A Study on Initial Public Offerings

University of Mumbai for partial fulfillment of the degree of

Master in Commerce – Semester III
Under the Faculty of Commerce
(Advanced Accountancy)
By
Prathamesh Khopkar

Roll No:15
Under the Guidance of Ms. Ruchi Mali

SIR SITARAM & LADY SHANTBAI PATKAR COLLEGE OF ARTS & SCIENCE
AND
V.P. VARDE COLLEGE OF COMMERCE & ECONOMICS (Autonomous)
S.V. ROAD, GOREGAON (WEST), MUMBAI-400104

2021-22

A Study on Initial Public Offerings

 University of Mumbai for partial fulfillment of the degree of
Master in Commerce – Semester III
Under the Faculty of Commerce
(Advanced Accountancy)
By
Prathamesh Khopkar

Roll No: 15
Under the Guidance of (Name of Mentor/Internal Examiner)

SIR SITARAM & LADY SHANTBAI PATKAR COLLEGE OF ARTS & SCIENCE
AND
V.P. VARDE COLLEGE OF COMMERCE & ECONOMICS (Autonomous)
S.V. ROAD, GOREGAON (WEST), MUMBAI-400104
 SIR SITARAM & LADY SHANTBAI PATKAR COLLEGE OF ARTS & SCIENCE
AND
V.P. VARDE COLLEGE OF COMMERCE & ECONOMICS (Autonomous)
S.V. ROAD, GOREGAON (WEST), MUMBAI-400104

CERTIFICATE
This is to certify that Kum. Prathamesh Khopkar has worked and duly completed
his/her Project work for the degree of Master in Commerce under the Faculty of Commerce in
the subject of Advanced Accountancy and his /her project is entitled, “A Study on Initial
Public Offerings” under my supervision.

I further certify that the entire work has been done by the learner under my guidance and that no
part of it has been submitted previously for any Degree or Diploma of any University.

It is his/her own work and facts reported by his/her personal findings and investigations.

________________________ __ ___________________
Ms. Ruchi Mali (Dr. Shital Patil)
Coordinator
________________________ _____________________
(External Examiner) (Dr. Shrikant Sawant)
Principal
Date of submission:
(page 2)
 DECLARATION BY LEARNER

I, Kum. Prathamesh Khopkar, here by, declare that the work embodied in this project
work titled “A Study on Initial Public Offerings” forms my own contribution to the research
work carried out under the guidance of Ms. Ruchi Mali is a result of my own research work and
has not been previously submitted to any other University for any other Degree/Diploma to this
or any other University.

Where ever reference has been made to previous works of others, it has been clearly indicated
as such and included in the bibliography.

I, here by further declare that all information of this document has been obtained and presented
in accordance with academic rules and ethical conduct.

_____________________

Prathamesh Khopkar

Roll No.:15

______________________________

Ms. Ruchi Mali

 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the completion
of this project.

I take this opportunity to thank the University of Mumbai for giving me a chance to do this project.

I would like to thank my Principal, Dr. Srikant Sawant, for providing the necessary facilities required for
completion of this project.

I take this opportunity to thank our Coordinator, Dr. Shital N. Patil, for his moral support and guidance.

I would also like to express my sincere gratitude towards my project guide, Ms. Ruchi Mali whose guidance
and care made the project successful.

I would like to thank my College Library, for having provided various reference books and magazines related
to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of
the project, especially my parents and Peers who supported me throughout my project.

_________________

Prathamesh Khopkar

Roll No. 15
 Index

Sr. no. Chapter Scheme Page No.

1 Title Page (Inside) II
2 Certificate III
3 Declaration by Learner IV
4 Acknowledgement V
5 Index of contents & Tables VI
6 Abstract/Summary 8
7 Chapter 1: Introduction
1.1. Introduction
1.2. History of India
1.3. Advantages and Disadvantages
1.4. What is IPO process
8 Chapter 2: Review of literatures

9 Chapter 3: Research Methodology

3.1. Objectives of the study
3.2 Hypothesis
3.3 Scope of the study
3.4 Limitations of the study
3.5 Significance of the study
3.6 Selection of the problem,
3.7 Sample Size
3.8 Collection of Data
10 Chapter 4: Data Analysis, Interpretation and
Presentation
4.1. Analysis of data with tabular and graphical
presentation & Interpretation of data
11 Chapter 5: Conclusions and Suggestions
5.1 Summary & Conclusion
 5.2 Future Scope
12 Bibliography
 ABSTRACT/SUMMARY

Objectives: (a) To analyse the performance of Indian IPOs in the short term. (b) To determine
the significance of abnormal return of the IPOs. (c) To study the impact of over-subscription,
profit after tax, promoters’ holdings, issue price and market returns on IPO performance.
Design/ Methodology/Approach: This research paper is based on empirical analysis. All the 52
IPOs listed in the NSE (National Stock Exchange, India) during the year 2018 to 2020 were
considered for the study. The study is based on secondary data. The daily share price and Nifty-
50 index value were taken from NSE website (www.nseindia.com) and other relevant data from
red-herring prospectus of the respective company. The research / statistical tools used are:
Market adjusted short run performance model, Wealth relative model, ‘t’ test and regression
analysis. Scope of the study: The scope of the study is limited to the IPO’s listed only in the
National Stock Exchange (NSE), India. Period of study: The loss. study covers a period from
January 2018 to December, 2020. Limitation of the study: The study considers only the
influence of the external factors on the performance of IPOs. Findings: The average IPO return
on the first trading day is 13.52%, ranging from -23.15% to 82.16% with standard deviation of
26.72%. The average IPO return on the third trading day was the highest and is found to
be14.52%, ranging from -19.22% to 117.55% with standard deviation of 18.57%. The analysis
reveals that the over subscription impacts the IPO performance and the other factors namely,
issue price, Profit after Tax, market returns and promoters holdings do not influence IPO returns.
Originality / Value: This is an original work that analyses the listing gain or loss and the post
listing performance of IPOs in India and other factors that might influence the listing gain or loss
 CHAPTER 1: INTRODUCTION

1.1 INTRODUCTION
Initial Public Offering means when a company sells its share or offer its share in pubic for the
first time. The offer generally issued by the new and smaller companies to expand their capital
but it can also be done by the large privately companies to become public company. The new
companies mostly don’t have resources to conduct the IPO. So, they generally depend on the
other private funding like personal loans, family and friends. Therefore, they look for the
investors which help them for their IPO process. Investors offer finance to the company for the
stake in the company. The investor is liable in the decision-making process and also advice the
management in most of the company issues. When the investors of the company want to
liquidate their investment, they have options like sell the equity to different company, sell the
whole company to another company as an acquisition, or sell the equity in the Initial Public
offering of the company. Also, when a company in needs of finance for the development of their
company then they have options like private market equity, issue debt in the market or offer
equity in the public which means initial public offer in the market. IPOs performance can be
affected by different factors like issue size, delay in listing time etc. Some advantages for going
public are like significant access to investment capital, some stock price support after the listing
etc. While some disadvantages for going public are like for small companies the cost incurred
for IPO is very high etc. SEBI is the regulator of the Indian Capital market including the primary
market i.e., IPOs. IPOs have some fixed process and which every company has to follow when it
comes for the IPO in the market.
The most important objective of an IPO is to raise capital for the company. It helps a company
to tap a wide range of investors who would provide large volumes of capital to the company for
future growth and development. A company going for an IPO stands to make a lot of money
from the sale of its shares which it tries to anticipate how to use for further expansion and
development. The company is not required to repay the capital and the new shareholders get a
right to future profits distributed by the company.
The IPO trend came in India in the eighties when a large number of companies, organization
came out with public issues, which triggered a growth in the primary market. An entire industry
of Merchant Bankers, Brokers, Agents and Retail Investors grew in the primary issues market.
During eighties and nineties many of the companies just disappeared without a trace after the
listing was done. There were estimated of over hundreds of companies which disappeared from
the market after raising funds in the primary market. People lost all their income as the
fundamentals of the company were not known by them. But in late nineties did not see much
activity in the primary market. The primary issues market resurrected itself after 2003 largely
triggered by the divestment program of public sector companies in the beginning of year in
January 2008. Many investors lost their income, saving which they invested in the company.
India saw a dramatic recovery in its IPO markets in 2010. This revival has been a domestic
consumption led–growth story, driven by an influx of capital from Western economies and a
booming local stock market. India saw a growth of 21.5% in the number of IPOs compared to
2009. India is a promising market when it comes to commodity, currency, equity or derivatives.
This means that in the coming decade, exchanges engaged in these asset classes will only see
higher growth as more and more investors take to investing Beginning of 2017 has proved to be
yet another good year for IPOs as some of the well-known names like Bombay Stock Exchange
(BSE), D-Mart’s parent company Avenue Supermarts have given tremendous returns to
investors on the day of the listing. Among the other companies (some of them already armed
with a SEBI approval) coming to tap the primary market this year includes India’s premier stock
exchange; National Stock Exchange, Cochin Shipyard Ltd. etc. Looking back, 2016 turned out
to be a good year for IPOs both in terms of funds raised and performance & we anticipate that
this trend will continue in 2017 too.
Before we go into the detailing of the IPO, let’s understand what an IPO is. An IPO, or Inala
Public Offering, is an invitation to the public to subscribe to a company's share capital. When
these needs are large, companies need to approach investors to finance their future fund
requirements. In return, investors can expect a share of the company's future profits through
dividends, and capital growth through stock price appreciation.
The company management is responsible for running the business well, with healthy revenue
and profit growth. In turn, this induces more investors to participate in that business by buying
the company's shares in the stock market (secondary market). The result: share price
appreciation. When investors are highly confident of both the prospects of the company's
business and its management's ability to deliver on that potential, the scope for future share price
appreciation tends to get factored into the price of the newly-issued shares as soon as they are
listed on the stock exchange.
The Indian capital markets have witnessed a transformation over the last decade. India now
finds its place amongst some of the most sophisticated and largest markets of the world. With
over 20 million shareholders, India has the third largest investor base in the world after the USA
and Japan. Over 9,000 companies are listed on Indian stock exchanges. The Indian capital
market is significant in terms of the degree of development, volume of trading and its
tremendous growth potential. Over the past few years, the capital markets have also witnessed
substantial reforms in regulation and supervision. Reforms, particularly the establishment and
empowerment of SEBI, market-determined prices and allocation of resources, screen-based
nation-wide trading, dematerialization and electronic transfer of securities, rolling settlement and
derivatives trading have greatly improved both the regulatory framework and efficiency
of trading and settlement. There are 23 recognized stock exchanges in India, including the
OTCEI for small and new companies and the NSE, which was set up as a model exchange to
provide nation-wide services to investors. During 2002-03 the NSE and the BSE were ranked
third and sixth respectively amongst all exchanges in the world with respect to the number of
transactions. The year 2003, also witnessed setting up of the NCDEX, an online multi-
commodity exchange for trading of various commodities.

