the IPOs in India. It has been found
from the present study that majority of selected IPOs had under-performed the market for the period under study.
The IPOs with positive return in short and long run are suggested for future investments. Also the IPOs with
positive MAAR are also suggested for purchasing in secondary market.
Key-words: IPO, Performance, Wealth Relative, MAAR.

1. Introduction:1
IPOs are best described as ‘the first sale of stock by a private company to the general public’. These are often
issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned
companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm,
which helps it to determine what type of security to issue (common or preferred), the best offering price, the time
to bring it to market and getting the issue successfully subscribed by establishing a public market for shares (initial
sale). An IPO gives several benefits to the company. It enlarges and diversify equity base, cheaper access to
capital, increasing image of the company etc. IPO can be issued both to the retail investor and institutional
investor. There are some guidelines given by Security Exchange Board of India (SEBI) to issue IPO. The issue to
the general public is required to be not less than 25% of the total issue. Minimum promoter contribution for IPO is
20-25% of the public issue. Moreover it is mandatory for a company to get its shares listed at a regional stock
exchange where the registered office of the issuer is located. The Minimum of 50% of the Net offer to the Public
has to be reserved for the Investors applying for less than 1000 shares. Minimum time period for keeping a public
issue open is three days and the maximum time is ten days. The allotment of shares has to be made within 30 days
of closure of the public issue. Refunds of excess application money i.e. for un-allotted shares have to be made

1
*Faculty, Continental Group of Institutes, ** Assistant. Professor, Continental Group of Institutes,
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within 30 days of the closure of the allotment. Draft prospectus submitted to SEBI is also required to be submitted
simultaneously to all stock exchanges where it is proposed to be listed. A regulation provides that an issuer may
make an IPO if it has a track record of distributable profits for at least three out of the immediately preceding five
years.

2. Review of Literature:
There has been enormous research on the performance of IPOs in India using different methods. Some of the
prominent literature related to the area is as discussed below:

Miller (2000) in his study explained the reason of IPO underperformance in the US stock exchange market. He
argued that investments are not made randomly, but are conditional on an investor’s expectations about the stock
risk adjusted returns. This means that stocks whose returns have been overestimated are more likely to be included
in the portfolio than stocks whose returns have been underestimated. As a result the returns on stocks conditional
to being included in the portfolio tend to be less than expected. This effect is especially important for IPO’s where
the divergence of opinion is especially high.

Gompers & Lerner (2001) in their study on IPO performance after the formation of NASDAQ analyzed the
performance of 3,661 IPOs issued between 1935 and 1972. They found some evidence of underperformance.

Loughran & Ritter (2002) in their study found a model that focused on the correlation between the money left as
the number of sold times the difference between the first market closing price and offer price. This theory is the
explanation of hot issue market. It also explained the reason of underpricing of issues.

Jacobsen (2005) in his study used a new approach for interpretation of long run return of stocks. It was found by
him that ‘buy and hold’ return of IPO and SEO stocks of Denmark under-performed the market by 27.3 % and by
21.4 % respectively. By applying the new approach it was found that after five years the same stocks
underperformed by 43.7 percent and 38.1 percent.

Rajib & Sahoo (2010) their study gave the evidence that the Indian IPOs are short-run underpriced and Long-run
under performed. The empirical results suggested that the investors investing in IPOs through direct subscription
are earning a positive market-adjusted return throughout the period of study. But investors who have bought shares
on the IPO listing day are earning negative returns up to 12 months from the listing date and expect to earn
positive market-adjusted return thereafter. Wealth Relative and buy and hold formula is used for the calculation of
IPO’s short and long run performance. It was found that the IPOs were underpriced in short run but
underperforming in long run.

