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CHAPTER- 1 INTRODUCTION

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1.1 IMPORTANCE
The prospectus includes very important information like the historical performance of the company in the previous years, the current owners of the company, the amount of shares that they are offering to the public, what they intend to do with the money after the I.P.O amongst other things. Any prudent investor will take his/her time to go through this information in order to make an informed decision on the amount of shares to take up or even if to participate in the offer. As an investor this are the things to look out for in the prospectus The company performance in the pre-ceding years. This is important for you to develop performance trends and therefore be able to predict its future performance- all factors held constant. This is mainly done by looking at the statements of accounts. The balance sheet is important so as to look at the net book value of the share to determine if the company is overvalued or undervalued (offered at a discount) at the time of the offering. The net book value is arrived at by taking the total assets divided by the total number of shares. It will be interesting to see how safaricom arrived at its value for the share offer. What did it include as part of its assets to reach that price? The cash flow statement shows the company's ability to offset its debts in the short run thus avoid bankruptcy. We have seen in the past stable companies with huge asset outlays being placed into receivership because it did not have any liquid cash to pay off its debts. Its therefore to observe the investment mix of the company especially the current investments against the long term investments. The profit trading and loss statement shows how the company is using its assets to generate a profit. This statement is important for an investor to determine the rate of return on his investment and probable earnings against his investment in the form of dividends and bonus shares. Safaricom in this respect is a very strong company since a little investment is yielding massive gains The current list of owners. This will help you determine the performance of the company in the future since some directors have a reputation of turning around companies or leading them to huge growth. Observe the ratio of the directors who have the technical expertise in the company's area of operation against those who don't have. Also look at the management team and their qualifications. Also establish which owners are offloading their share ownership and why are they doing so, is it to expand the business or to cash in? Normally investors who want to cash in on their ownership raise a number of suspicions to investors because in most cases shares are offered to raise capital for the company's expansion. A cash in means that the investor is bailing out which is not a good sign. In respect to safaricom shares, it would be good to see what the vendors intend to do with the cash they raise and if it shall be of benefit to the company. Also important in the safaricom issue is to know who are the owners of the mysterious 5% of the company and are they selling off their shares..The general industry trends. This includes the company's perception of the market. Its market share, the existing competition and the company's evaluation of the risks that arise from the industry and other sources and how it intends to mitigate these risks. This is important for you as the investor to firstly understand the business the company is involved in and its general business environment. It is on this basis that you will be able to determine the future the company will have in respect to its strengths like market share, its weaknesses like internal wrangling or huge labor force, its opportunities in terms of unexploited markets and its threats like competition, new government regulation and political influences among

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others. As it stands out, this is safaricom's greatest strength and what investors are being offered. It is not into its ownership but its future prospects. It is therefore necessary for investors to find out the current worth of the future normally known as the Net Present Value then evaluate the possibility of the company achieving that future value which is a very complex process that involves the evaluation of the risks and the estimation of the probability of the positive occurrence The share allocation criteria and the time table of principle events. This is important especially to observe the share allocation to institutional investors who create the bulk of demand for the company's share. If they are likely to get full allocation then the prices are not likely to rise after the offer but drop as speculators will offer their shares to no buyer. It is good to get their opinion of the institutional investors and what closely their purchase patterns if possible. The dates of the offer, period of the offer before the closure date, the refund payment date and the listing date are also very important since this dates will affect the amount of money to be raised and help you evaluate the opportunity cost in investing in the companies I.P.O. the opportunity cost in this case refers to the cost forgone if you invested your money in another venture against the expected returns. In the case of the safaricom share, it might just be possible to discover that it makes more prudent sense to purchase other shares whose value have greatly reduced than to buy safaricom shares also the listing date may coincide with other major announcements like other I.P.Os of company's results thus dampening the demand for the companies shares. The above items are the basic things that you look for in a prospectus of a company intending to list. It is also very important to try and understand the business that the company is involved in and get information about the company from other sources. Despite the fact that companies go through very rigorous evaluations before listing, a few gaps may exist that might require you to go through in detail of the companies reports to identify any ghosts in the cabinets'. Remember the devil is in the details so if you intend to commit huge sums of money in a companies I.P.O and your risk factor is very high then it is worth the effort.

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1.2 OBJECTIVES
1. To get the knowledge of IPO. 2. Find out the factors which influence the IPO Listing Process. 3. Analysis between Share Holder and IPO Companies. 4. Analysis of Auction, Pricing, Issued Price and Reverse IPO¶s. 5. Find out the companies which like to adopt this technique. 6. To analyse the growth of shares of few companies. 7. Analyse the benefits to go IPO rather than purchase the share through secondary market. 8. Analyse why company go to issue IPO. 9. To study the broking industry.

10. Know which companies follow ESOP. 11. Find out the risk involve in purchasing IPO. 12. To what extent SEBI can protect the interest of investors. 13. To know which company can issue IPO. 14. To know the parameters which investors follow to judge an IPO.

1.3 HYPOTHESIS
1. The investors consider financial data while selecting an IPO. 2. The investors consider all services of broking firms going for IPO. 3. The investors are interested to know where the issuing company employ the fund. 4. The investors evaluate others IPOs while investing one company. 5. Investors follow the suggestion of analyst while purchasing an IPO.

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1.4 SCOPE
2. Spread awareness about this process. 3. Find out the companies which like to adopt this technique. 4. Find out the factors which influence the IPO Listing Process. 5. What the companies are looking from Open New IPO¶s in India? 6. Analysis between Share Holder and IPO Companies. 7. Analysis of IPO¶s post/present/future Prospects. 8. Analysis of Auction, Pricing, Issued Price and Reverse IPO¶s.

1.5 METHODOLGY
The project includes both primary & secondary sources of data. The data collected through these sources has been organized properly.

Primary source of data includes personal interviews from various respondents. The secondary source of data includes different websites of banks which contains details which is helpful for making my project report.

1.6DATA COLLECTION
Data is collected through simple random survey by interviewing people in pune.

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1.7 LIMITATION
1. The study was to be completed in a short time; the time factor put a considerable limit on the scope and the extensiveness of the study. 2. The unsupportive attitude of the respondents while responding to the questions, requiring the qualitative information may have affected the final findings and outcomes. 3. Because of the diversity of nature of respondents as well as due to conduction of the study on very small scale, the findings of the survey could not be generalized. 4. It was tried very harder to include the best of information from published and unpublished sources available on internet, books and magazines but some of the data required for the detailed study was not available freely.

1.8 CHAPTER SCHEME
1. Introduction 2. Review of literature 3. Analysis & interpretations 4. Findings & suggestions 5. Bibliography 6. Annexure

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CHAPTER-2 REVIEW OF LITERATURE

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2.1 IPO Concept
An Initial Public Offer is the selling of securities to the public in the primary market. It is the first time a company offers shares of stock to the public. Smaller, younger companies seeking capital to expand their business often consider venturing in IPOs. It is also referred to as a "Public Offering." What is a primary market? Market for new issues of securities, as distinguished from the Secondary Market, where previously issued securities are bought and sold. A market is primary if the proceeds of sales go to the issuer of the securities sold. In other words, it refers to the initial launch of a company's shares when they first become available for a trading on the Stock Market What is Closed End Fund? Closed End Funds are popularly known as investment trusts. They are companies whose shares are traded like any other listed company. Because of this the number of units that the Fund Portfolio is divided into is fixed, unless the fund has a new share issue. This means that investors wishing to take part in the fund have to buy shares in it on the secondary market. On the other hand, a unit trust continues to issue units to any new investors wishing to take part. What are the reasons for which an IPO may be considered? Reasons for going Public: ‡ Strategic Expansion ‡ Strengthening Marketing Avenues ‡ Financial Expansion ‡ Debt refinancing ‡ Business Diversification ‡ Merchant Banking Dimension ‡ Providing an Exit route for Investors What is the argument of "Winner's Curse"? Winner's Curse refers to the tendency for the winning bid to exceed the intrinsic value of the item being auctioned. This is common in sealed bid auctions. This argument was highlighted by Rock in 1986 when he explained the empirical evidence of under pricing in the IPOs as compensation to uninformed investors for being allocated a disproportionately large fraction of overpriced issues, relative to informed investors. The argument assumes that investors are of two types- informed and uniformed- and accounts for under pricing as compensation to uninformed investors for being allocated a