1.2 History of India

In 1985, India started having balance of payments problems. By the end of 1990, India was in a
serious economic crisis. The crisis damaged the credit worthiness of India and the government
was close to default. The central bank had refused new credit and foreign exchange rates had
been reduced enormously. In 1991, India had to pledge 47 tonnes of gold to Bank of England
and 20 tonnes of gold to Union Bank of Switzerland as part of a bailout with the International
Monetary Fund (IMF). India went to a more capitalist system and has emerged as one of the
fastest growing large economies of the world. In 1999, investment banks were allowed to use
book building as a price mechanism for the Indian capital market. A second method that was
introduced is the fixed-price method. In 1999, when pricing flexibility was coupled with
discretion in allocation, the process of IPO liberalization took a major step forward. After 1999,
issuers could still choose for fixed price offerings in which investment banks allocated shares on
a pro rata basis. On the other hand, they could choose for book building in which a quota of
shares is reserved for discretionary allocation to qualified institutional buyers (QIBs). After the
1991 economic crisis, the central government launched economic liberalization. The economic
reforms started on 24 July 1991. After 2000, India’s productivity grew enormously, which might
also explain the services growth of India. According to Das et al. (2011), the services sector
accounted for around 88% of the growth rate in real gross domestic product in 2008-2009. It was
found that the main driver of growth in India’s services sector is growth in the domestic demand
for services and not growth to the export of services.

As it stands now, India is one of the poorest countries in the world. The main reason is the very
large Indian population. There has been strong growth in recent years. The Indian government
has made an effort to improve the economic strength. Because of the large high-tech sector and
the large percentage of the population that is still engaged in traditional small-scale farming, the
improvement of economic strength has still a long way to go. Some facts about India in 2013 are
as follows. The economic freedom score is 55.2. The economic freedom denotes the ability of
the population to undertake economic directions and actions. From 2012 to 2013, India made
improvement in the management of public finance and monetary freedom compensating a
continuing decline in freedom from corruption. In 2013, India’s overall score is below the world
average. India has a population of 1.27 billion people, a gross domestic product at purchasing
power parity of 4.5 trillion dollar, an unemployment rate of 9.8%, inflation rate based on the
consumer price index of 8.6%, foreign direct investment inflow of 31.6 billion dollar and a
growth rate of 7.2%
Key initiatives in recent years include:
 Depository and share de-materialization process have enhanced the efficiency of the
transaction cycle.
 Replacing the flexible, but often exploited, long settlement cycles with rolling settlement, to
bring about transparency.
 IT driven stock exchanges (NSE and BSE) with a national presence (for the benefit of
investors across locations) and other initiatives to enhance the quality of financial disclosures by
the listed companies.
 Empowering SEBI with powers to impose higher penalties and establish itself as an
independent regulator with adequate statutory powers.
 NSE, which in the recent past has accounted for the largest trading volumes, has a fully
automated screen-based system that operates in the wholesale debt market segment as well as
the capital market segment
 Many new instruments have been introduced in the markets, including index futures, index
options, derivatives and options and futures in select stocks.
Historically, an initial public offering, or IPO, has referred to the first time a company offers its
shares of capital stock to the general public. Under the federal securities laws, a company may
not lawfully offer or sell shares unless the transaction has been registered with the SEC or an
exemption applies.
To register an offering, a company files a registration statement with the SEC, typically using
Form S-1. Some offerings may involve other registration statement forms. An important part of
this registration statement is the “prospectus” that will be used by the company to solicit
investors. The prospectus is the offering document describing the company, the IPO terms and
other information that an investor may use when deciding whether to invest. It is important to
read the prospectus because it provides information regarding the terms of the securities being
offered as well as disclosure regarding the company’s business, financial condition, management
and other matters that are key to deciding whether the offering is a good investment.
 Investor Assistance

Registration statements for IPOs are subject to review by the SEC’s staff to monitor compliance
with applicable disclosure requirements. In such reviews, the staff concentrates on disclosures
that appear to conflict with SEC rules or the applicable accounting standards and on disclosure
that appears to be materially deficient in explanation or clarity. The staff’s review often results
in revisions to the prospectus. However, the review process is not a guarantee that a company’s
disclosure is complete or accurate, and the staff does not evaluate the merits of any IPO or
determine whether an investment is appropriate for any investor. Rather, responsibility for
complete and accurate disclosure lies with the company and others involved in the preparation of
the company’s registration statement and prospectus.
Once any staff comments have been addressed, the staff will issue an order declaring the
registration statement effective, which means the company may proceed to consummate its IPO.
Although the staff will not declare a registration statement effective if the staff has reason to
believe that the disclosure is incomplete or inaccurate in any material respect, the SEC’s
declaration of effectiveness does not represent an approval of the merits of the IPO or an
indication that the information disclosed is complete or accurate.
The underwriters of the IPO typically will have obtained “indications of interest” from
prospective investors prior to effectiveness and will use this information to recommend a price
for the shares to the issuer, who ultimately determines the price of the IPO. Underwriters are the
investment banks that manage and sell the IPO for the company.
An IPO helps to establish a trading market for the company’s shares. In conjunction with an
IPO, a company usually applies to list its shares on an established stock exchange, such as the
New York Stock Exchange or NASDAQ. Any planned exchange listing will typically be
disclosed in the prospectus for the IPO. The new public company will also be required on a
going-forward basis to disclose certain information to the public, including its quarterly and
annual financial statements on Forms 10-Q and 10-K.
 How do I invest in an IPO?

An IPO gives the investing public an opportunity to own and participate in the growth of a
formerly private company. By their nature, however, IPOs can be risky and speculative
investments. n There are two ways the general public can invest in a new public company. First,
if you are a client of an underwriter involved in the IPO, you may be offered the opportunity to
directly participate in the IPO. In this instance, you will be able to purchase the shares at the
offering price. It is often the case that underwriters and dealers will distribute most of the shares
in the IPO to their institutional and high net-worth clients, such as mutual funds, hedge funds,
pension funds, insurance companies and high net-worth individuals. For the typical investor,
being able to directly buy in a popular IPO is a unique opportunity.
n the other way, which is more common in the case of individual investors, is to purchase the
shares when they are resold in the public market in the days following the IPO. An investor
could place an order with his or her broker to purchase shares in this manner.
 How do I learn about the company?

A company undertaking an IPO discloses required information in the registration statement,

typically on Form S-1. Form S-1 and its amendments, which are denoted as S-1/A, are filed with
the SEC and publicly available through the SEC’s EDGAR database at www.
sec.gov/edgar/searchedgar/webusers.htm. Comment letters issued by the staff during the course
of an IPO filing review are also made available on EDGAR, but they are not posted until at least
20 business days after the registration statement is declared effective.
Most of a Form S-1 is comprised of the prospectus, which contains important information about
the company. A new public company typically has no prior reporting history, and the
information that can inform a decision to invest often can only be found in the prospectus,
although, if it has sold securities in reliance on an exemption, the company may have filed one
or more notices on Form D.
Being well informed is critical in deciding whether to invest. Therefore, it is important to
review the prospectus and ask questions when researching an IPO. Whenever possible,
verifying the information you are given against independent sources is also recommended. If
you buy directly in an IPO, you will receive a copy of the prospectus before your broker
confirms your sale, but you can also read the prospectus before then by reviewing the prospectus
included in the company’s most recent registration statement on EDGAR. When you read a
prospectus, you should check to make sure you are referring to the company’s most recent filing,
because the contents of the prospectus may be revised during the course of the registration
process. In addition to reading the prospectus, be sure to ask questions if the information is not
clear.
After a company’s IPO registration statement has been declared effective, the company will
typically file a final prospectus—usually identified as a 424B3 or 424B4 filing in the EDGAR
database. The final prospectus generally includes information related to the final offering price
that is not available at the time the preliminary prospectus is distributed.
Highlighted below are some of the sections of an IPO prospectus that an investor should
consider. Of course, other or additional sections may contain information that is important to an
investment decision in the context of a particular IPO.
Prospectus Summary briefly summarizes information that is disclosed in greater detail
throughout the prospectus, including the company’s business, strategy, plans for using the funds
raised in the IPO and financial condition, as well as the terms of the IPO itself. n Risk Factors
identifies risks that the company’s management feels could significantly impact the company’s
business, operations or performance, or an investment in the securities being offered. Use of
Proceeds specifies what the company plans to do with the money it raises in the offering.
Dividend Policy describes the company’s history of paying, and possibly its plans to pay,
dividends to shareholders. Dilution illustrates the usually significant disparity between the price
that investors are paying for shares in the company’s IPO to both (1) the book value of such
shares and (2) the average price paid by existing shareholders that include founders, officers and
early investors Selected Financial Data discloses certain key financial and other data in a
summarized column format. The information and presentation can highlight significant trends in
the company’s financial condition and results of operations. Companies are generally required to
disclose selected financial data for the prior five years. However, if the company is an
“emerging growth company” (as described in a section below), this disclosure can be limited to
the prior two years. “Smaller reporting companies” (generally those expected to have less than
$75 million in publicly held common stock following the IPO) are not required to provide
selected financial data. n Management’s Discussion and Analysis gives management an
opportunity to discuss in narrative form management’s perspective on the company’s financial
condition, changes in financial condition and results of operations. This narrative section should
provide investors with information to help them understand how and why the company’s
financial results have changed over the time period covered by the financial statements and
factors that management thinks might affect the company’s future financial condition or
operating results.
Business describes the company’s lines of business, its principal products or services and their
markets, any significant suppliers and customers on whom the company’s business depends, and
its competitive landscape and principal methods of competition, among other matters. This
section may also provide information regarding the relative contribution to the company’s
financial results from different significant lines of business or operations in foreign countries. In
addition, Legal Proceedings, which is usually located at the end of Business, discloses the
significant litigation involving the company.
Management offers biographical information regarding the directors and executive officers of
the company. n Financial Statements and Notes provides standardized financial reports on the
company’s financial condition and performance. Emerging growth companies and smaller
reporting companies are required to include two years of audited financial statements in their
IPO prospectuses (compared to three years for other companies conducting IPOs). In addition,
immediately prior to the financial statements is the auditor’s opinion that sets forth the
independent auditor’s opinion of the financial statements it audited.