Sohail & Rehman (2010) in their study used short run market adjusted abnormal rate for 73 stocks at the Karachi
Stock Exchange. This analysis has been done in three states of economy that is normal, Boom and recession. The
wealth relative formula has been applied to calculate the rate of return under different states of economy. Overall it
is concluded that the Pakistani IPOs outperformed in short-run basis under different states of economy by
rewarding the investors with positive abnormal returns.
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Salgado & Robert (2010) in their study focused on after market performance of IPOs issued after privatization in
Chile stock markets during the period 1984-89. They discussed the operational details of the stock issuing
mechanism, complemented with a statistical study on the IPOs’ Market Adjusted Returns. While the sample size
was limited and did not support a significant external validity, the analysis confirmed the presence of aftermarket
performance patterns that were very similar to those observed in private IPOs reported elsewhere in the world.

Sabrinathan (2011) in his study argued that understanding the evolution of IPOs since the establishment of SEBI
may help in better understanding the IPO market. The study also tried to relate the change in the profile of the
issuers to certain regulatory developments which may have been intended to influence those attributes of issuers
and issuances. It has been experienced that the market is in its early days and some pointer are provided to design
a more effective system.

Mittel & Mayur (2012) in their study investigated the relationship between changes in insider's ownership around
during IPO and post-IPO. The performance deterioration test of Indian firms has been done to know the effect of
individuals and time on the IPO performance. Empirical analysis based on panel data showed that change in
ownership inversely affects the performance of firm’s IPO. The influence of insiders' ownership on performance
was analyzed by considering promoters' ownership as one of the independent variables.

Ghosh (2012) studied IPOs in Indian banking sector which is the backbone of Indian economy. The study based
on key accounting parameters showed improvement in the performance of the banks in the post-listing period.
Also it was found that there is no difference in the IPO performance of the private and the public sector.

3. Research Objectives:
The following are the main objectives of the research:

i) To evaluate the short run and long run performance of Indian IPOs.
ii) To do the comparative performance analysis of Indian IPOs vis-à-vis Indian stock market.

4. Research Methodology:
In the present study IPO performance for short and long run is calculated for the different time periods. For short
run listing day performance, one, three and nine month performances have been calculated and for long run one
year, two year and three year performances of IPOs have been calculated for the period under study of i.e. 2009-
2011.

4.1. Sample Selection:

Twenty IPOs issued in the Indian stock market during the year 2009 has been selected as a sample for studying
IPO performance in the Indian markets.
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4.2. Data Collection:

The study is based on the Secondary data. The historical stock prices of the companies under study and market
index (BSE Sensex) historical values has been collected for the period under study from the website of the
Bombay Stock Exchange of India.

4.3 Methodology:

The methodology used is to analyze the IPO performance as on the day of listing, and one month, three month and
nine month performance, which is followed by an estimation of three years long run performance of the issue.
Stock Performance Evaluation Models to calculate long run and short run performance are

W = ;

MAA =

Where;
W = Wealth Relative of security i, for time t.
MAA = Market Adjusted Abnormal Rate of Return of security i, for year under consideration
= IPO returns for security i, for time t under consideration.
Rmt=market return for time t under consideration.
N= the total size of IPOs in the portfolio for discussion.

4.4 Data Analysis:

The collected historical data has been put into the two models and the following rankings are obtained:

4.4.1 Short Term IPO Performance:

Table-1 Average Returns of IPOs in Short-run

Ranking(Short Term Average

IPO Short Term Average Return (in %)
Returns)
Edserv Soft Systems Ltd. 97.64583333 1

Think Soft Global Services Ltd. 81.37 2

Cox and Kings (India) Ltd. 41.93181818 3
MBL Infrastructures Ltd. 28.85416667 4
Godrej Properties Ltd. 23.27295918 5
Globus Spirits Ltd. 22.875 6
Pipavav Shipyard Ltd. 21.63793103 7
JSW Energy Ltd. 20.10526316 8
Oil India Ltd. 19.91190476 9
D B Corp Ltd. 18.07783019 10
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Ranking(Short Term Average

IPO Short Term Average Return (in %)
Returns)
Mahindra Holidays and Resorts India Ltd. 13.66666667 11

Adani Power Ltd. 8.5625 12

Astec Life Sciences Ltd. 7.540322581 13
Den Networks Ltd. -2.788461538 14
Jindal Cotex Ltd. -12.91666667 15
NHPC Ltd. -20.13888889 16
Indiabulls Power Ltd. -27.19444444 17
Rishabhdev Techno Cable Ltd. -42.25757576 18
Raj Oil Mills Ltd. -52.57291667 19
Euro Multivision Ltd. -53.13333333 20