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disproportionately large share of overpriced IPOs. The marginal investor will be the least-informed investor among the investors and this investor (by virtue of being the marginal investor) makes a zero excess return. Other investors in the IPO have more precise information than that of the marginal investor and thus these investors make positive excess returns, which in turn are observed empirically as under pricing. What are the basic steps to a Public Issue? The following constitute the basic steps for a company venturing an IPO in the Primary Market: ‡ Approval of Board ‡ Appointment of Lead Managers ‡ Appointment of other Intermediaries ‡ Filing of Prospectus with SEBI ‡ Filing of Prospectus with registrar of companies ‡ Printing and Dispatch of Prospectus ‡ Filing of Initial listing Application ‡ Promotion of the Issue ‡ Statutory Announcement ‡ Processing of Applications ‡ Establishing the Liability of Underwriters ‡ Allotment of Shares ‡ Listing of the issue Eligibility Criterion for Listed Companies for an IPO A limited company must have the aggregate of issues, made in that financial year, and the revenue accounted by the new name has to be at least 50% of its total revenue. Eligibility Criterion for Unlisted Companies for an IPO An unlimited company must comply with the following conditions: ‡ Net tangible asset of at least 3 crores ‡ Net worth of at least Rs. 1 crore. ‡ Track record of distributable profits for at least 3 years. What are the issues to be kept in mind for the determination of the capital and the issue structure? ‡ The number of new shares to be issued must be determined ‡ The total issued and paid-up capital is arrived at by the Directors ‡ The post-issue capital structure must be fixed

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‡ The details and findings with regards to the face value, premium, & final offer price ‡ Minimum and Maximum amount of subscription per applicant ‡ Promoter's contribution must be defined ‡ Firm Allotments ‡ Net Public Offer What are the Qualitative and Quantitative Factors for the justification of the share premium? Qualitative Factors: ‡ Company's past record, and achievements ‡ Experience of the promoters in the relevant fields and avenues ‡ Credit rating by a recognised Agency ‡ The company''s selling propositions and business basics ‡ The industry scenario, and the growth prospects ‡ Any International recognition or Awards received, if any ‡ An honest perusal of prospective business opportunities Quantitative Factors: ‡ The current market price & high/low for last 3 years. ‡ Comparison of the P/E ratio of the company and the industry ‡ The Book Value of the share & the Book Value multiple in relation to offer price. ‡ The growth rate in PAT (Profit After Tax) & EPS (Earnings Per Share) for the past year. ‡ SENSEX volatility of the economy at that point What is P/E Ratio? P/E ratio is the commonly used term for the ratio of the market price of a share to earnings per share (EPS). It could be used as an indicator of how much an investor may be willing to pay for a share for every rupee of its earnings What is Book Building? In the Indian context, book-building is widely used by good quality corporate issuers in order to achieve optimal pricing by generating a high level of investor interest. SEBI guidelines define Book Building as "a process, undertaken by which a demand for the securities, proposed to be issued by a body corporate, is elicited and built-up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document". Enumerate the various provisions for a book built issue In case of a 100% book built issue: ‡ Not more than 50% of NPO (Net Public Offer) shall be allocated to QIBs (Qualified

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Institutional Buyers) ‡ Not less than 25% of NPO shall be allocated to non-institutional bidders ‡ Not less than 25% of NPO shall be available for allocation to retail investors In case of a 75% book built issue: As per Rule 19 (2) b of Securities Contracts (Regulation) Rules, 1957: ‡ The NPO shall consist of min of 20 Lakh shares ‡ Size of public offer is at least Rs.100cr ‡ Issue was offered to maximum extend permissible (50%) to QIBs Process of Book Building ‡ The issue is marketed on a wholesale basis through a team, consisting of Book Running Lead Manager (BRLM) and Co-BRLM. ‡ Company issues offer document known as ''Red Herring Prospectus'' ‡ Bidding period can be anywhere from a minimum of 5 days to a maximum of 10 days ‡ Each bidder can furnish three options in his bid. ‡ Once the bidding period closes, BRLM's and the company decide the "Issue Price" What is a Green Shoe Option? It is an option that allows the underwriting of an IPO to sell additional shares to the public if the demand is high. It refers to the option of allocating shares in excess of the shares included in the public issue and operating a post-listing price stabilising mechanism, which is granted to a company through a stabilising agent

Legal Compliance during Issuance ‡ In case of a public issue, the draft prospectus has to be filed through a Lead Manager. ‡ SEBI assesses it and may suggest changes, if any, within 21 days. ‡ The draft prospectus can then be issued to the public any time within 365 days from the date of the letter from SEBI or if no letter is received from SEBI, within 365 days from the date of expiry of 21 days of submission of prospectus with SEBI. ‡ If the issue size is up to Rs. 20 crores, then the Lead Managers are required to file prospectus with the regional office of SEBI; if the issue size is more than Rs. 20 crores, Lead Managers are required to file prospectus at SEBI, Mumbai office. ‡ The Prospectus is also required to be filed with the concerned stock exchanges, along with the application for listing its securities. ‡ After the filing of the draft offer document with SEBI and the stock exchanges and making it public, the lead manager has to attend to the modifications or amendments, required at short notice. ‡ There must be a smooth co-ordination with registrars, bankers, advertisement agencies, brokers to the issue, underwriters to the issue, printers and couriers.

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‡ The main function during the issuance is to ascertain daily figures from the bankers or the stock exchange and to take a decision on the closure of the issue, based on the procurement of minimum subscription. The apex members of the company must shoulder this responsibility. ‡ Post issuance, the company has to actively associate with the allotment, refund & dispatch and shall regularly monitor the grievances, arising therefrom Contents of offer document/Prospectus ‡ Risk factors ‡ Issuers absolute responsibility ‡ Table of the contents ‡ Liability of Directors ‡ Company Hierarchy and allocations of responsibility ‡ General information ‡ Statutory information ‡ Financial information ‡ Financial statements prepared on basis of more than one system of accounting standards ‡ Tax Implications both for the company and the investors ‡ Declaration and verification by signatories to the prospectus together with signatures by themselves or through their constituted attorney.

2.2IPO Basics: What is an IPO?
Selling Stock IPO is an acronym for Initial Public Offering. This is the first sale of stock by a company to the public. A company can raise money by issuing either debt (bonds) or equity. If the company has never issued equity to the public, it's known as an IPO. Companies fall into two broad categories: private and public. A privately held company has fewer shareholders, if any, and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents, and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public." Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the SEC. In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the

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open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock. Why Go Public? Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:
y y

y

Because of the increased scrutiny, public companies can usually get better rates when they issue debt. As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal. Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.

Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed. The Internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their business. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. In VC talk, this is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning. How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money. In our opinion, IPOs like this are extremely risky and should be avoided.

2.3IPO Basics: How can I get in on an IPO?
The Underwriting Process Getting a piece of a hot IPO is very difficult, if not impossible. To understand why, we need to know how an IPO is done, a process known as underwriting. When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required - it's just the way Wall Street works. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). You can think of underwriters as middlemen between companies and the investing public. The biggest underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan Stanley.

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The company and the investment bank will first meet to negotiate the deal. Items usually discussed include the amount of money a company will raise, the type of securities to be issued, and all the details in the underwriting agreement. The deal can be structured in a variety of ways. For example, in a "firm commitment," the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public. In a "best efforts" agreement, however, the underwriter sells securities for the company but doesn't guarantee the amount raised. Also, investment banks are hesitant to shoulder all the risk of an offering. Instead, they form a syndicate of underwriters. One underwriter leads the syndicate and the others sell a part of the issue. Once all sides agree to a deal, the investment bank puts together a registration statement to be filed with the SEC. This document contains information about the offering as well as company info such as financial statements, management background, any legal problems, where the money is to be used, and insider holdings. The SEC then requires a "cooling off period," in which they investigate and make sure all material information has been disclosed. Once the SEC approves the offering, a date (the effective date) is set when the stock will be offered to the public. During the cooling off period the underwriter puts together what is known as the red herring. This is an initial prospectus containing all the information about the company except for the offer price and the effective date, which aren't known at that time. With the red herring in hand, 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. What About Me? As you can see, the road to an IPO is a long and complicated one. You may have noticed that individual investors aren't involved until the very end. This is because small investors aren't the target market. They don't have the cash and therefore hold little interest for the underwriters. If underwriters think an IPO will be successful, they'll usually pad the pockets of their favorite institutional client with shares at the IPO price. The only way for you to get shares (known as an IPO allocation) is to have an account with one of the investment banks that is part of the underwriting syndicate. But don't expect to open an account with $1000 and be showered with an allocation. You need to be a frequently trading client with a large account to get in on a hot IPO. Bottom line, your chances of getting early shares in an IPO are slim to none unless you're on the inside. If you do get shares, it's probably because nobody else wants them. Granted, there are exceptions to every rule and it would be incorrect for us to say that it's impossible. Just keep in mind that the probability isn't high if you are a small investor.