What else should I consider?

Following are some things to consider when making an investment decision involving shares of
a new public company.
1. Offering price
The company and the underwriters make the decision on where to set the offering price. The
factors they will consider in setting the price, as well as the terms of the underwriting agreement
between the company and the underwriters, are discussed in the prospectus, usually under the
caption Underwriting or Plan of Distribution. It is important to understand that the offering price
is determined by a mix of market conditions, analysis and negotiation. Competing interests
affect the determination of the offering price.
From the perspective of the company offering its shares in the IPO, the higher the offering price,
the more capital the company can raise. The underwriters also have an interest in a high price
not only to meet the company’s objectives, but also because their compensation is typically a
percentage of the offering price.
At the same time, the underwriters are responsible for selling the IPO and will want a price that
is attractive to the client-investors to whom they will be selling. Under-pricing an IPO creates a
discount for the initial investors, increases the demand for the IPO and helps the underwriters
sell all of the available shares. Under-pricing may also affect how much, if at all, the stock’s
price rises on its first trading day. If there is a large increase, or “bump,” from the offering price
during the initial trading, the underwriter’s client-investors may be satisfied because the value of
their investment will have increased. However, the company may be unsatisfied in that case, as
it might have been able to sell its shares at a higher initial offering price and thereby raise more
capital.
Informing these competing interests are valuation analyses of the company’s business and the
“order book.” Valuation analyses, which can be conducted by underwriters or potential
investors, attempt to value a company based on its revenues, customers, financial results and
other metrics. The “order book” is the compilation of indications of interest that the underwriters
have obtained from the client-investors they solicited regarding the IPO. The order book lists
how many shares each client-investor would like to purchase and at what price.
All of the foregoing factor into the determination of the offering price. Whether you have an
opportunity to participate directly in an IPO or are buying shares in the open market, it is
important to realize that the offering price reflects a negotiated estimate as to the value of the
company. The offering price may bear little relationship to the trading price of the securities, and
it is not uncommon for the closing price of the shares shortly after the IPO to be well above or
below the offering price.
In addition, purchasing shares in the market immediately following an IPO can be risky.
Underwriters can support the trading price of the new issue in its first few days of trading with
certain trading activities, including purchasing shares of the company. This is often done to keep
the trading price from falling too far below the offering price. Once this support ends, the stock
price may decline significantly below the offering price.
2. Selling shareholders

Existing shareholders can sell their shares in the IPO if their shares are included in and
registered as part of the offering. Most large IPOs include only new shares that the company
sells in order to raise capital. However, in some cases, shares held by existing shareholders are
included in the IPO and the shareholders are called “selling shareholders.” The proceeds from
the sales by selling shareholders do not go to the company and instead go to the selling
shareholders.
The cover page of the prospectus details how many shares are being sold by selling
shareholders, if any. The company will also disclose the number of shares each selling
shareholder currently owns, plans to sell in the offering, and will retain following the offering
under Principal and Selling Shareholders or a similarly captioned section. Selling shareholders
may include, in addition to early investors seeking liquidity on their investment, the company’s
founders and management. Companies must disclose any position, office or other material
relationship each selling shareholder has had with the company within the past three years. It
may be worthwhile to discern the relationships the selling shareholders have had with the
company and what proportion of their respective holdings is being sold.

3. Limited trading volume

The trading price of a new issue may be affected by a limited supply of shares in the market
immediately following an IPO. The shares being traded on the first day are generally only shares
that were sold in the IPO. All other outstanding shares, such as those held by founders, early
investors and employees that have not been included in the IPO, may often not be sold in the
public market so soon after the IPO, either because they are “restricted securities” under the
federal securities laws that can only be resold without registration under certain circumstances,
or because the existing shareholders have entered into a “lock-up agreement” in which they
agree not to sell their shares for a certain period of time, typically 180 days.
Moreover, underwriter policies that discourage
“flipping” also limit the number of shares sold in the IPO that may trade on the public market in
the first few days or weeks of trading. “Flipping” is the term used to describe the act of
immediately reselling the shares acquired in an IPO through the open market. Underwriters may
discourage flipping by refusing to allocate IPO shares to customers who have flipped shares in
the past, but the practice of flipping, alone, is not prohibited under the federal securities laws.
These restrictions, lock-up arrangements and underwriter flipping policies all serve to limit the
number of shares that trade in the public market immediately following an IPO. The resulting
limited trading volume, particularly in the case of a highly sought-after IPO, can operate to drive
the trading price of an issue steeply up because of the limited supply to meet the high demand.
4. Market overhang

The number of shares that are outstanding but cannot be traded at the time of the IPO is
sometimes referred to as the “market overhang.” The share price after an IPO may decline over
time as shares that were previously restricted become available for sale. In addition, when lock-
up agreements expire, the share price may decline significantly if a large number of shares
become available for sale all at once. Early investors and shareholders in a company often view
an IPO as an exit strategy—a way to realize a profit on their investment by being able to sell
shares to the public. The lock-up expirations give these early investors the opportunity to sell
their shares to the extent they weren’t able to do so as selling shareholders in the IPO.
An investor can discover the extent of a company’s market overhang in the IPO prospectus. A
company must discuss the shares that it has agreed to register for sale or that will be available
for sale without registration following the IPO. This disclosure can typically be found under
Shares Eligible for Future Sale or a similar caption.
5. Dual-class common stock

An increasing number of companies engaging in IPOs have created separate classes of common
stock with one class having greater voting power than the class being sold in the IPO. This dual-
class common stock structure is often used by companies that are family-controlled or will
continue to be led by their founders, with the “super-voting” common stock held by the founders
or controlling family. With this structure, the holder of the super-voting common stock has a
much greater percentage of the voting rights in the company than his or her equity stake would
otherwise provide and can control the company without owning a majority of its shares.
Generally, the super-voting common stock converts to the lesser-voting class of common stock
when sold by its initial holder. While many successful companies maintain a dual-class common
stock structure, investors should be aware that such a structure may make it more difficult, if not
impossible, for public shareholders to exert any influence or control over corporate matters.
Investors in new public companies can determine whether a company maintains a dual-class
common stock structure and the rights they will have as shareholders by reviewing the first page
of the prospectus as well as the section entitled Description of Capital Stock.
6. Stage of the company

An IPO is a significant milestone for a company, and high-profile IPOs frequently include
companies that have exhibited recent tremendous growth and development. However,
companies at different stages of development engage in IPOs for various reasons. Often, a
company is seeking to access the capital markets in order to fund future growth and expansion.
In other instances, a large and mature business may be returning to the public market after a
successful reorganization under bankruptcy. It is important to keep in mind that an IPO does not
always represent an opportunity to invest at an early stage with a fast-growing company.
7. Emerging growth companies

One thing to keep in mind before investing in an IPO is that many disclosures and other
requirements that now apply to public companies are phased in over time for what are called
“emerging growth companies.” Emerging growth companies generally have less than $1 billion
in revenue. A company will remain an emerging growth company for up to five years after
becoming a public company, unless its revenue exceeds $1 billion or it exceeds certain other
thresholds. n Emerging growth companies may elect to have the same extended periods of
compliance that may be available for private companies to implement any new or revised
accounting standards. This means that other public companies may have to implement new or
revised accounting standards before emerging growth companies do. Emerging growth
companies will have to disclose whether or not they are electing to take advantage of the
extended compliance periods. When you compare an emerging growth company’s financial
statement to those of other companies, you should keep this potential difference in mind. n
Emerging growth companies are not required to have their auditors annually assess their internal
controls over financial reporting. Other public companies that are not emerging growth
companies have up to two years after their IPO before they are required to have their auditors
assess their internal controls, and smaller reporting companies are exempt from this requirement.
After the IPO, management of emerging growth companies will have to assess the effectiveness
of internal controls, like other public companies, but a separate auditor’s assessment of such
controls is not required. n Emerging growth companies do not have to disclose as much about
executive compensation as other public companies. n Emerging growth companies do not have
to conduct shareholder advisory votes on executive compensation arrangements, such as “say-
on-pay” and “say-on-golden parachutes” votes. n Brokers and dealers, including underwriters
who are participating in an emerging growth company’s IPO, are allowed to provide research
reports regarding emerging growth companies prior to, during and after the IPO registration
process. These research reports may not present all the information required in a prospectus filed
with the SEC and are not subject to the stricter liability standards for a prospectus. Investors
should keep in mind that brokers and dealers participating in the offering may face a conflict of
interest between their obligation to provide their research clients with a balanced research report
on a company and their desire to facilitate a successful offering on behalf of the company, which
is their investment banking client or potential client. n A research report can provide useful
information, but as a general matter, you should never rely solely on a research report. You
should also do your own research—such as reading the prospectus—to determine whether a
particular investment is appropriate in light of your own financial circumstances
The first modern IPO occurred in March 1602 when the Dutch East India Company offered
shares of the company to the public in order to raise capital. ... In other words, the VOC was
officially the first publicly traded company, because it was the first company to be ever actually
listed on an official stock exchange.
Reliance was the first Indian company to go public. They had launched their IPO in 1977. It was
even before SEBI was born. Their services back then involved oil. However, today they have
expanded their industry and services.
With an IPO, the company can come out with a public issue to invite retail investors to
participate in the company’s equity. The company will issue shares to retail investors to deal
with their funding requirements. When an investor purchases a share in the company, they
become shareholders of the company.