Table-1 depicted short term average return of IPO for the sample under consideration. After analyzing the table it is
found that Edserve Soft System Ltd. performed well in the short run. This IPO performed well on listing day and it
was an underpriced IPO. Its performance has increased in next three quarters from its offer price. It is followed by
Think soft Global Services Ltd. which gave 81.37% average return in short run period. Euro Multivision Ltd. is the
most underperformed IPO in the Short run. It is an overpriced IPO and gives negative return in the short run.
Fig-1 : Short Run IPO Performance

Figure -1 depicts the IPO performance in short run for the IPOs issued in year 2009. The return is on quarterly basis.
The figure shows IPO of Edserve Soft system Ltd. perform well in short run, followed by Thinksoft Global Services
Biz & Bytes (Vol. II. Issue 2013) E-ISSN: 0976 0458, Print ISSN: 2320 897X

Ltd, Cox and Kings( India) Ltd. MBL Infrastructures Ltd. The most underperformed IPO in short run is Euro
Multivision Ltd. followed by Raj Oil Mills Ltd., Rishabhdev Technologies Ltd., and India Bulls Power Ltd.

4.4.2 Long Run IPO performance:

Table-2 Average returns of IPO in Long run

Long run average return Ranking

IPO
in percentage (Long run average)
Globus Spirits Ltd. 31.15 1
Pipavav Shipyard Ltd 30.86206897 2
Edserv Softsystems Ltd. 27.13888889 3
Godrej Properties Ltd 23.5170068 4
D B Corp Ltd. 9.400607453 5
Jindal Cotex Ltd. 7.866666667 6
Mahindra Holidays and Resorts India Ltd. -4.211111111 7
MBL Infrastructures Ltd. -11.7962963 8
Cox and Kings (India) Ltd. -17.77777778 9
Adani Power Ltd. -19.48333333 10
JSW Energy Ltd. -30.38596491 11
Den Networks Ltd. -31.81196581 12
Thinksoft Global Services Ltd. -33.58666667 13
Astec Life Sciences Ltd. -37.5 14
NHPC Ltd. -37.59259259 15
India-Bulls Power Ltd. -63.08148148 16
Raj Oil Mills Ltd. -83.32777778 17
Euro Multivision Ltd -84.73333333 18
Rishabhdev Technocable Ltd. -88.5959596 19
Oil India Ltd. -98.90952381 20

Table-2 depicts the Long run performance of IPOs. The table shows that Globus Spirit Ltd. is the best performer
between the sample companies for the long term performance. This company is followed by Pipava Shipyard Ltd.
and Edserv Software System Ltd. which also performed well in the short run. Oil India Ltd. is the most
underperforming company for the selected period of three years. Although this company performed well in short run
but in Long run it has not performed well.
Figure-2 shows that in the long run only 24% companies are performing well. In 2011 most of the companies have
shown negative return as compared to their offer price. In year 2010, 33% companies are well performing. Whereas,
In year 2011 only 12% companies performed well.
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4.4.3 Short Run Market Adjusted Rate of Return (MARR):