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2.4IPO Basics: Some Things to Consider Before Buying
Let's say you do get in on an IPO. Here are a few things to look out for. No History It's hard enough to analyze the stock of an established company. An IPO company is even trickier to analyze since there won't be a lot of historical information. Your main source of data is the red herring, so make sure you examine this document carefully. Look for the usual information, but also pay special attention to the management team and how they plan to use the funds generated from the IPO. And what about the underwriters? Successful IPOs are typically supported by bigger brokerages that have the ability to promote a new issue well. Be more wary of smaller investment banks because they may be willing to underwrite any company. The Lockup Period If you look at the charts following many IPOs, you'll notice that after a few months the stock takes a steep downturn. This is often because of the lockup period. When a company goes public, the underwriters make company officials and employees sign a lockup agreement. Lockup agreements are legally binding contracts between the underwriters and insiders of the company, prohibiting them from selling any shares of stock for a specified period of time. The period can be anything from 3 to 24 months. 90 days is the minimum period stated under Rule 144 (SEC law) but the l ockup specified by the underwriters can last much longer. The problem is, when lockups expire all the insiders are permitted to sell their stock. The result is a rush of people trying to sell their stock to realize their profit. This excess supply can put severe downward pressure on the stock price. Flipping Flipping is reselling a hot IPO stock in the first few days to earn a quick profit. This isn't easy to do, and you'll be strongly discouraged by your brokerage. The reason behind this is that companies want long-term investors who hold their stock, not traders. There are no laws that prevent flipping, but your broker may blacklist you from future offerings or just smile less when you shake hands. Of course, institutional investors flip stocks all the time and make big money. The double standard exists and there is nothing we can do about it because they have the buying power. Because of flipping, it's a good rule not to buy shares of an IPO if you don't get in on the initial offering. Many IPOs that have big gains on the first day will come back to earth as the institutions take their profits. Avoid the Hype It's important to understand that underwriters are salesmen. The whole underwriting process is intentionally hyped up to get as much attention as possible. Since IPOs only happen once for each company, they are often presented as "once in a lifetime" opportunities. Of course, some IPOs soar high and keep soaring. But many end up selling below their offering prices

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within the year. Don't buy a stock only because it's an IPO - do it because it's a good investment.

2.5IPO Basics: Tracking Stocks
Tracking stocks appear when a large company spins off one of its divisions into a separate entity. The rationale behind the creation of tracking stocks is that individual divisions of a company will be worth more separately than as part of the company as a whole. From the company's perspective, there are many advantages to issuing a tracking stock. The company gets to retain control over the subsidiary but all revenues and expenses of the division are separated from the parent company's financial statements and attributed to the tracking stock. This is often done to separate a high growth division with large losses from the financial statements of the parent company. Most importantly, if the tracking stock rockets up, the parent company can make acquisitions with stock of the subsidiary instead of cash. While a tracking stock may be spun off in an IPO, it's not the same as the IPO of a private company going public. This is because tracking stock usually has no voting rights, and often there is no separate board of directors looking after the rights of the tracking stock. It's like you're a second class shareholder! This doesn't mean that a tracking stock can't be a good investment. Just keep in mind that a tracking stock isn't a normal IPO.

2.6IPO Basics: Conclusion and Resources
Let's review the basics of an IPO:
y y y y y y y y y y y y y y

An IPO is the first sale of stock by a company to the public. 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. Getting in on a hot IPO is very difficult, if not impossible. The process of underwriting involves raising money from investors by issuing new securities. Companies hire investment banks to underwrite an IPO. The road to an IPO consists mainly of putting together the formal documents for the SEC 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. An IPO company is difficult to analyze since there isn't a lot of historical info. Lockup periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock. Flipping may get you blacklisted from future offerings. Road shows and red herrings are marketing events meant to get as much attention as possible. Don't get sucked in by the hype. A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.

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y

Don't consider tracking stocks to be the same as a normal IPO, as you are essentially a second-class shareholder

2.7 FACTORS CONSIDERED BY THE INVESTORS:

Promoter¶s Credibility

Promoter¶s past performance with reference to the companies promoted by them earlier. The integrity of the promoters should be found out with enquiries and from financial magazines and newspapers. The managing director¶s background and experience in the field. The composition of the Board of Directors is to be studied to find out whether it is broad based and professionals are included. The credibility of the appraising institution or agency. The stake of the appraising agency in the forthcoming issue. Reliability of the demand and supply projections of the product. Competition faced in the market and the marketing strategy. If the product is export oriented, the tie-up with the foreign collaborator or agency for the purchase of products. Accounting policy. Revaluation of the assets, if any. Analysis of the data related to capital, reserves, turnover, profit, dividend record and profitability ratio. Pending litigations and their effect on the profitability of the company. Default in the payment of dues to the banks and financial institutions. A careful study of the general and specific risk factors should be carried out. A through reading of the auditor¶s report is needed especially with reference to significant notes to accounts, qualifying remarks and changes in the accounting policy. In the case of letter of offer the investors have to look for the recently audited working result at the end of letter of offer. Investor should find out whether all the required statutory clearance has been obtained, if not, what is the current status. The clearances used to have a bearing on the completion of the project. Promptness in replying to the enquiries of allocation of shares, refund of money, annual reports, dividends and share transfer should be assessed with the help of past record.

Efficiency of the Management

Project Details

Product

Financial Data

Litigation

Risk Factors

Auditor¶s Report

Statutory Clearance

Investor Service

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INITIAL PUBLIC OFFERINGS: The first offering of a company¶s shares to the public. The shares offered may be existing ones held privately, or the company may issue new shares to the public. PARTIES INVOLVED IN THE IPO: The promoters also should have a clear idea about the agencies to coordinate their activities effectively in the public issue. The various parties involved are:
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The manager to the issue, The registrars to the issue, Underwriters, Bankers, Advertising agencies, Financial Institutions and Government /Statutory Agencies.

The Managers To The Issue: Lead managers are appointed by the company to manage the initial public offering campaign. Their main duties are:

y y y y

Drafting of prospectus Preparing the budget of expenses related to the issue Suggesting the appropriate timings of the public issue Assisting in marketing the public issue successfully

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y

Advising the company in the appointment of registrars to the issue, underwriters,

brokers, bankers to the issue, advertising agents etc.
y

Directing the various agencies involved in the public issue.

The merchant banking division of the financial institutions, subsidiary of commercial banks, foreign banks, private sector banks and private agencies are available to act as lead mangers. Such as SBI Capital Markets Ltd., Bank of Baroda, Canara Bank, DSP Financial Consultant Ltd. ICICI Securities & Finance Company Ltd., etc.

The Registrar To The Issue After the appointment of the lead managers to the issue, in consultation with them, the Registrar to the issue is appointed. Quotations containing the details of the various functions they would be performing and charges for them are called for selection. Among them the most suitable one is selected. It is always ensured that the registrar to the issue has the necessary infrastructure like Computer, Internet and telephone.

The Registrars normally receive the share application from various collection centers. They recommend the basis of allotment in consultation with the Regional Stock Exchange for approval. Usually registrars to the issue retain the issuer records at least for a period of six months from the last date of dispatch of letters of allotment to enable the investors to approach the registrars for redressal of their complaints.

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The Underwriters Underwriting is a contract by means of which a person gives an assurance to the issuer to the effect that the former would subscribe to the securities offered in the event of non subscription by the person to whom they were offered. The person who assures is called an underwriter. The underwriters do not buy and sell securities. They stand as back-up supporters and underwriting is done for a commission. Underwriting provides an insurance against the possibility of inadequate subscription. Underwriters are divided into two categories:
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Financial Institutions and Banks Brokers and approved investment companies.

The company after the closure of subscription list communicates in writing to the underwriter the total number of shares/debentures under subscribed, the number of shares/debentures required to be taken up by the underwriter. The underwriter would take up the agreed portion. If the underwriter fails to pay, the company is free to allot the shares to others or take up proceeding against the underwriter to claim damages for any loss suffered by the company for his denial. The Bankers To The Issue: Bankers to the issue have the responsibility of collecting the application money along with the application form. The bankers to the issue generally charge commission besides the brokerage, if any. Depending upon the size of the public issue more than one banker to the issue is appointed. When the size of the issue is large, 3 to 4 banks are appointed as bankers to the issue. The number of collection centers is specified by the central government. The bankers to the issue should have branches in the specified collection centers.