 REASON FOR LISTING IPOs:

 Increase in the capital: An IPO allows a company to raise funds for utilizing in various
corporate operational purposes like acquisitions, mergers, working capital, research and
development, expanding plant and equipment and marketing.
 Liquidity: The shares once traded have an assigned market value and can be resold.
This is extremely helpful as the company provides the employees with stock incentive
packages and the investors are provided with the option of trading their shares for a
price.
 Valuation: The public trading of the shares determines a value for the company and sets
a standard. This works in favor of the company as it is helpful in case the company is
looking for acquisition or merger. It also provides the shareholders of the company with
the present value of the shares.
 Increased wealth: The founders of the companies have an affinity towards IPO as it can
increase the wealth of the company, without dividing the authority as in case of
partnership.
1.3 ADVANTAGES & DRAWBACKS OF IPO:
The Advantages of IPO are numerous. The companies are launching more and more IPOs to
raise funds which are utilized for undertakings various projects including expansion plans. The
Advantages of IPO is the primary factor for the immense growth of the same in the last few
years. The IPO or the initial public offering is a term used to describe the first sale of the shares
to the public by any company. All types of companies with the idea of enhancing growth launch
IPOs to generate funds to cater the requirements of capital for expansion, acquiring of capital
instruments, undertaking new projects. IPO has a number of advantages. IPO helps the
company to create a public awareness about the company as these public offerings generate
publicity by inducing their products to various investors.
1)The increase in the capital: An IPO allows a company to raise funds for utilizing in various
corporate operational purposes like acquisitions, mergers, working capital, research and
development, expanding plant and equipment and marketing.
2) Liquidity: The shares once traded have an assigned market value and can be resold. This is
extremely helpful as the company provides the employees with stock incentive packages and the
investors are provided with the option of trading their shares for a price.
3) Valuation: The public trading of the shares determines a value for the company and sets a
standard. This works in favour of the company as it is helpful in case the company is looking
for acquisition or merger. It also provides the shareholders of the company with the present
value of the shares.
4) Increased wealth: The founders of the companies have an affinity towards IPO as it can
increase the wealth of the company, without dividing the authority as in case of partnership
MERITS OF IPO:
 Low cost financing No commitment of fixed returns.

 No restrictions attached to financing.

 No issues such as mortgaging, hypothecation etc.

 Entire money received in one stroke without linking to any milestones.

 No issues with returning of finance

DEMERITS:
o Success of IPO has an element of risk.
 o IPO can only finance part of the project

o IPO performance post listing has also born.

o For new promoters and new company, it is difficult to market their IPO.

More often than not, the pricing of any IPO is what influences the decision of any investor. The
rating agencies, in this case, will not talk about ‘what price ‘and ``what time ' aspects of the
offer. Given that the decision to invest or avoid investments in any IPO is most often a function
of the pricing, the lack of this aspect in the present IPO grading system could make the whole
process an unfinished task. Also, rating agencies (experienced in debt rating) could face trouble
with rating the equities, which, unlike debt rating, is more dynamic and cannot be standardized.
Further, IPO grading mechanism is a globally-unique initiative; it could increase the cost of
raising capital in India and urge companies to seek capital overseas Markets, in the short term,
can be price-driven and not purely motivated by company fundamentals. That is to say that, at
times, even good companies at higher price could be a bad investment choice, while the not-as-
good ones could be a steal at lower prices. Despite having disclaimers, a higher graded IPO may
well tempt small investors into falsely believing that a high premium would come about on
listing. Similarly, investors may get deluded by a low-graded IPO, which could become a
`missed opportunity’ in the future. The purpose of introducing grading, thus, might get defeated
if it leads to a false sense of buoyancy or alarm among investors.

 Factors Deciding IPO Price:

 Promoters and their background.

 Current National and Global economic scenario.
 Sector specific issues in which company will be operating.
 Tie up with financial institutions.
 Investors outlook for the company
ANALYSING AN IPO INVESTMENT:
Initial Public Offering is a cheap way of raising capital, but all the same it is not considered as
the best way of investing for the investor. Before investing, the investor must do a
proper analysis of the risks to be taken and the returns expected. He must be clear about the
benefits he hopes to derive from the investment. The investor must be clear about the objective
he has for investing, whether it is long-term capital growth or short-term capital gains. The
potential investors and their objectives could be categorized as:
INCOME INVESTOR:
An ‘income investor’ is the one who is looking for steadily rising profits that will be distributed
to shareholders regularly. For this, he needs to examine the company’s potential for profits and
its dividend policy.
GROWTH INVESTOR:
A ‘growth investor’ is the one who is looking for potential steady increase in profits that are
reinvested for further expansion. For this he needs to evaluate the company’s growth plan,
earnings and potential for retained earnings IPO
INVESTMENT STRATEGIES:
Investing in IPOs is much different than investing in seasoned stocks. This is because there is
limited information and research on IPOs, there is some of the strategies that can be considered
before investing in the IPO;
1) UNDERSTAND THE WORKING OF IPO: The first and foremost step is to understand the
working of an IPO and the basics of an investment process. Other investment options could also
be considered depending upon the objective of the investor.
2) GATHER KNOWLEDGE: It would be beneficial to gather as much knowledge as possible
about the IPO market, the company offering it, the demand for it and any offer being planned by
a competitor.
3) INVESTIGATE BEFORE INVESTING: The prospectus of the company can serve as a
good option for finding all the details of the company. It gives out the objectives and principles
of the management and will also cover the risks.
4) KNOW YOUR BROKER: This is a crucial step as the broker would be the one who would
majorly handle your money. IPO allocations are controlled by underwriters. The first step to
getting IPO allocations is getting a broker who underwrites a lot of deals.
5) MEASURE THE RISK INVOLVED: IPO investments have a high degree of risk involved.
It is therefore, essential to measure the risks and take the decision accordingly.
6) INVEST AT YOUR OWN RISK: After the homework is done, and the big step needs to be
taken. All that can be suggested is to ‘invest at your own risk’. Do not take a risk greater than
your capacity.
Key initiatives in recent years include:
 Depository and share de-materialization process have enhanced the efficiency of the
transaction cycle.
 Replacing the flexible, but often exploited, long settlement cycles with rolling settlement, to
bring about transparency.
  IT driven stock exchanges (NSE and BSE) with a national presence (for the benefit of
investors across locations) and other initiatives to enhance the quality of financial disclosures by
the listed companies.
 Empowering SEBI with powers to impose higher penalties and establish itself as an
independent regulator with adequate statutory powers.
 NSE, which in the recent past has accounted for the largest trading volumes, has a fully
automated screen-based system that operates in the wholesale debt market segment as well as
the capital market segment
 Many new instruments have been introduced in the markets, including index futures, index
options, derivatives and options and futures in select stocks.
Historically, an initial public offering, or IPO, has referred to the first time a company offers its
shares of capital stock to the general public. Under the federal securities laws, a company may
not lawfully offer or sell shares unless the transaction has been registered with the SEC or an
exemption applies.
To register an offering, a company files a registration statement with the SEC, typically using
Form S-1. Some offerings may involve other registration statement forms. An important part of
this registration statement is the “prospectus” that will be used by the company to solicit
investors. The prospectus is the offering document describing the company, the IPO terms and
other information that an investor may use when deciding whether to invest. It is important to
read the prospectus because it provides information regarding the terms of the securities being
offered as well as disclosure regarding the company’s business, financial condition, management
and other matters that are key to deciding whether the offering is a good investment.
 Investor Assistance

Registration statements for IPOs are subject to review by the SEC’s staff to monitor compliance
with applicable disclosure requirements. In such reviews, the staff concentrates on disclosures
that appear to conflict with SEC rules or the applicable accounting standards and on disclosure
that appears to be materially deficient in explanation or clarity. The staff’s review often results
in revisions to the prospectus. However, the review process is not a guarantee that a company’s
disclosure is complete or accurate, and the staff does not evaluate the merits of any IPO or
determine whether an investment is appropriate for any investor. Rather, responsibility for
complete and accurate disclosure lies with the company and others involved in the preparation of
the company’s registration statement and prospectus.
Once any staff comments have been addressed, the staff will issue an order declaring the
registration statement effective, which means the company may proceed to consummate its IPO.
Although the staff will not declare a registration statement effective if the staff has reason to
believe that the disclosure is incomplete or inaccurate in any material respect, the SEC’s
declaration of effectiveness does not represent an approval of the merits of the IPO or an
indication that the information disclosed is complete or accurate.
The underwriters of the IPO typically will have obtained “indications of interest” from
prospective investors prior to effectiveness and will use this information to recommend a price
for the shares to the issuer, who ultimately determines the price of the IPO. Underwriters are the
investment banks that manage and sell the IPO for the company.
An IPO helps to establish a trading market for the company’s shares. In conjunction with an
IPO, a company usually applies to list its shares on an established stock exchange, such as the
New York Stock Exchange or NASDAQ. Any planned exchange listing will typically be
disclosed in the prospectus for the IPO. The new public company will also be required on a
going-forward basis to disclose certain information to the public, including its quarterly and
annual financial statements on Forms 10-Q and 10-K.

1.4 What is the IPO Process?

The Initial Public Offering IPO Process is where a previously unlisted company sells
new or existing securities and offers them to the public for the first time.
Prior to an IPO, a company is considered to be private – with a smaller number of shareholders,
limited to accredited investors (like angel investors/venture capitalists and high net worth
individuals) and/or early investors (for instance, the founder, family, and friends).
After an IPO, the issuing company becomes a publicly listed company on a recognized stock
exchange. Thus, an IPO is also commonly known as “going public”.
Overview of the IPO Process
This guide will break down the steps involved in the process, which can take anywhere from six
months to over a year to complete.
Below are the steps a company must undertake to go public via an IPO process:
Select a bank
Due diligence and filings
Pricing
Stabilization
Transition
Step 1: Select an investment bank
The first step in the IPO process is for the issuing company to choose an investment bank to
advise the company on its IPO and to provide underwriting services. The investment bank is
selected according to the following criteria:
Reputation
The quality of research
Industry expertise
Distribution, i.e., if the investment bank can provide the issued securities to more institutional
investors or to more individual investors
Prior relationship with the investment bank

Step 2: Due diligence and regulatory filings

Underwriting is the process through which an investment bank (the underwriter) acts as a broker
between the issuing company and the investing public to help the issuing company sell its initial
set of shares. The following underwriting arrangements are available to the issuing company:
Firm Commitment: Under such an agreement, the underwriter purchases the whole offer and
resells the shares to the investing public. The firm commitment underwriting arrangement
guarantees the issuing company that a particular sum of money will be raised.
Best Efforts Agreement: Under such an agreement, the underwriter does not guarantee the
amount that they will raise for the issuing company. It only sells the securities on behalf of the
company.
All or None Agreement: Unless all of the offered shares can be sold, the offering is cancelled.
Syndicate of Underwriters: Public offerings can be managed by one underwriter (sole managed)
or by multiple managers. When there are multiple managers, one investment bank is selected as
the lead or book-running manager. Under such an agreement, the lead investment bank forms a
syndicate of underwriters by forming strategic alliances with other banks, each of which then
sells a part of the IPO. Such an agreement arises when the lead investment bank wants to
diversify the risk of an IPO among multiple banks.