Table-3 MARR Of IPOs Under Consideration
IPO Listing date 3month 6 month 9month Average(%)
Mahindra Holidays and Resorts Ltd. 26.2685954 -0.543242 1.839404 1.62203 7.2967
D B Corp Ltd. 14.4282811 1.8438064 1.375817 0.58402 4.55798
MBL Infrastructures Ltd. 3.33411688 6.8675165 5.496099 1.71663 4.35359
JSW Energy Ltd. 0.99711337 4.576333 6.553978 0.41486 3.13557
Godrej Properties Ltd. 1.33968561 0.6868066 5.796588 1.81842 2.41038
Pipavav Shipyard Ltd. -3.6021654 -2.0918197 2.927722 10.1486 1.84559
Oil India Ltd. 0.45565616 2.6817555 1.036632 1.31593 1.37249
Adani Power Ltd. -1.9680384 5.6441453 0.74856 -1.4735 0.7378
Globus Spirits Ltd. -1.9071246 -1.0898425 1.552323 3.4334 0.49719
Astec LifeSciences Ltd IPO 2.99718595 -6.9103033 -0.758778 0.51805 -1.0385
Rishabhdev Technocable Ltd. 4.70775971 -2.1778271 -2.258671 -4.4723 -1.0503
Den Networks Ltd. -2.7517368 -1.4662808 -0.758314 -0.4587 -1.3588
NHPC Ltd. -0.1772503 -2.6448692 -3.901476 -3.4667 -2.5476
Cox and Kings (India) Ltd IPO 54.8288856 -10.929974 -77.45971 11.8989 -5.4155
India bulls Power Ltd. -12.777778 5.7774611 -11.34747 -8.0315 -6.5948
Edserv Softsystems Ltd. -31.137787 -1.8928822 2.172139 2.03364 -7.2062
Jindal Cotex Ltd. 1.16549154 -2.8052967 -2.552273 -26.022 -7.5536
Raj Oil Mills Ltd. -4.3419329 -11.552019 -9.398751 -5.4766 -7.6923
Euro Multivision Ltd. -9.0985474 -11.462177 -13.26269 -10.353 -11.044
Table-3 depicted Market Adjusted Abnormal Rate of Return. The table shows the relationship of IPO performance
with the market return. The study shows that Mahindra Holidays and Resort India Ltd. is the best performing IPO
and Euro Multivision Ltd. is the most underperformed company in short run.
Fig-3 Market Adjusted Abnormal Rate of Return for IPOs under Consideration
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Figure-3 shows that Mahindra Holidays and Resorts Ltd. is the IPO giving highest return in short run and Euro
Multivision Ltd. gave lowest return in short run.
4.4.4 Long Run Market Adjusted Abnormal Rate of Return:

Table-4 MARR IPO Performance Under Consideration

IPO 2009 2010 2011 Average (%)

Pipavav Shipyard Ltd 8.389001224 1.641681 3.54089 4.523857
Godrej Properties Ltd 6.79545644 4.766661 0.194304 3.918807
Globus Spirits Ltd 4.221645556 -1.06634 0.60302 1.252775
D B Corp Limited 4.345617568 -2.74296 -0.22166 0.460332
Edserv Softsystems Limited 2.020716034 -2.82362 -1.81241 -0.87177
Mahindra Holidays and Resorts -0.702114316 -1.53487 -1.49393 -1.24364
Adani Power Limited IPO 5.644145315 -5.77116 -4.21121 -1.44608
MBL Infrastructures Ltd 3.145161482 -9.29208 -1.55585 -2.56759
Jindal Cotex Limited 3.86744555 -2.74562 -10.0689 -2.98235
Den Networks Ltd -2.589295089 -7.48076 -1.89324 -3.98777
Rishabhdev Technocable Limited -3.485608669 -3.62994 -5.70921 -4.27492
NHPC Limited -2.644869162 -6.21317 -4.14099 -4.33301
Astec LifeSciences Ltd -0.916542572 -9.33076 -4.40521 -4.88417
JSW Energy Limited 0.727877839 -14.6116 -2.90094 -5.5949
Thinksoft Global Services Ltd -6.015536161 -13.4169 -1.72232 -7.05159
Raj Oil Mills Ltd -11.9359971 -11.4538 -6.69852 -10.0294
Indiabulls Power Ltd 7.873879182 -26.7117 -15.6192 -11.4856
Oil india Ltd -12.11974493 -11.8374 -10.7127 -11.5566
Euro Multivision Ltd -14.14343858 -17.7419 -15.4053 -15.7635
Cox and Kings (India) Ltd -18.20933454 -22.2015 -11.4802 -17.297
Fig. 4 MARR (Market adjusted abnormal rate of return) for IPO under consideration
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Table-4 depicted the long run performance of IPO in the form of market adjusted abnormal rate of return. The Long
run period has taken from year 2009 to year 2011.Pipava Shipyard Ltd. performed well in long run. Cox & Kings
Ltd. is the most underperformed company in the given sample. Figure-4 Shows the performance of the sample IPO
in graphical form which shows the positive and highest bars for Pipavav Shipyard Ltd. The most underperformed
IPO in this study is Cox and Kings Ltd. as it does not perform well in secondary market according to market
adjusted abnormal rate of return.
4.4.5 Short Term Wealth Relative Performance of IPOs