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Advertising Agents: Advertising plays a key role in promoting the public issue. Hence, the past track record of the advertising agency is studied carefully. Tentative program of each advertising agency along with the estimated cost are called for. After comparing the effectiveness and cost of each program with the other, a suitable advertising agency if selected in consultation with the lead managers to the issue. The advertising agencies take the responsibility of giving publicity to the issue on the suitable media. The media may be newspapers/ magazines/ hoardings/press release or a combination of all.

The Financial Institutions Financial institutions generally underwrite the issue and lend term loans to the companies. Hence, normally they go through the draft of prospectus, study the proposed program for public issue and approve them. IDBI, IFCI & ICICI, LIC, GIC and UTI are the some of the financial institutions that underwrite and give financial assistance. The lead manager sends copy of the draft prospectus to the financial institutions and includes their comments, if any in the revised draft. Government And Statutory Agencies The various regulatory bodies related with the public issue are:
y y y y y

Securities Exchange Board of India Registrar of companies Reserve Bank of India (if the project involves foreign investment) Stock Exchange where the issue is going to be listed Industrial licensing authorities

22

y

Pollution control authorities (clearance for the project has to be stated in the prospectus)

2.8COLLECTION CENTERS

Generally there should be at least 30 mandatory collection centers inclusive of the places where stock exchanges are located. If the issue is not exceeding Rs.10 Cr (excluding premium if any) the mandatory collection centers are the four metropolitan centers viz. Mumbai, Delhi, Kolkatta and Chennai and at all such centers where stock exchanges are located in the region in which the registered office of the company is situated. The regional divisions of the various stock exchanges and the places of their locations are given in the following table:

Collection centers

Region Northern Region

Exchange Ludhiana Stock Exchange Delhi Stock Exchange Jaipur Stock Exchange U P Stock Exchange Hyderabad Stock Exchange Bangalore Stock Exchange Mangalore Stock Exchange Madras Stock Exchange

City Ludhiana Delhi Jaipur Kanpur

Southern Region

Hyderabad Bangalore Managlore Chennai Coimbatore Cochin

23

Coimbatore Stock Exchange Cochin Stock Exchange Eastern Region Calcutta Stock Exchange Gawahati Stock Exchange Magadh Stock Exchange Bhubaneswar Stock Exchange Bombay Stock Exchange National Stock Exchange OTCEL Stock Exchange M P Stock Exchange Pune Stock Exchange Vadodara Stock Exchange Ahmedabad Stock Exchange Sauashtra Kutch Stock Exchange Kolkatta Gawahati Patna Bhubaneswar

Western Region

Mumbai Mumbai Mumbai Indore Pune Vadodara Ahmedabad Rajkot

In addition to the collection branch, authorized collection agents may also be appointed. The names and addresses of such agent should be given in the offer documents. The collection agents are permitted to collect such application money in the form of cheques, draft, and stock-invests and not in the form of cash. The application money so collected should be deposited in the special share application account with the designated scheduled bank either on the same day or latest by the next working day.

The application collected by the bankers to the issue at different centers are forwarded to the Registrar after realization of the cheques, within a period of 2 weeks from the date of closure of the public issue. The applications accompanied by stock-invests are sent directly

24

to the Registrars to the issue along with the schedules within one week from the date of closure of the issue. The investors, who reside in places other than mandatory and authorized centers, can send their application with stock-invests to the Registrar to the issue directly by registered post with acknowledgement due card.

2.9 PLACEMENT OF THE IPO
Initial public offers are floated through Prospectus; Bought out deals/offer for sale; Private Placement and Book Building.

OFFER THROUGH PROSPECTUS According to Companies (Amendment) Act 1985, application forms for shares of a company should be accompanied by a Memorandum (abridged prospectus). In simple terms a prospectus document gives details regarding the company and invites offers for subscription or purchase of any shares or debentures from the public. The draft prospectus has to be sent to the Regional Stock Exchange where the shares of the company are to be listed and also to all other stock exchanges where the shares are proposed to be listed. The stock exchange scrutinizes the draft prospectus. After scrutiny if there is any clarification needed, the stock exchange writes to the company and also suggests modification if any. The prospectus should contain details regarding the statutory provisions for the issue, program of public issue ± opening, closing and earliest closing date of the issue, issue to be listed at, highlights and risk factors, capital structure, board of directions, registered office of the company, brokers to the issue, brief description of the issue, cost of the project, projected earnings and other such details. The board, lending financial institutions and the

25

stock exchanges in which they are to be listed should approve the prospectus. Prospectus is distributed among the stock exchanges, brokers and underwriters, collecting branches of the bankers and to the lead managers.

Salient Features of the Prospectus Salient Features of the Prospectus: General Information Name and address of the registered office of the company. The name(s) of the stock exchange(s) where applications have been made for permission to deal in and for official quotations of shares/debentures. Opening, closing and earliest closing dates of the issue. Name and address of lead managers. Issued, subscribed and paid-up capital. Size of the present issue giving separately reservation for preferential allotment to promoters and others. Paid-up capital ± After the present issue Details regarding the promoter¶s contribution.

Capital Structure of the Company

Terms of the Present Issue

Authority for the issue, terms of payment, procedure and time schedule for allotment, issue of certificate and rights of the instrument holders. How to apply ± availability of forms, prospectus and mode of payment. Special tax benefits to the company and share holders under the Income Tax Act, if any. Object of the issue Project cost Means of financing (including promoter¶s contribution). History, main objects and present business of the company. Subsidiary (ies) of the company, if any. Promoters and their background. Names, addresses and occupation of managing directors and other directors including nominee directors and whole-time directors. Location of the project. Plant and machinery, technological process etc. Collaboration, any performance guarantee or assistance in

Particulars of the Issue

Company, Management and Project

26

marketing by the collaborators. Infrastructure facilities for raw materials and utilities like water, electricity etc. Schedule of implementation of the project and progress so far, giving details of land acquisition, civil works, installation of plant and machinery, trail production, consumer production etc. The Product ± (a) Nature of the products ± Consumer or Industrial and the end users; (b) Approach to marketing and proposed marketing set-up; (c) Export possibilities and export obligations, if any. Future prospects ± expected capacity utilization during the first three years from the date of commencement of production and the expected year when the company would be able to earn cash profit and net profit. Stock market data for shares, debentures of the company (high ± low price for each of the last years in consideration). Particulars regarding the other listed companies under the same management, which have made any capital issues during the last three years. Outstanding Litigations Details of the outstanding litigations pertaining to matters likely to affect the operations and finances of the company including disputed tax liabilities of any nature, any other default and criminal prosecution launched against the company. Management perception of risk factors like sensitivity to foreign exchange rate fluctuations, difficulty in the availability of raw materials or in marketing of products, cost, time over-run etc.

Risk Factors

Justification of the issue premium

The justification for price is given, taking into account the following parameters: Performance of the company ± reflected by earnings per share and book value of shares for the past five years. Future projections in terms of EPS and book value of shares in the next three years. Stock market data. Net asset value as per the latest audited balance sheet. If the projections are not based on the past data, appraisal made by a banker or financial institution should be specifically stated. Financial performance of the company for last five years should be given from the audited annual accounts in tabular form. Balance sheet date ± equity capital, reserves (revaluation reserve, the year of revaluation and its monetary effect on assets) and borrowings. Profit and loss data ± sales, gross profit, net profit, and dividend paid, if any.

Financial Information

27

Any change in the accounting policy during the last three years and its effect on the profit and reserves of the company. Statutory and other information Minimum subscription. Details of the fee payable to Advisers, Registrar, Managers, and underwriters. Details regarding the previous issues, if any.

BOUGHT OUT DEALS (OFFER FOR SALE) Here, the promoter places his shares with an investment banker (bought out dealer or sponsor) who offers it to the public at a later date. In other works in a bought out deal, an existing company off-loads a part of the promoters¶ capital to a wholesaler instead of making a public issue. The wholesaler is invariably a merchant banker or some times just a company with surplus cash. In addition to the main sponsor, there could be individuals and other smaller companies participating in the syndicate. The sponsors hold on to these shares for a period and at an appropriate date they offer the same to the public. The hold on period may be as low as 70 days or more than a year.