An underwriter must draft the following documents:

Engagement Letter: A letter of engagement typically includes:
Reimbursement clause: This clause mandates that the issuing company must cover all out-of-
the-pocket expenses incurred by the underwriter, even if the IPO is withdrawn during the due
diligence stage, the registration stage, or the marketing stage.
Gross spread/underwriting discount: Gross spread is arrived at by subtracting the price at which
the underwriter purchases the issue from the price at which they sell the issue.
Gross spread = Sale price of the issue sold by the underwriter – Purchase price of the issue
bought by the underwriter
Typically, the gross spread is fixed at 7% of the proceeds. The gross spread is used to pay a fee
to the underwriter. If there is a syndicate of underwriters, the lead underwriter is paid 20% of the
gross spread. 60% of the remaining spread, called “selling concession”, is split between the
syndicate underwriters in proportion to the number of issues sold by the underwriter. The
remaining 20% of the gross spread is used for covering underwriting expenses (for instance,
roadshow expenses, underwriting counsel, etc.).
Letter of Intent: A letter of intent typically contains the following information:
The underwriter’s commitment to enter an underwriting agreement with the issuing company
A commitment by the issuing company to provide the underwriter with all relevant information
and, thus, fully co-operate in all due diligence efforts.
An agreement by the issuing company to provide the underwriter with a 15% overallotment
option.
The letter of intent does not mention the final offering price.
Underwriting Agreement: The letter of intent remains in effect until the pricing of the securities,
after which the Underwriting Agreement is executed. Thereafter, the underwriter is contractually
bound to purchase the issue from the company at a specific price.
Registration Statement: The registration statement consists of information regarding the IPO, the
financial statements of the company, the background of the management, insider holdings, any
legal problems faced by the company, and the ticker symbol to be used by the issuing company
once listed on the stock exchange. The SEC requires that the issuing company and its
underwriters file a registration statement after the details of the issue have been agreed upon.
The registration statement has two parts:
The Prospectus: This is provided to every investor who buys the issued security
Private Filings:  this is comprised of information which is provided to the SEC for inspection but
is not necessarily made available to the public
The registration statement ensures that investors have adequate and reliable information about
the securities. The SEC then carries out due diligence to ensure that all the required details have
been disclosed correctly.
Red Herring Document: In the cooling-off period, the underwriter creates an initial prospectus
which consists of the details of the issuing company, save the effective date and offer price.
Once the red herring document has been created, the issuing company and the underwriters
market the shares to public investors. Often, underwriters go on roadshows (called the dog and
pony shows – lasting for 3 to 4 weeks) to market the shares to institutional investors and
evaluate the demand for the shares.

Step 3: Pricing
 After the IPO is approved by the SEC, the effective date is decided. On the day before
the effective date, the issuing company and the underwriter decide the offer price (i.e.,
the price at which the shares will be sold by the issuing company) and the precise
number of shares to be sold. Deciding the offer price is important because it is the price
at which the issuing company raises capital for itself. The following factors affect the
offering price:
 The success/failure of the roadshows (as recorded in the order books)
 The company’s goal
 Condition of the market economy.
 IPOs are often under-priced to ensure that the issue is fully subscribed/ oversubscribed
by the public investors, even if it results in the issuing company not receiving the full
value of its shares.
 If an IPO is under-priced, the investors of the IPO expect a rise in the price of the shares
on the offer day. It increases the demand for the issue. Furthermore, under-pricing
compensates investors for the risk that they take by investing in the IPO. An offer that is
oversubscribed two to three times is considered to be a “good IPO.”

Step 4: Stabilization
After the issue has been brought to the market, the underwriter has to provide analyst
recommendations, after-market stabilization, and create a market for the stock issued.
The underwriter carries out after-market stabilization in the event of order imbalances by
purchasing shares at the offering price or below it.
Stabilization activities can only be carried out for a short period of time – however, during this
period of time, the underwriter has the freedom to trade and influence the price of the issue as
prohibitions against price manipulation are suspended.

Step 5: Transition to Market Competition

The final stage of the IPO process, the transition to market competition, starts 25 days after the
initial public offering, once the “quiet period” mandated by the SEC ends.
During this period, investors transition from relying on the mandated disclosures and prospectus
to relying on the market forces for information regarding their shares. After the 25-day period
lapses, underwriters can provide estimates regarding the earning and valuation of the issuing
company. Thus, the underwriter assumes the roles of advisor and evaluator once the issue has
been made.

Metrics for judging a successful IPO process

The following metrics are used for judging the performance of an IPO:
Market Capitalization: The IPO is considered to be successful if the company’s market
capitalization is equal to or greater than the market capitalization of industry competitors within
30 days of the initial public offering. Otherwise, the performance of the IPO is in question.
Market Capitalization = Stock Price x Total Number of Company’s Outstanding Shares

Market Pricing: The IPO is considered to be successful if the difference between the offering
price and the market capitalization of the issuing company 30 days after the IPO is less than
20%. Otherwise, the performance of the IPO is in question.

CHAPTER 2 REVIEW OF LITERATURE

Madan (2003) - “Investments in IPOs in the Indian capital market” examined the
relationship between return on listing and issue price, issue size, age of firm, issue capital
listing and was found negative. The study found that the relationship between the variables
was statistically significant. The researcher also found that the issue rating was positive for
relationship between returns on listing of the IPO shares and foreign equity. The study
concluded that in the long run, there was a significant fall in IPO returns. The returns of
initial public offerings were observed to be negative for the period of the 2Nd to the 5the
year of listing.

Vitiator C, Kennedy D. G. (2005) – “The factors affecting on IPO return in Thai Stock
Market”. The research was carried out by applying multiple regression models to study
the relationship between several variables and the initial return of the IPO. Secondary data
was the necessary information for the analysis. The initial return of the IPO was regarded
by the investigator as the dependent variable and 7 other variables as the independent
variable.

It was found that there were 14% to 24% returns by IPOs in Thai stock market. The figure
was similar with the returns seen in the international Stock markets.

Data and Mao (2006) - “Deep underpricing of China’s IPOs: sources and implications”
have suggested that the issuer company knowingly underprice the IPOs to encourage a
wider subscription. According to the researcher, on the listing day of the shares, it is noted
that investors are over- enthusiastic and thus bid for IPOs at a price well above the true
fundamental value of the stock. This is the major reason for abnormal returns of the IPO on
the listing day.

Alok Pande and R. Vaidyanathan (2007) - “Determinants of IPO Underpricing in the

National Stock Exchange of India”, looks at the pricing of IPOs in the NSE. In terms of the
demand that the IPO has generated among the investors, the delay in listing of the shares on
the stock exchange, and the money that the company spends on marketing the initial public
offering, the researchers try to understand empirically the 1st day underpricing of initial
public offerings. The researchers are also trying to understand whether the Indian IPO
market has any emerging trends. The research also tries to find a month in the post IPO
returns. The study's key findings were that the demand which the initial public offering had
generated and the listing delay of the IPO had a significant positive impact on the first day
of pricing. The money spent on the promotion of the IPO had no major effect on pricing on
the first day. The study also found that the performance of the IPO post 1 month of listing is
negative.
Singh and Sehgal (2008) - “Determinants of Initial and Long-Run Performance of IPOs in
Indian Stock Market” investigated the possible determinants of underpricing and the long
run performance of 438 Indian initial public offerings (IPOs) listed on the Bombay Stock
Exchange during June 1992-- March 2001. The researchers found that underpricing in
Indian IPO’s has been found to be 99.20%. The level of underpricing is extremely high
compared with the international evidence. The study also found that some of the important
determinants of underpricing are Age of the firm, listing delay of the IPO and the demand
for the IPO. It was also found that in the long run, the Indian initial public offerings don’t
tend to underperform.
Sahoo and Pragian (2010) in the research paper titled, “After Market Pricing Performance
of Initial Public Offerings: Indian IPO Market 2002-2006” studies performance of 92 IPOs.
The researchers have determined that the average level of under pricing of initial public
offerings in India is to the extent of 46.55%. The level of underpricing was obtained by
comparing the listing day performance with the market index.
Nurani A. Ahmad-Saluki and Lim Boon Kept (2012) - “The investment performance of
MESDAQ market initial public offerings (IPOs)” provided evidence on both the short-run
and long-run investment performance of Malaysian initial public offering (IPO) companies
that are listed on the Mesdag market. The researchers studied about the factors that
influence the performance of IPOs. The results of the study were in line with previous
Malaysian studies. It was found that the raw returns and the market-adjusted initial returns
of IPOs are extremely underpriced in the short-run. However, it was seen that the IPO
companies were underperforming the market in the long run. In contrast to the results found
in previous Malaysian studies using a subset of listed firms, the researchers' findings
concentrated on long term success. Researchers determined that businesses in the
technological sector that launched IPOs in the hot issue period and underpriced their IPOs
did less well in the long term. The fad hypothesis of long-run under performance is
confirmed by this observation. The results obtained also suggest that investors who buy
shares of the IPO on the Mesdag market make significant returns in the short-run. However,
they do not fare well in the long-run. The research provides new information to investors in
order to evaluate IPOs listed on bursa Malaysia.

Bansal &Khanna (2012) analyzed that there is significant difference between the
magnitudes of level of underpricing of IPOs that priced through the book build with those
priced through the fixed price option and IPOs price through book build are more
underpriced than fix price option IPOs.