Table-5 wealth relative for IPO under consideration

Short Run Performance Wealth Relative(Times)

Listing date 2.902835236
3month 0.578619355
6month 0.594905495
9month 1.386076138
The performance of a group of IPOs on using the wealth relatives is evaluated for a specific point of time. Short run
performance of IPO has calculated for 24 IPOs issued in year 2009.
Rit is the return of the individual IPO stocks i on day t from the offer day; Rmt is the market index return for BSE for
the corresponding time period. We calculate the wealth relatives for different time periods, i.e., listing day, at one
month, three months, six months and nine month. If the value of wealth relative is greater than one it mean that the
IPO has outperformed the market. It means that the IPO has given higher return than the market. The sample IPO in
short run perform well above the market on listing day but after another points of time in short run these IPOs were
under performing the market.
Graph-5 Evaluating IPO performance using Wealth Relative

Figure-5 indicates that the listing date performance of IPO’s is better than another point of time in short run.
4.4.6 Long Run Wealth Relative Performance of IPOs
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Table-5 Wealth relative for IPOs under consideration

Year Wealth Relative( times)

2009 0.670185452
2010 -4.745068656
2011 -2.085469603

In long run the IPO’s are not performing well. These IPO‘s are under performing the market performance. In the
year 2009, 2010 and 2011 Wealth Relative Index is less than one it means that the IPO ‘s performed less than the
market performance.
Fig-6 Wealth Relative For IPOs Under Consideration

In figure-6 we can find that in 2009 Wealth Relative of IPOs is positive but less than one and in year 2010 and
2011 Wealth Relative of IPOs is negative this indicate that overall for the long term IPO performance is less than
the market performance.

5. Findings, Recommendations and Conclusion:

5.1 Findings
 Edserve Software System is the most well performed IPO while calculating return of IPO for short run. but
in long run this company is on third number in the ranking of IPO positive returns. As per the market adjusted
abnormal rate of return for short run and long run this IPO has performed negative but still it is good
performer in negative return giving IPO’s.
 Euro Multivision is the most underperformed IPO in short run in long run it is third highest underperformed
IPO under the sample size taken into consideration in long run As per the market adjusted abnormal rate of
return it is highly negative performer in short run and long run.
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 The wealth relative metric of IPO’s in sample size on listing day is more than one which shows that IPO
outperformed the market for that period. This metric shows less than one return for three months, six month
and nine month short run period which shows that IPO is under performed from market in that particular
period.
 In long run wealth relative metric is less than one it shows that in long run IPO are underperformed by market
performance.

5.2 Recommendations
 The study recommendation for the investors is to invest in the companies with positive wealth relative
metrics.
 The IPO with positive return in short and long run are suggested for the IPO investment.
 The IPO which has positive market adjusted abnormal rate of return is also suggested for purchasing in
secondary market.

6. Conclusion:
In this study IPO s issued in the year 2009 are studied and it has been found that Edserve Software System IPO is
the most well performed IPO for the short run. But in long run this company is on third number in the ranking of
IPO. As per the market adjusted abnormal rate of return for short run and long run this IPO has performed negative
but still a better performer than those showing negative return. Euro Multivision is the most underperformed IPO in
short run in long run it is third highest underperformed IPO under the sample size taken into consideration in long
run. As per the Market Adjusted Abnormal Rate of Return it is highly negative performer in short run and long run.

References:

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 Jacobson, R. (2005). The A New Approach for Interpreting Long-Run Returns, Applied to IPO and SEO
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 Sahoo, S. & Rajib, P., (2010) After Market Pricing Performance of Initial Public offering. Vikalpa. Vol 35,
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