In a bought out deal, proving is the essential element to be decided. The bought out dealer decides the price after analyzing the viability, the gestation period, promoters¶ background and future projections. A bough out dealer sheds the shares at a premium to the public.

PRIVATE PLACEMENT

28

In this method the issue is placed with a small number of financial institutions, corporate bodies and high net worth individuals. The financial intermediaries purchase the shares and sell them to investors at a later date at a suitable price. The stock is placed with issue house client with the medium of placing letter and other documents which taken together contribute a prospectus, giving the information regarding the issue. The special feature of the private placement is that the issues are negotiated between the issuing company and the purchasing intermediaries. Listed public limited company as well as closely held private limited company can access the public through the private placement method. Mostly in the private placement securities are sold to financial institutions like Unit Trust of India, mutual funds, insurance companies, and merchant banking subsidiaries of commercial banks and so on. Through private placement equity shares, preference shares, cumulative convertible preference shares, debentures and bonds are sold.

BOOK BUILDING

Book building is a mechanism through which the initial public offerings (IPOS) take place in the U.S. and in India it is gaining importance with every issue. Most of the recent new issue offered in the market has been through Book Building process. Similar mechanisms are used in the primary market offerings of GDRs also. In this process the price determination is based on orders placed and investors have an opportunity to place orders at different prices as practiced in international offerings.

29

The recommendations given by Malegam Committee paved way for the introduction of the book building process in the capital market in Oct 1995. Book building involves firm allotment of the instrument to a syndicate created by the lead managers who sell the issue at an acceptable price to the public. Originally the potion of book building process was available to companies issuing more than Rs.100 cr. The restriction on the minimum size was removed and SEBI gave impression to adopt the book building method to issue of any size. In the prospectus, the company has to specify the placement portion under book building process. The securities available to the public are separately known as net offer to the public. Nirma by offering a maximum of 100 lakh equity shares through this process was set to be the first company to adopt the mechanism.

Among the lead managers or the syndicate members of the issue or the merchant bankers as member. The issuer company as a book runner nominates this member and his name is mentioned in the draft prospectus. The book runner has to circulate the copy of the draft prospectus to be filed with SEBI among the institutional buyers who are eligible for firm allotment. The draft prospectus should indicate the price band within which the securities are being offered for subscription.

The offers are sent to the book runners. He maintains a record of names and number of securities offered and the price offered by the institutional buyer within the placement portion and the price for which the order is received to the book runners. The book runner and the issuer company finalize the price. The issue price for the placement portion and offer to the public should be the same. Underwriting agreement is entered into after the fixation of the price.

30

One day earlier to the opening of the issue to the public, the book runner collects the application forms along with the application money from the institutional buyers and the underwriters. The book runner and other intermediaries involved in the book building process should maintain records of the book building process. The SEBI has the right to inspect the records.

Book building as discussed is a process of offering securities in which bids at various prices from investors through syndicate members are collected. Based on bids, demand for the security is assessed and its price discovered. In case of normal public issue, investor knows the price in advance and the demand is known at the close of the issue. In case of public issue through book building, demand can be known at the end of everyday but price is known at the close of issue.

An issuer company proposing to issue capital through book building has two options viz., 75% book building route and 100% book building route. In case of 100% book buil ding route is adopted, not more than 60% of net offer to public can be allocated to QIBs (Qualified Institutional Buyers), not less than 15% of the net offer to the public can be allocated to non-institutional investors applying for more than 1000 shares and not less than 25% of the net offer to public can be allocated to retail investors applying for up to 1000 shares. In case 75% of net public offer is made through book building, not more than 60% of the net offer can be allocated to QIBs and not less than 15% of the net offer can be allocated to non-institutional investors. The balance 25% of the net offer to public, offered at a price determined through book building, are available to retail individual investors who

31

have either not participated in book building or have not received any allocation in the book built portion. Allotment to retail individual or non-institutional investors is made on the basis of proportional allotment system. In case of under subscription in any category, the un-subscribed portions are allocated to the bidder in other categories. The book built portion, 100% or 75%, as the case may be, of the net offer to public, are compulsorily underwritten by the syndicate members or book runners.

Other requirements for book building include:
y y y y y y

Bids remain open for at least 5 days. Only electronic bidding is permitted. Bids are submitted through syndicate members. Bids can be revised. Bidding demand is displayed at the end of every day. Allotments are made not later than 15 days from the closure of the issue etc.

The 100% book building has made the primary issuance process comparatively faster and cost effective and trading can commence from T+16.

The SEBI guidelines for book building provides that the company should be allowed to disclose the floor price, just prior to the opening date, instead of in the Red herring prospectus, which may be done by any means like a public advertisement in newspaper etc. Flexibility should be provided to the issuer company by permitting them to indicate a 20% price band. Issuer may be given the flexibility to revise the price band during the bidding

32

period and the issuers should be allowed to have a closed book building i.e. the book will not be made public. The mandatory requirement of 90% subscription should not be considered with strictness, but the prospectus should disclose the amount of minimum subscription required and sources for meeting the shortfall. The Primary Market Advisory Committee recommended the practice of µgreen-shoe option¶ available in markets abroad which is an µover allotment¶ option granted by the issuer to the underwriter in a public offering. This helps the syndicate member to over allocate the shares to the extent of option available and to consequently purchase additional shares from the issuer at the original offering price in order to cover the over-allotments.

FIXED VERSUS BOOK BUILDING ISSUES

The main difference between offer of shares through book building and offer of shares through normal public issue can be identified on the following parameters:

y

Priceat which securities will be allotted is not known in case of offer of shares

through Book Building while in case of offer of shares through normal public issue, price is known in advance to investor. Under Book Building, investors bid for shares at the floor price or above and after the closure of the book building process the price is determined for allotment of shares.

33

y

In case of Book Building, the demandcan be known everyday as the book is being

built. But in case of the public issue the demand is known at the close of the issue.

2.10 ON-LINE INITIAL PUBLIC OFFERS (IPO)
A company proposing to issue capital to public through on-line system of the stock exchange has to comply with Section 55 to 68A of the Companies Act, 1956 and SEBI Guideline, 2000. The company is required to enter into an agreement with the stock exchange(s), which have the requisite system for on-line offer of securities. The agreement should cover rights, duties, responsibilities and obligations of the company and the stock exchanges inter-se, with provision for a dispute resolution mechanism between the company and the stock exchange. The issuer company appoints a Registrar to the Issue having electronic connectivity with the stock exchanges. The issuer company can apply for listing of its securities at any exchange through which it offers its securities to public through on-line system, apart from the requirement of listing on the regional stock exchange. The stock exchange appoints brokers for the purpose of accepting applications and placing orders with the company. The lead manager would co-ordinate all the activities amongst various intermediaries connected in the system.

In addition to the above, the SEBI guidelines also provide details of the contents of the offer document and advertisement, other requirements for issues of securities, like those under Rule 19(2)(b) of SC(R) Rules, 1957. The guidelines also lay down detailed norms for issue of debt instruments, Issue of capital by designated financial institutions and preferential/bonus issues.

34

ELIGIBILITY TO ISSUE SECURITIES The issues of capital to public by Indian companies are governed by the Disclosure and Investor Protection (DIP) Guidelines of SEBI, which were issued in June 1992. SEBI has been issuing clarifications to these guidelines from time to time aiming at streamlining the public issue process. In order to provide a comprehensive coverage of all DIP guidelines, SEBI issued a compendium series in January 2000, known as SEBI (DIP) Guidelines, 2000. The guidelines provide norms relating to eligibility for companies issuing securities, pricing of issues, listing requirements, disclosure norms, lock-in period for promoter¶s contribution, contents of offer documents, pre-and post-issue obligations, etc. The guideline applies to all public issues, offers for sale by listed and unlisted companies.