Bagger, Khurana & Singh (2012) analyzed that IPOs of January, 2001 to August, 2011,
most of the stocks have generated listing profits whereas in long term most of the companies
have underperformed compared to market returns. The researchers advised the investors the
following 3 strategies while investing in an initial public offering. The first strategy is that
the investors could sell all their shares on the listing day itself and thereby make listing gains
in most cases. The second strategy is that the investors could book partial profit on the
listing day and hold the remaining shares for a long term. This will help in reducing risk.
The third strategy is that the investors could hold their shares for a period of more than 5
years. However, they should ensure that the company is fundamentally strong if they decide
to invest for a long period.
Motwani and Singh (2012) noted that subscription rate of the IPO plays major role only in
short run. The study concluded that the investors may try to analyses the demand and supply
for an IPO before deciding whether to invest or not. They can use the over subscription rate
of IPO, before deciding whether to invest or not. It was found that the demand for the IPO
has a significant impact on the performance in the short run were relatively overpriced
compared to medium and large-size IPOs.

Batool K. Aziri and Alaa J. Haji (2014) - “The determinants of IPO underpricing in the
GCC countries” documented the phenomenon of underpricing initial public offerings
(IPOs) for 194 firms that went public between 2000 and 2013 in the markets of the six-gulf
cooperation council (GCC) countries. The research was carried out to determine the factors
that potentially influence abnormal returns on the listing day. The researchers have used
several variables which have been previously evaluated like. The researchers also made use
of various other variables and additional variables like seasonal affective disorder. The key
findings of the study were that both the firm age and the size of the bid are negatively
linked to the underpricing stage. The study also indicated that there exists a relationship
between financial and non-financial companies, and that there are many gaps which exist
between insurance and banking firms. One of the significant results of the analysis was that
it seemed that the discrepancy between the month of Ramadan and the month of the IPO
was significant. The author had carried out the models during the financial crisis period and
it was found that almost all appeared to be significant.

Leila B & Farshad A. (2014) – “Study of Factors Affecting the Initial Public Offering (IPO)
Price of the Shares on the Tehran Stock Exchange.” The research was carried out to
determine if the pricing of IPOs in Tehran Stock Exchange is less than actual. The
researchers also study the different factors which affect pricing of IPOs on the Tehran Stock
Exchange. To carry out the study, a sample of 115 stock exchange companies which were
listed between 2006 to 2012 was considered. The finding of the study was that the Price to
Earnings ratio of a firm has significant impact on the price changes of IPO’s. The ration had
the highest impact on price of the IPO.

Shah S, Mehta D (2015) - Initial performance of iOS in India: evidence from 2010-2014
studied listing day performance pertaining to 113 IPOs in India during January, 2010 to
December, 2014, listed in National Stock Exchange (NSE) India. The researchers found
that, on an average, most IPOs have a significant positive return on the first trading day. It
was also found that the Market Adjusted Abnormal Returns (MAAR) of the IPO companies
was 7.19%. The researchers observed that most IPOs are underpriced initially. They made
use of t-test to verify the returns of the IPOs. The mean initial return of the IPOs was
7.19%. In order to analyses whether there is a link between the degree of underpricing of
IPOs and other independent variables such as the issue price, the scale of the problem, over
subscription and the returns from the market index, the researchers used the regression
model. The findings obtained from the regression analysis showed that there was no
important relationship except over subscription between the IPO's degree of underpricing
and the other independent variables. As the IPOs are underpriced during the initial days, the
researcher recommends that investors should consider to invest a part of their capital in a new
issue during the initial days.
Reddy K S (2015) in his article entitled “The aftermarket pricing performance of initial
public offers: Insights from India” examined the underpricing of initial public offers
(IPOs), which were announced by Indian firms for the period 2007 through 2009. The fact
that well-developed capital markets are a function of the economic development of a
nation and a reflection of its financial system motivated the report. The key findings of the
analysis were that, in the short run, post-listing IPOs produce a good return. In the long
run, however, the returns begin to plunge and they become negative. The highest returns
from IPOs were observed during the first week of post- listing.

Kampala, R. C., Lakshmi, P. A., & Dooku, S. R. (2016) - “A Study on Factors Influencing
the Initial Public Offerings (IPO) in the Bombay Stock Exchange (BSE), India: During
2007- 2013” This study has examined the IPO performance in India from 2007 to 2013. The
major finding of the study was that underpricing exists in the 1set day of trading. However,
the researcher has observed that the degree of underpricing has significantly decreased
compared to the previous studies. The research also found that the issue variables influence
the initial public offerings. It is observed that the face value of shares and level of over
subscription influence the listing day performance of IPOs in a major way. After 3 years
from listing, it is seen that IPOs are underperformed by 29.09%. The researcher found that
some of the factors impacting the IPO performance in the long term are the market
capitalization of the company, issue share premium, face value of the shares, issue price of
the IPO, and the number of times the IPO is over-subscribed are some of the factors
affecting IPO success in the long run. The researchers considered a sample of 146
companies to identify the various factors influencing the Initial Public Offerings (IPO) in
the Bombay Stock Exchange (BSE)

Poornima S, Haji A (2016) - “A study on the performance of initial public offering of

companies listed in NSE, India & Gulf base GCC index.” The researcher analyzed the
short-term performance of the companies in this analysis in order to explain the
phenomenon of irregular returns as well as the long-term performance in order to evaluate
the long-term performance of the IPOs. Between Jan 2013 and Dec 2014, the thesis was
performed. The researchers considered a sample of nine companies listed in NSE for the
study. The researchers found that IPO stocks are a good instrument for long term
investment. In order to maximize their profits, they recommended that investors subscribe
to the initial public offering or buy the shares from the primary market and retain them for a
defined time in the secondary market.

Patel A (2016) - “Determinants of Listing Day Performance of IPOs: Study from Indian
Equity Market” carried out a study based on listing day performance of 80 initial public
offerings (IPOs) in India during January, 2011 to June, 2016, listed on National Stock
Exchange (NSE), India. The researchers observed that on an average, the listing day returns
of IPOs were positive. The investigator performed a sample t-test to check whether or not
the average raw returns and the average market adjusted excess returns (MAER) are
substantially below values. The researcher found that during the study period, the MAER of
all samples IPOs was 14.01 percent and it was important at the 1 percent stage. The
investigator concluded, therefore, that IPOs were substantially underpriced. The researcher
also used the Multiple Regression model to examine the relationship between MAER and
other independent variables such as the size of the problem, subscription question, listing
delay, keeping of the business age and post problem promoters. It was found that there was
no important association between MAER and the other independent variables such as the
keeping of age and post problem promoters through the multiple regression study. It was also
noticed that MAER showed a significant link with the size of the issue, over-subscription
and delay in listing.

Ambala. M et al (2016) in their paper entitled “A Study on Performance of IPOs under

NSE from issue price to last trading price in the year 2013-2015”, studied the performance
of IPO’S listed in National Stock Exchange (NSE) during, 2013 to 2015. The study found
that, on average, initial public offerings yield dramatically positive returns. The majority of
investors were also found to invest in the IPO primarily on the basis of the company's image
and not on the basis of a fundamental analysis. It has also been found that most shareholders
tend to buy at a lower cost. It is noted that the last trading price is often greater than the
price provided by the IPO. The new trade price comes after the price offered in the analysis
by the IPO.

Roopa P. (2016) investigated on introductory execution of Initial public offerings in India

during 2015-2016 - Valuing Instruments is a significant choice before giving Initial public
offerings. The study assumes that any initial public offerings in the stock market are an
indispensable job in success and failure. One of the big developments Indian Capital
Markets has seen in the past is the presentation of deals through the method of book building.
The researchers considered in this paper the execution of 69 initial public offerings on the
posting day either by Book Building technique for open initial public offerings or through
fixed value strategy during the monetary year 201516.

Bhanu M et al. (2016) in their article entitled “Long-run performance of IPO market in
India” examined the Long-run performance of initial public offerings (IPOs). The data was
obtained for 31 IPOs from the period 2000 to 2003. Using SPSS Version 16, the researchers
used the Logistic Regression Model to test the relationship between long-term IPO output
and short-term company performance variables. The study reveals that long-term variables
have no relationship or negative relationship with short-run variables. It has a positive
relationship with some of the theory supporting the view that there should be small listing
gains, moderate short-run gains and large long-run gains for IPO markets to be successful.
Only then will the long-term growth of the IPO sector take place. But the true scenario is
the opposite. Companies have listing earnings, short-run earnings, but they do not make
long-term gains.

Dhamija, S., & Arora, R. K. (2017) in their article entitled “Determinants of long-run
performance of initial public offerings: Evidence from India” studied the long- run
performance of 377 initial public offerings (IPOs) made by Indian companies during the
period 2005–2015. The aim of the paper is to examine if, in the long run, Indian IPOs are
underperforming or outperforming the large m9arket and to identify the key determinants of
their long- term success. The findings indicate that Indian IPOs outperform the general
market, preceded in the long run by considerable under-performance initially. During 2005-
2015, the IPOs listed on the main board yielded an average initial excess return (IERs) of
about 22 percent. Negative IERs were, however, provided by 37 per cent of the IPOs. The
IPOs underperformed the wide industry, producing an abnormal buy- and-hold return of
57.33 percent (BHAR) over 36 months following listing. Over 36 months holding time, just
38 out of 377 IPOs (10 percent) outperformed the benchmark index. The type of issuer
(government-owned or private), lead manager credibility (LMP), promoter retention and the
scale of the issue are the significant problem characteristics that affect the long-term
success of IPOs in India.

Suri A, Hada B (2018) in their article entitled “Performance analysis of initial public
offerings in India” examined the performance of 107 IPOs in Indian stock market. The time
period for the study was between the period 2011 to June 2017. The researchers verified the
IPOs on the basis of two main performance metrics namely the over-subscription ratio of
the IPO and the listing day gains generated by the IPO. The purpose of the study was to
compare between January 2011-May 2014 and June 2014-June 2017 the performance of the
IPOs. The study findings indicate that the performance of the IPOs launched between 2011
and May 2014 was substantially different from the performance of the IPOs launched
between June 2014 and June 2017. It was also investigated that the number of IPOs and the
fund raised from them also varied significantly for the two years.

Tented N, Mustafa S (2019) - “A Study of Returns Between IPO Issue Price and Listing
Day Price” (2019) conducted a study to identify the difference in returns between IPO offered
price, listing day opening price, closing price. The goal of the study was to assist investors
to make an investment decision through the IPO or buy it directly from the secondary
market. Data is collected for the review of all IPOs released over 10 years. The study
concluded that the price offered by the IPO, the open-day listing price and the closing-day
listing price did not vary statistically significantly. The mean value for the open price listing
day was higher than the price provided by the IPO. For the listing day close price, the mean
value was high compared to the listing day open price. For the listing day closing price,
when the price offered by the IPO was high, the mean value was high.
 CHAPTER 3 RESEARCH METHODOLOGY

3.1 OBJECTIVES

1. To analyses the performance of Indian IPOs in the short term.

2. To determine the significance of abnormal return of the IPOs.
3. To study the impact of over- subscription, profit after tax, promoters’ holdings,
issue price and market returns on IPO performance.