Eligibility Norms: Any company issuing securities through the offer document has to satisfy the following conditions:

y

A company making a public issue of securities has to file a draft prospectus with SEBI,

through an eligible merchant banker, at least 21 days prior to the filing of prospectus with the Registrar of Companies (RoCs). The filing of offer document is mandatory for a listed company issuing security through a rights issue where the aggregate value of securities, including premium, if any, exceeds Rs.50 lakh. A company cannot make a public issue unless it has made an application for listing of those securities with stock exchanges(s). The company must also have entered into an agreement with the depository for

35

dematerialization of its securities and also the company should have given an option to subscribers/ shareholders/ investors to receive the security certificates or securities in dematerialized form with the depository. A company cannot make an issue if the company has been prohibited from accessing the capital market under any order or discretion passed by SEBI.

y

An unlisted company can make public issue of equity shares or any other security

convertible into equity shares, on fixed price basis or on book building basis, provided: (i) It has a pre-issue net worth of not less than Rs.1 crore in 3 out of the preceding 5

years and has minimum net worth in immediately preceding two years, (ii) It has a track record of distributable profits in terms of section 205 of the Companies

Act, 1956, for at least 3 out of immediately preceding 5 years, and (iii) The issue size (offer through offer document + firm allotment + promoters

contribution through the offer document) does not exceed five times its pre-issue net worth. (iv) A listed company is eligible to make a public issue, on fixed price basis or on book

building basis, if the issue size does not exceed five times its pre-issue net worth. If the company, listed or unlisted, does not meet the above criteria, then the issue will have to be compulsorily made through book building route. In such a case, 60% of the issue size will have to be allotted to the µQualified Institutional Buyers¶ (QIBs) failing which the full subscription money shall be refunded.

y

Infrastructure companies are exempt from the requirement of eligibility norms if their

project has been appraised by a public financial institution or infrastructure development finance corporation or infrastructure leasing and financing services and not less than 5% of

36

the project cost is financed by any of the institutions, jointly or severally, by way of loan and/or subscription to equity or a combination of both. Banks and rights issues of listed companies are also exempt from the eligibility norms.

Thus the quality of the issue is demonstrated by track record/appraisal by approved financial institutions/credit rating/subscription by QIBs.

PRICING OF ISSUES

The Controller of Capital Issues Act governed issue of capital prior to May 27, 1992 1947. Under the Act, the premium was fixed as per the valuation guidelines issued. The guidelines provided for fixation of a fair price on the basis of the net asset value per share on the expanded equity base taking into account, the fresh capital and the profit earning capacity.

The repealing of the Capital Issue Control Act resulted in an era of free pricing of securities. Issuers and merchant bankers fixed the offer prices. Pricing of the public issue has to be carried out according to the guidelines issued by SEBI.

At Premium: Companies are permitted to price their issues at premium in the case of the following:

37

y y

First issue of new companies set up by existing companies with the track record. First issue of existing private/closely held or other existing unlisted companies with

three-year track record of consistent profitability.
y

First public issue by exiting private/closely held or other existing unlisted companies

without three-year track record but promoted by existing companies with a five-year track record of consistent profitability.
y

Existing private/closely held or other existing unlisted company with three-year track

record of consistent profitability, seeking disinvestments by offers to public without issuing fresh capital (disinvestments).
y

Public issue by existing listed companies with the last three years of dividend paying

track record.

At Par Value: In certain cases companies are not permitted to fix their issue prices at premium. The prices of the share should be at par. They are for:

y

First public issue by existing private, closely held or other existing unlisted companies

without three-year track record of consistent profitability and
y

Existing private/closely held and other unlisted companies without three-year track

record of consistent profitability seeking disinvestments offer to public without issuing fresh capital (disinvestments).

How to evaluate an IPO ?

38

Whether you are buying stock from the secondary market or subscribing to an initial public offering (IPO), make sure you have all the facts. That means going through the small print in the IPO document with a fine-toothed comb. Don't let market hype, investment trends or media reports influence you. Following these parameters should help:

y

Promoters. Who runs the company? Professionals or a family? If the directors are

well known, it gives a company credibility. Check the credentials of the promoters, directors and key managerial persons. See if they have at least five years' experience in the company's line of business,

y

Industry outlook. There should be demand for the company's product or service,

with adequate profit potential. Business plans. Check the progress made, and the money invested in aspects such as

y

land/office space, plant and machinery, utilities, regulatory clearances, personnel, financing, projects in hand, sales and marketing, technical and marketing tie-ups. High investments from promoters lend credibility to the IPO plan, as do project appraisals by merchant bankers. Financials. Check if the company is over-leveraged in terms of the equity and debt on

y

its books, and whether the additional issue of equity is justified.

Check for consistency in revenue, profit growth and margins for at least three years before the IPO. A steady growth rate suggests a fundamentally sound company.

More important, scale the historic trend into future projections: A company with a PAT (profit after tax) of Rs 10 lakh will find it difficult to reach a projected PAT of Rs 15 crore. Projections are based on assumptions, which give promoters leeway to manipulate figures. A good way to check if projections are true is to see whether the assumptions are realistic,

39

given the company's scope of operations, and check how it compares with competitors' figures.

y

Risk factors. This is the most relevant part of the offer document. General risk factors

are not as damaging as specific ones. Check for contingent liabilities, disputed tax claims, litigation against promoters and directors, and delay in government clearances. Assume a worst-case scenario, and see how such factors could impact the company's operations.

y

Key names. An issue's lead managers and merchant bankers are the people who

manage the issue, from vetting the company's prospectus to seeing the issue through. Check their track record. You could look up the Sebi website (www.sebi.com) for the issues the merchant banker has managed in the recent past to see how they fared. Pricing. For valuation purposes, compare a company's issue price-earnings (P/E)

y

multiple with that of similar players. Check if the earning projections are achievable. If so, discount the issue price for the next two years to arrive at the growth-adjusted P/E multiple. You invest in a company purely for returns. In the case of primary equity issues, this can be a tricky proposition because there are no benchmarks in the form of secondary market prices to go by. When a stock is listed, market sentiment, technical factors and investor interest influence share prices. But in the medium- to long-term, fundamentals take over, which is what should matter to you if you're in for the long haul. Listing. Ensure you have access to brokers of stock exchanges where the company

y

proposes to list. If you reside in, say, Delhi, and subscribe to an IPO that is likely to be listed on the Hyderabad Stock Exchange, the time lag in selling can eat into your returns.

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2.11What is µIPO Grading¶?
IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date. The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals IPO grade 2: Below-average fundamentals IPO grade 3: Average fundamentals IPO grade 4: Above-average fundamentals IPO grade 5: Strong fundamentals

IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO.

2.

I am an issuer. By when am I required to obtain the grade for the IPO?

IPO grading can be done either before filing the draft offer documents with SEBI or thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be, must contain the grade/s given to the IPO by all CRAs approached by the company for grading such IPO.

Further information regarding the grading process may be obtained from the Credit Rating Agencies.

41

3.

Who bears the cost of the IPO grading process?

The company desirous of making the IPO is required to bear the expenses incurred for grading such IPO.

4.

Is grading optional?

No, IPO grading is not optional. A company which has filed the draft offer document for its IPO with SEBI, on or after 1st May, 2007, is required to obtain a grade for the IPO from at least one CRA.

5.

Can the issuer company reject an IPO grade?

IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

6.

Will IPO grading delay the process of issue?

IPO grading is intended to run parallel to the filing of offer document with SEBI and the consequent issuance of observations. Since issuance of observation by SEBI and the grading process, function independently, IPO grading is not expected to delay the issue process.

7.

What are the factors that are evaluated to assess the fundamentals of the issue while arriving at the IPO grade?

42

The IPO grading process is expected to take into account the prospects of the industry in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business(es) and capitalise on the opportunities available, as well as the company¶s financial position.

While the actual factors considered for grading may not be identical or limited to the following, the areas listed below are generally looked into by the rating agencies, while arriving at an IPO grade

Ø

Business Prospects and Competitive Position i. ii. Industry Prospects Company Prospects

Ø Ø Ø Ø Ø

Financial Position Management Quality Corporate Governance Practices Compliance and Litigation History New Projects²Risks and Prospects

It may be noted that the above is only indicative of some of the factors considered in the IPO grading process and may vary on a case to case basis.

8.

Does IPO grading consider the price at which the shares are offered in the issue?

43

No. IPO grading is done without taking into account the price at which the security is offered in the IPO. Since IPO grading does not consider the issue price, the investor needs to make an independent judgment regarding the price at which to bid for/subscribe to the shares offered through the IPO.

9.

Where can I find the grades obtained for the IPO and details of the grading process?

All grades obtained for the IPO along with a description of the grades can be found in the Prospectus. Abridged Prospectus, issue advertisement or any other place where the issuer company is making advertisement for its issue. Further the Grading letter of the Credit Rating Agency which contains the detailed rationale for assigning the particular grade will be included among the Material Documents available for Inspection.

10.

Does an IPO grade, which indicates µabove average or strong fundamentals¶ mean I could subscribe safely to the issue?