3.2 HYPOTHESIS:
Hypothesis is usually considered as the principal instrument in research. Its main function is to
suggest new experiments and observations. In fact, many experiments are carried out wi8th the
deliberate object of testing hypothesis. Decision-makers often face situations wherein they are
interested in testing hypothesis on the basis of the available information and then take decisions
on the basis of such testing. Ordinarily, when one talks about hypothesis, one simply means a
mere assumption or some supposition to be proved or disproved. But for a researcher hypothesis
is a formal question that he intends to resolve.

H0 = There is no association between IPOs performance and various determinants.

H1 = There is significant association between IPOs performance and various
determinants.

3.3 SCOPE OF STUDY

The scope of the study is limited to the IPO’s listed only in the National Stock
Exchange (NSE), India.
3.4 RESEARCH DESIGN
Descriptive research design is used to assess the efficiency of IPOs and the
effects of different determinants such as issue size, over subscription, listing
delay, age of the firm and post issue promoter's holding on the performance
of IPOs.

3.5 SELECTION OF PROBLEM

IPOs are often seen as a speculative possibility to make exceptional gains on the listing day.
There is, however, uncertainty about the effects of various determinants such as issue size,
over subscription, age of business, holding of promoter’s post issue and various other
fundamental factors on the success of the IPOs. There also exists confusion among
investors whether to hold the stock for a short term or to sell it on listing day. If these
problems are not addressed, investors may not be able to effectively analyze the stock while
formulating an investment strategy

3.6 PERIOD OF STUDY

The study covers a period from January 2018 to December2020.

3.7 DATA COLLECTION

This study was completely based on secondary data. The official website of
NSE India is used to collect the list of IPOs during the study duration, the daily
stock price and the data on the market index namely, nifty. The red herring
prospectus issued by the company oils used to get details regarding the listing
date, issue size, age of firm and Promoter's holding. Over subscription and
listing date data are collected from NSE website.

3.8 SAMPLE SELECTION

The sample consists of all Indian companies which issue IPOs and listed on
National Stock Exchange (NSE) during January 2018 to December 2020. The
below table shows the number of IPOs which have been listed

Year Number of IPOs listed in

NSE
 2020 13
2019 16
2018 23
Table no 1 Sample Data

Sr. No. Name of the issue Year

of
Issue
1 Burger King India Limited 2020
2 Gland Pharma Limited 2020
3 Equites Small Finance Bank Limited 2020
4 Mazagon Dock Shipbuilders Limited 2020
5 Likhitha Infrastructure Limited 2020
6 UTI Asset Management Company Limited 2020
7 Angel Broking Limited 2020
8 Chemcon Speciality Chemicals Limited 2020
9 Computer Age Management Services 2020
Limited
10 Route Mobile Limited 2020
11 Happiest Minds Technologies Limited 2020
12 Rossari Biotech Limited 2020
13 SBI Cards and Payment Services Limited 2020
14 Prince Pipes and Fittings Limited 2019
15 Ujjivan Small Finance Bank Limited 2019
16 CSB Bank Limited 2019
17 Vishwaraj Sugar Industries Limited 2019
18 Indian Railway Catering and Tourism 2019
Corporation Limited
19 Sterling & Wilson Solar Limited 2019
20 Spandana Sphoorty Financial Limited 2019
21 Affle India Limited 2019
22 IndiaMART InterMESH Limited 2019
23 Neogen Chemicals Limited 2019
24 Polycab India Limited 2019
25 Metropolis Healthcare Limited 2019
26 Rail Vikas Nigam Limited 2019
27 MSTC Limited 2019
28 Chalet Hotels Limited 2019
29 Xelpmoc Design and Tech Limited 2019
30 Aavas Financiers Limited 2018
31 Garden Reach Shipbuilders & Engineers 2018
Limited
32 CreditAccess Grameen Limited 2018
33 HDFC Asset Management Company 2018
Limited
34 TCNS Clothing Co. Limited 2018
35 Varroc Engineering Limited 2018
36 Fine Organic Industries Limited 2018
37 RITES Limited 2018

38 IndoStar Capital Finance Limited 2018

39 Lemon Tree Hotels Limited 2018
40 ICICI Securities Limited 2018
41 Mishra Dhatu Nigam Limited 2018
42 Sandhar Technologies Limited 2018
43 Karda Constructions Limited 2018
44 Hindustan Aeronautics Limited 2018
45 Bandhan Bank Limited 2018
46 Bharat Dynamics Limited 2018
47 H.G. Infra Engineering Limited 2018
48 Aster DM Healthcare Limited 2018
49 Galaxy Surfactants Limited 2018
50 Amber Enterprises India Limited 2018
51 Newgen Software Technologies Limited 2018
52 Apollo Micro Systems Limited 2018
 CHAPTER4:DATA ANALYSIS, INTERPRETATION AND
PRESENTATION
4.1. Analysis of data with tabular and graphical presentation & Interpretation of data

Table 2: Mean Stock Returns

Mean Standard Maximum Minimum

Return Deviation Return Return
1st Day IPO return 0.1351765 0.267211081 0.821636587 -0.231511801
55
2st Day IPO return 0.1388046 0.269524012 0.993251773 -0.182988446
73
3st Day IPO return 0.1452098 0.288717181 1.17557333 -0.192254597
99
4st Day IPO return 0.1385371 0.289069073 1.070441412 -0.21511138
95
5th Day IPO return 0.1359110 0.288348604 0.986669309 -0.206587809
97
6th Day IPO return 0.1261916 0.293770569 0.970660539 -0.259560252
99
7th Day IPO return 0.1274125 0.299398605 1.06096811 -0.279243204
62
8th Day IPO return 0.1355735 0.304805068 1.149780575 -0.307654206
07
9th Day IPO return 0.1422070 0.300671205 1.10359983 -0.346436974
82
10th Day IPO 0.1430136 0.313326566 1.089683658 -0.351844017
return 34
11th Day IPO 0.1369469 0.313906472 1.05836883 -0.383048751
return 97
12th Day IPO 0.14042296 0.317532567 1.073864119 -0.365185634
return
13th Day IPO 0.13660323 0.31700323 1.073294481 -0.360313517
return 6
14th Day IPO 0.13422303 0.31453043 1.06096811 -0.338083704
return 9
15th Day IPO 0.13614038 0.309573389 1.048779915 -0.277157011
return 6
16th Day IPO 0.14054113 0.3086986 1.042629654 -0.284675843
return 5
17th Day IPO 0.14473385 0.298825346 1.030809185 -0.271430664
return 9
18th Day IPO 0.14075834 0.299290713 1.013304006 -0.401169711
return 3
19th Day IPO 0.13942112 0.297469408 7.763361387 -0.40285263
return 7
20th Day IPO 0.13633080 0.294437117 1.069977018 -0.349886308
return 6
21th Day IPO 0.12828562 0.30031662 1.069065466 -0.422613678
return 1
22nd Day IPO 0.13447162 0.294468608 1.04215216 -0.366711602
return 1

The logarithmic return on the

market index (NIFTY 50) during the same time period is:

Rm, d = Ln(I1) – Ln(I0)

Where, Rm, d is the return on index at the end of the dth day,
I1 is the closing S&P CNX Nifty value at the dth day and
I0 is the closing S&P CNX Nifty value on the offering day of the stock
 Table 3: Mean Index Returns

Mean Standard Maximum Minimum

Return Deviation Return Return
1st Day Index - 0.03719721 0.062578406 -0.203134758
return 0.00023956
8
2st Day Index 0.00126595 0.042072951 0.076310101 -0.228498845
return 6
3st Day Index 0.00091396 0.049010167 0.082843963 -0.285666771
return 6
4st Day Index - 0.053204622 0.090967553 -0.310213417
return 0.00048707
3
5th Day Index 0.00309582 0.046657506 0.097671075 -0.253522028
return 6
6th Day Index - 0.064132301 0.099075973 -0.39255957
return 0.00027092
6
7th Day Index 0.00060153 0.062088806 0.099373474 -0.367797253
return 7
8th Day Index 0.00319376 0.055577417 0.102431344 -0.303651785
return 4
9th Day Index 0.00422715 0.050445082 0.077848052 -0.2654852
return
10th Day Index 0.00514889 0.050413866 0.084852363 -0.263312002
return 3
11th Day Index 0.00518989 0.056653815 0.094211235 -0.308079783
return 3
12th Day Index 0.00793780 0.054302659 0.096209565 -0.270555052
return 3
13th Day Index 0.00801662 0.058418915 0.09963738 -0.311381893
return 2
14th Day Index 0.00678796 0.062309666 0.096180145 -0.332193534
return 3
15th Day Index 0.01028846 0.053787357 0.099025682 -0.248190628
return
 16th Day Index 0.00982206 0.055223456 0.085302848 -0.25314476
return 5
17th Day Index 0.01236877 0.052732012 0.095587356 -0.39255957
return 9
18th Day Index 0.01164945 0.053729611 0.08205567 -0.225514583
return 8

19th Day Index 0.0136992 0.055206451 0.087708821 -0.233165652

return 46
20th Day Index 0.0156542 0.054663648 0.088453744 -0.225631336
return 62
21th Day Index 0.0182346 0.053212514 0.097062795 -0.195622868
return 82
22nd Day Index 0.0170441 0.054798912 0.101062934 -0.19615178
return 97

Interpretation

The above tables show the various statistics like mean return, minimum return,
maximum return and standard deviation on the stock and index value for the first
22 trading days. It is observed that on an average, the stock return was 13.52%,
ranging from -23.15% to 82.16% with standard deviation of 26.72% after first
trading day. For the similar 1st trading day, Index return on average remains -
0.0%, while it ranges from -20.31% to 6.25% with standard deviation of 3.72%.
Therefore, we can conclude that the IPO outperforms the market on the first
trading day.