An IPO grade is NOT a suggestion or recommendation as to whether one should subscribe to the IPO or not. IPO grade needs to be read together with the disclosures made in the prospectus including the risk factors as well as the price at which the shares are offered in the issue.

11.

How do I interpret the IPO Grades?

The grades are allocated on a 5-point scale, the lowest being Grade 1 and highest Grade 5.The meaning of these grades have been explained under Question 1 in this FAQ.

12.

How does IPO Grading help in deciding about investing in an IPO?

44

IPO Grading is intended to provide the investor with an informed and objective opinion expressed by a professional rating agency after analyzing factors like business and financial prospects, management quality and corporate governance practices etc. However, irrespective of the grade obtained by the issuer, the investor needs to make his/her own independent decision regarding investing in any issue after studying the contents of the prospectus including risk factors carefully.

13.

What is the role of SEBI in IPO grading exercise?

SEBI does not play any role in the assessment made by the grading agency. The grading is intended to be an independent and unbiased opinion of that agency.

14.

Will IPO Grading given by CRAs be a parameter for SEBI to issue its observations?

The grading is intended to be an independent and unbiased opinion of a rating agency. SEBI does not pass any judgment on the quality of the issuer company. SEBI¶s observations on the IPO document are entirely independent of the IPO grading process or the grades received by the company.

45

CHAPTER ± 3 ANALYSIS AND INTERPRETATIONS

46

3.1 Gender of Investors.
Table No.1 Male Female Total Source: Primary data 92 08 100

Graph no.1

Gender
8%

Male

Female

92%

Interpretation:- 92% investors are male. And 8% female.

47

3.2 Age group of investors
Table No.2. (a) 15 to 35 (b) 35 to 50 (c) 50 to 60 (d) Above 60 Total Source: Primary Data 35 42 18 05 100

Graph No.2

Age group
45% 40%

35% 30% 25%
20% Age grou

35%
15%

10% 5%

18%

5% 0%
15 to 35 35 to 50 50 to 60 Above 60

Interpretation:- 42% investors age between 35 to 50 and 35% investors age between 15 to 35.

 

42%

48

3.3 Your Annual Income?
Table No.3 (a) >1,00,000 (b) 1,00,000 to 2,00,000 (c) 2,00,001 to 3,00,000 (d) <3,00,000 and Above Total Source: Primary Data Graph No.3 10 21 24 45 100

Annual Income
50%
45% 40%

35% 30%
25%

20% 15%
10% 21% 24%

45%
Annual Income

5% 0%

10%
>1,00,000 1,00,000 to 2,00,000 2,00,001 to 3,00,000 <3,00,000 And Above

Interpretation:- 45% investors annual income more than 3,00,000. And 24% investors income Between 2,00,001 to 3,00,000.

49

3.4 Which area you belong?
Table No.4 (a) Rural (b) Urban Total Source: Primary Data Graph No.4 05 95 100

Area
5%

Rural Urban

95%

Interpretation:- 95% investors belong to urban area.

50

3.5 Occupation
Table No.5 Consultant Engineer Builder Businessman Total Source: Primary Data Graph No.5 17 18 25 40 100

Occupation
45% 40% 35%
30%

25%

15% 25%
10% 5% 17%

18%

0% Consultant Engineer Builder Business man

Interpretation:- 40% investors are businessman. And 25% builder , 18% engineer, 17% engineers.

£¢

¡

20%

40%

Occu ati

51

3.6 How much do you invest in IPO¶s ?
Table No.6 (a) 1000-10,000 (b) 10,001-50,000 (c) 50,001-5,00,000 (d) 5,00,001 and Above Total Source: Primary Data Graph No. 6
50% 45%

04 44 38 14 100

40% 35% 30%
25% 20%

44% 38%

15% 10%
5% 0%

14% 4%

Interpretation:-44% of the investors, invest around 10,000 to 50,000 and 38% of investors, invest around 50,001 to 5, 00,000.

¤

1,000-10,000

10.001-50,000

50,001-5,00,000

5,00,001 a d a ve

¦¥

52

3.7 What do you see before investing in IPO?
Table No.7 (a) Promoters Background (b) sector Performance (c) Performance of existing companies (d) Premium amount Total Source: Primary Data Graph No.7
40%

18 36 32 14 100

35% 30% 25% 20% 36% 15% 10% 5% 0% 32%

18% 14%

Interpretation:- 36% of the investors say they go by sector performance and 32% of them say they go by the performance of theexisting companies.   

©  

© 

¨ 

¨ ©¨ §

r

ter a ckgr u d Sector Perfor a c e

perfor a c e of existi g compa ies

Premium mou t 

53

3.8 What is the source of information you use?
Table No.8 (a) Print Media (b) Electronic Performance (C) Expert Opinion (d) Friend Advice Total Source: Primary Data Graph No.8 30 28 26 16 100

Source of I for ation
35%

30% 25%
20%

15% 10%

30%

28%

26%
16%

Source of Information

5% 0%

rint Media

Electronic Media

Expert Opinion Friend Advice

Interpretation:- 30% of investor say the source of information is print media, 16% say electronic media, 28% go with expert opinion and 26% agree to their friends advice. 

54

3.9 Factors considered for IPO.

Table No.9 Factors 1. Company Goodwill 2. Market Share 3. Corporate Profile 4. Historical background 5. Board member 6. Legal matter 7. Current financial position 8. Percentage subscription 9. Future Prediction and Forecast 10. Management quality 11. Market response to the IPO 12. Size of the IPO issued 13. Key shareholders 14. Broker Advice 15. Comments in the media 16. Legitimacy 17. Market driven valuation 18. Corporate governance practices 19. Compliances and Litigation history 20. New project risk and prospects VHC 50 48 35 28 17 42 47 18 10 17 25 29 13 31 26 27 47 23 13 46 HC 35 29 43 33 44 31 34 25 21 41 42 35 27 39 35 38 41 29 24 32 LC 08 14 16 20 27 20 11 38 34 16 20 22 38 27 14 19 08 33 40 11 NC 07 09 06 19 12 07 08 19 35 26 13 14 22 03 24 16 04 15 23 10

55

Source: Primary Data Graph No.9
New Project Risk and Propects Compliances and Litigation History Corporate Governance Practices 13% 23% 47% 27% 26% 38% 36% 46% 24% 29% 32% 40% 33% 41% 19% 14% 11% 10% 23% 15% 8% 4% 16% 24%

Market Driven Valuation Legitimacy Comments in the media Broker dvice Key Shareholders Size of the IPO Issued Market Response to the IPO Management Quality 13% 29% 25% 17%

Future Prediction and forecast 10% Percentage Subscription Current Financial Position
Legal matter Board Member historical background Corporate Profile Market share o mpa y Goodwill

Note:- VHC- Very high consider, HC- High consider, LC- Low consider, NC- Not Consider Interpretation:-50% investors very high consider for company goodwill , 48% Very high consider for market share, 43% high consider for corporate profile, 33% high consider for historical background, 44% high consider for board member, 31% high consider for legal matter, 47% very high consider for current financial position, 38% low consider for percentages subscription, 35% not consider for future prediction and forecast, 41% high consider for management quality, 42% high consider for market response to the IPO, 35% high consider for size of the IPO issued, 

31% 27%

39% 38% 35% 42% 41% 16% 34% 25% 47% 38% 34% 31% 44% 33%
43% 29% 35%

27% 22% 22% 20%

3%

14% 13% 26% VHC HC LC 19% 11% 8% 20% 7% 12% 19%
16% 14% 6% 9%

21%

35%

18%

NC

42% 17% 28%
35% 48% 50%

27% 20%

8% 7%  

0%

20%

40%

60%

80%

100%

120%

56

3.10 How long are you trading in stock and IPO¶s?
Table No.10 (a) 1yr.-2yr (b) 3yr-5yr (c) 6yr-10yr (d) 11yr and Above Total Source: Primary Data Graph No.10
60%

12 48 28 12 100

50%

40%

30% 48% 20% 28% 10% 12%
0%

12%

1 yr.- 2yr

3yr-5yr

6yr- 10yr

11yr and above

Interpretation:-48% investors are trading for 3 years to 5 years. And 28% for 6 to 10 yr.

57

3.11 What is your advice to new investors in IPO?
Table No.11 (a) Go by only Promoters (b) Go by only Premium (c) Go by only sector performance (d) Go by all of the above Total Source: Primary Data Graph No.11
45% 40%
35%

14 30 42 14 100

30%
25%

20% 15%
10% 30%

42%

5%
0%

14%

14%

Interpretation:-42% investors advice the new investors to go by only sector performance. 30% investors advice go by only premium.     

Go y only Promoters

Go y Only premium

Go y only Sectors Performance

Go y of all t e a ove 

58

3.12 Do you go by the grading before investing?
Table No.12 (a) Yes (b) No Total Source: Primary Data Graph No. 12 48 52 100

48%

Yes No

52%

Interpretation:-52% investors does not go by the grading before investing. And 48% investors go by grading before investing.

59

3.13 How much Percentages have you gained on IPO listing?
Table No.13 (a) Below 10% (b) Up to 10% (c) 10%-15% (d) 15% and Above Total Source: Primary Data 20 34 30 16 100

Graph No.13
40% 35%
30% 25% 20%

34%
15% 10% 5% 0% 20% 16% 30%

Below 10%

UP TO 10%

10%-15%

15% and Above

Interpretation:-34% of investors say they have gained upto 10% and 30% say for 10% to 15%.

60

3.14 Is it better to invest in IPO or Pick the same stock on listing?
Table No.14 (a) Invest in IPOs (b) Pick the same stock on listing (c) partly invest in IPO and pick the stock on listing (d) Wait sometime after listing Total Source: Primary Data 20 32 28 16 100

Graph No.14
35% 30% 25%
20% 15% 32% 28% 20%

10% 5% 0%

16%

Interpretation:-32% of the investors feel that its better to pick the same stock on the listing. 28% investors feel they would partly invest in IPO and pick the stock on listing.  

Invest In IPOs

Pick t e same stock on partly invest in IPO and listing Pick t e stock on listing

Wait sometime after listing

61

3.15 How do you come to know about the new IPO listing?
Table No.15 (a) Through broker (b) Through television (c) Through friend (d) Through Newspaper Total Source: Primary data 20 20 38 22 100

Graph No.15
40%
35% 30%

25% 20% 15% 10%
5% 0% 20% 20% 22%

38%

Interpretation:- 38% of the investors come to know about the new IPO listings through their friends. And investors say 22% for newspaper and 20% for television and broker.

!

T roug

roker

T roug Telivision

T roug Friend

t roug newspapers

62

3.16 What i the purpose of IPO i
Tabl No.16 (a) Li ti (b) Long t Total Source: Pri ary Data gai gain

estment?

47 53 100

Graph No.16

47%
"

53%

Lis ing gain
# "

Long er

gain

Interpretation: 53% investors say long term gain their purpose of IPO investment and 47% investors say listing gain.

63

3.17 How do you feel about the procedure for IPOs?
Table No.17 (a) Easy (b) Difficult (c) Complicated (d) Lengthy Total Source: Primary Data Graph No.17
50%

32 08 16 44 100

45% 40%
35%

30% 25%
20%

44% 32%

15%
10%

16%

5% 0% Easy

8% Difficulty Complicated Lenghthy

Interpretation:-44% of the investors feel the procedure for applying for an IPO is lengthy, 32% feel easy and simple.

64

3.18 What difficulties did you face after applying IPOs?
Table No.18 (a) Refund problem (b) Delay in crediting allotted share to your DEMAT account (c) No clarity in allotment (d) None of the above Total Source: Primary Data 16 28 30 26 100

Graph No.18
35% 30% 25% 20% 15% 10% 16% 5% 0% Refund Problem Delay in crediting No clarity in allotment allotted shares to your DEMAT Account None of the above 30%
28%

26%

Interpretation:-30% of the investors say the delay in crediting allotted shares to the demat account. 28% say no clarity in allotment and 26% say they never faced difficulties. And 16% say refund problem.

65

CHAPTER- 4

FINDINGS AND SUGGESTIONS

66

4.1 FINDINGS
1. 90% investors are well aware of IPOs 2. 44% of the investors, invest around 10,000 to 50,000 and 38% of investors, invest around 50,000 to 5, 00,000. 3. 32% of the investors feel that its better to pick the same stock on the listing. 28% investors feel they would partly invest in IPO and pick the stock on listing. 4. 36% of the investors say they go by sector performance and 32% of them say they go by the performance of the existing companies. 5. 30% of investor say the source of information is print media, 16% say electronic media, 28% go with expert opinion and 26% agree to their friend¶s advice. 6. 48% investors are trading for 2 years to 5 years. 7. 42% investors advice the new investors to go by only sector performance. 8. 52% investors do not go by the grading before investing. 9. 34% of investors say they have gained upto 10% and 10% to 15%. 10. 44% of the investors feel the procedure for applying for an IPO is lengthy, 32% feel easy and simple. 11. 30% of the investors say the delay in crediting allotted shares to the demat account. 12. 28% say no clarity in allotment and 26% say they never faced difficulties. 13. Investors say yes and no at 30% about the awareness of the procedures before applying for IPOs. 14. 46% of investors expect about 50% to 100% and 34% investors expect the returns up to 10% - 50%. 15. Investors say yes and no at 30% about the awareness of the procedures before applying for IPOs.

4.2 SUGGESTIONS
1. The investment in IPO can prove too risky because the investor does not know anything about the company because it is listed first time in the market so its performance cannot be measure

2. Investors of the secondary market must take part in the primary markets as it has been seen that IPO activity in Indian Stock Market has been tremendously growing. And IPO is the safest stock market investment.

67

BIBLIOGRAPHY

Websites:www.scribd.com www.nscindia.com www.bscindia.com www.moneycontrol.com www.ipohome.com/hie-gerieooie/htm www.essortment.com/gteorerui-100%dkfjdkei.pdf www.investopedia.com/reserchpaper.froee-heofdvl%fkldks/ www.ipoavenue.com/ariownnipo-progress&arojsrei/5%akd2e32/ www.bullishindian.com www.rupya.com www.investorguide.com www.hdil.in/

68

Annexure

Questionnaire Topic:- Factors influencing investors to go for IPO
Name ______________________________ Today¶s date______________ Address ______________________________________________________ City, State_____________________________ Contact No.____________________________

1. Gender of Investors (a) Male 2. Age group of investors. (a) 15 to 35 (c)50 to 60 3. Your annual Income? (a) >1,00,000 (c) 2,00,001 to 3,00,000 (b) 1,00,000 to 2,00,000 (d)< 3,00,001 and Above (b)35 to 50 (d)Above 60 (b) Female

4. Which area you belong? (a) Rural 5. Occupation (a) Businessman (d) consultant (e)Others, Please specify______________________________________ (b)Engineer (c)Builder (b) Urban

69

6. How much do you invest in IPO¶s? (a)1000-10000 (c)50001-500000 (b)10001-50000 (d)500001 and above

7. What do you see before investing in IPO? (a) Promoters background (c)Performance of existing companies (b)Sector performance (d) Premium Amount

8. What is the source of information you use? (a) Print Media (c)Expert Opinion (b) Electronic Media (d) Friend Advice

9. Factors considered for IPO S. NO. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Factors Company Goodwill Market Share Corporate Profile Historical Background Board Member Legal Matter Current Financial Position Percentage Subscription Future Prediction and Forecast Management Quality Market Response to the IPO Size of the IPO Issued Key Shareholders Broker Advice Comments in the Media Legitimacy Market Driven Valuation Corporate Governance Practices Compliances and Litigation History New Project Risk and Prospects VHC HC LC NC

70

10. How long are you trading in stock and IPO¶s? (a)1year-2years (c)5years-10years (b)2years- 5years (d)10years and Above

11. What is your advice to new investors in IPO? (a) Go by only promoters (b) Go by only premium (c) Go by only sectors performance (d) Go by all of the above

12. Do you go by the grading before investing? (a) Yes (b) No

13. How much percentages have you gained on IPO listing? (a)Below 10% (c)10%-15% (b) up to10% (d)15% and Above

14. Is it better to invest in IPO or Pick the same stocks on listing? (a) Invest in IPOs (b) Pick the same stock on listing (c) Partly invest in IPO and pick the stock on listing (d) Wait sometime after listing

71

15. How do you come to know about the new IPO listing? (a) Through broker (c)Through Friend (b)Through television (d) Through Newspapers

16. What is the purpose of IPO investment? (a)Listing Gain (b)Long term Gain

17. How do you feel about the procedure for IPO¶s? (a)Easy (c)Complicated (b)Difficult (d)Lengthy

18. What difficulties did you face after applying IPO¶s? (a)Refund Problem (b) Delay in crediting allotted shares to your DEMAT Account

(c)No clarity in allotment (d) None of the above

72

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