It is observed that the highest returns are observed on the 3rd trading day. The
average returns were 14.52%, ranging from
-19.22% to 117.55% with standard deviation of 18.57%. For the similar 3rd
trading day, Index return on average is 0.09% and it ranges from -28.56% to 8.26%
with standard deviation of 4.90%
On 5th trading day, it is seen that the average stock return was 13.59%, ranging
from -20.65% to 98.66% with standard deviation of 28.83%. For the similar 5th
trading day, Index return on average remains 0.30% and it ranges from -25.65% to
9.76% with standard deviation of 4.66%. Therefore, we can conclude that the IPOs
continued to outperform the markets at the end of one week of listing.
On the 22Nd trading day, the stock return on average was 13.44%, ranging from -
36.67% to 104.21% with standard deviation of 29.44%. For the similar 22Nd
trading day, Index return on average remains 1.70%, while it ranges from -19.61%
to 10.10% with standard deviation of 5.47%. This implies that there is a small
 decrease in the performance of the compared to the first and fifth trading day.
TheIPO under performs compared to the broader market.

Graphical Representation of mean IPO return and market return

0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
3rd Day
4th Day
5th Day
6th Day
7th Day
8th Day
9th Day

11th Day

13th Day

15th Day

17th Day

19th Day

21th Day
2nd Day

10th Day

12th Day

14th Day

16th Day

18th Day

20th Day
1st Day

22th Day
-0.02

Mean Stock Return Mean Market Return

Figure 1: Graphical Representation of mean IPO return and

market return

Interpretation

From the above graph, we can observe that the IPOs outperform the markets in the
short run. It is seen that the IPO deliver superior returns during the first three
trading days. The highest returns are seen on the third trading day. Following the
third trading day, there is a small fall in the returns of the IPO which could be due
to profit booking of investors. The fall continues till the 6the trading day. Following
this the returns gradually start increasing again.

It is also observed that towards the end of the month, the returns start decreasing.
On the last day of the month (22Nd trading day), the returns of the IPO are slightly
lower compared to the first day returns.

Market-adjusted Short Run Performance & Wealth Relative Model

 Using these average stock returns and the market returns, the market-adjusted short
run performance for each IPO on dth day of trading is computed as:

MASRPi,d = { [ ( 1 + Ri,d ) / ( 1 + Rm,d )] – 1 }

This model measures the initial trading returns adjusted with the market returns.
This sort of measurement has been commonly used in many past studies to measure
the short run performance of IPOs with risk adjustment, assuming the
systematic risk of the newly listed stock to be 1.The average of market adjusted
short run performance return for the dthe trading day is represented in the formula
by MASRPd, which is a performance index. It is actually the return in excess of the
market return on investment divided equally among n new:

MASRPd = 1N ∑ MASRPi,d

To test if the MASRP equals zero, the associated t statistic is computed:

t = (MASRPd) / (S/√N)

Where,

S is the standard deviation of MASRP,d across the companies and N is the no.
of sample.
The wealth relative model has also been applied to measure the short run
performance for group of IPOs.

WRd = (1+ 1/N ∑Ri,d) / (1+ 1/N ∑Rm,d)

Where WRd is the Wealth Relative for the dth trading day
and n is the total number of IPOs in the sample.

A wealth relative score of more than one means that the IPOs has performed
better than market during the period of study. Wealth relative index score less
than one indicates poor performance in comparison to market.

Table 4: Market-adjusted Short Run Performance & Wealth

Relative Model

Standard
MASRP Deviation T Statistic Wealth
Relative
 1st Day 0.135263416 0.260982919 3.737403077 1.135448572
2st Day 0.138041713 0.26551783 3.749024856 1.13736482
3st Day 0.145479396 0.285833472 3.670202932 1.144164172
4st Day 0.14131695 0.290834566 3.503885506 1.139092015
5th Day 0.134300055 0.289359206 3.346883201 1.132405367
6th Day 0.129250726 0.294750885 3.162128725 1.126496896
7th Day 0.129061616 0.29794282 3.123675032 1.126734789
8th Day 0.133038114 0.299793279 3.200043321 1.1319583

9th Day 0.137382327 0.291759427 3.395530556 1.137399125

10th Day 0.136730333 0.302121694 3.26350762 1.137158527
11th Day 0.129794731 0.296716283 3.154404295 1.131076829
12th Day 0.129882508 0.298488422 3.13779703 1.131441798
13th Day 0.125996657 0.2960764 3.068717437 1.127563982
14th Day 0.12460119 0.290439504 3.093628606 1.126575884
15th Day 0.121970405 0.284652512 3.089876467 1.12457029
16th Day 0.126345627 0.281505169 3.236499271 1.129447626
17th Day 0.128267608 0.274045403 3.375173838 1.130747888
18th Day 0.124296655 0.273935463 3.271996677 1.127622157
19th Day 0.120342883 0.269360954 3.221717389 1.124022861
20th Day 0.115654487 0.267940693 3.112615552 1.118816558
21th Day 0.104962368 0.275972613 2.742643151 1.08080132
22nd Day 0.115750762 0.288380924 2.894403003 1.11545951

Interpretation

The above table shows the market adjusted initial returns, standard deviation and wealth
relative index along with t-statistic. The market adjusted short run performance for the 1st, 5th
and 22nd day are 13.52%, 13.43% and 11.58% respectively which simply means that the
abnormal returns are slightly falling near the end of the month. The similar result is being
shown by the wealth relative index which is 1.14, 1.13 and1.11 for respective days. The
critical value of T at 95% confidence level is 2.009. It is observed that the calculated values
for all the days are greater that the critical value. Hence, we can conclude that the returns
are significant.
Graphical Representation of Market Adjusted Short Run Performance

MESRP
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
4th Day
5th Day
6th Day
7th Day
8th Day
9th Day
2nd Day
3rd Day

10th Day
11th Day
12th Day
13th Day
14th Day
15th Day
16th Day
17th Day
18th Day
19th Day
20th Day

22nd Day
1st Day

21th Day
Figure 2: Graphical Representation of Market Adjusted Short
Run Performance
Interpretation

From the above graph, we can observe that the IPOs outperform the markets in the short
run. It is seen that the IPO deliver superior returns during the first three trading days. The
highest returns are seen on the third trading day. Following the third trading day, there is a
small fall in the returns of the IPO which could be due to profit booking of investors. The
fall continues till the 6th trading day. Following this the returns gradually start increasing
again.

It is also observed that towards the end of the month, the returns start decreasing. On the
last day of the month (22nd trading day), the returns of the IPO are slightly lower compared
to the first day returns.

Market-adjusted Short Run Performance & Wealth Relative Model

Using these average stock returns and the market returns, the market-adjusted short run
performance for each IPO on dth day of trading is computed as:

MASRPi,d = { [ ( 1 + Ri,d ) / ( 1 + Rm,d )] – 1 }

This model measures the initial trading returns adjusted with the market returns. This sort of
measurement has been commonly used in many past studies to measure the short run
performance of IPOs with risk adjustment, assuming the
systematic risk of the newly listed stock to be 1. The average of market adjusted short run
performance return for the dth trading day is represented in the formula by MASRPd, which
is a performance index. It is actually the return in excess of the market return on investment
divided equally among n new:
MASRPd = 1N ∑ MASRPi,d

To test if the MASRP equals zero, the associated t statistic is computed:

t = (MASRPd) / (S/√N)
Where,
S is the standard deviation of MASRP,d across the companies and N is the no. of
sample.The wealth relative model has also been applied to measure the short run
performance for group of IPOs.

WRd = (1+ 1/N ∑Ri,d) / (1+ 1/N ∑Rm,d)

Where WRd is the Wealth Relative for the dth trading day and n is the total number of IPOs
in the sample.A wealth relative score of more than one means that the IPOs has performed
better than market during the period of study. Wealth relative index score less than one
indicates poor performance in comparison to market.

Table 4: Market-adjusted Short Run Performance & Wealth

Relative Model

Standard
MASRP Deviation T Statistic Wealth
Relative
1st Day 0.135263416 0.260982919 3.737403077 1.135448572
2st Day 0.138041713 0.26551783 3.749024856 1.13736482
3st Day 0.145479396 0.285833472 3.670202932 1.144164172
4st Day 0.14131695 0.290834566 3.503885506 1.139092015
5th Day 0.134300055 0.289359206 3.346883201 1.132405367
6th Day 0.129250726 0.294750885 3.162128725 1.126496896
7th Day 0.129061616 0.29794282 3.123675032 1.126734789
 8th Day 0.133038114 0.299793279 3.200043321 1.1319583

9th Day 0.137382327 0.291759427 3.395530556 1.137399125

10th Day 0.136730333 0.302121694 3.26350762 1.137158527
11th Day 0.129794731 0.296716283 3.154404295 1.131076829
12th Day 0.129882508 0.298488422 3.13779703 1.131441798
13th Day 0.125996657 0.2960764 3.068717437 1.127563982
14th Day 0.12460119 0.290439504 3.093628606 1.126575884
15th Day 0.121970405 0.284652512 3.089876467 1.12457029
16th Day 0.126345627 0.281505169 3.236499271 1.129447626
17th Day 0.128267608 0.274045403 3.375173838 1.130747888
18th Day 0.124296655 0.273935463 3.271996677 1.127622157
19th Day 0.120342883 0.269360954 3.221717389 1.124022861
20th Day 0.115654487 0.267940693 3.112615552 1.118816558
21th Day 0.104962368 0.275972613 2.742643151 1.08080132
22nd Day 0.115750762 0.288380924 2.894403003 1.11545951

Interpretation

The above table shows the market adjusted initial returns, standard deviation and wealth
relative index along with t-statistic. The market adjusted short run performance for the 1set,
5tie and 22Nd day are 13.52%, 13.43% and 11.58% respectively which simply means that
the abnormal returns are slightly falling near the end of the month. The similar result is
being shown by the wealth relative index which is 1.14, 1.13 and 1.11 for respective days.
The critical value of T at 95% confidence level is 2.009. It is observed that the calculated
values for all the days are greater that the critical value. Hence, we can conclude that the
returns are significant.
Graphical Representation of Market Adjusted Short Run Performance

MESRP
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
4th Day
5th Day
6th Day
7th Day
8th Day
9th Day
2nd Day
3rd Day

10th Day
11th Day
12th Day
13th Day
14th Day
15th Day
16th Day
17th Day
18th Day
19th Day
20th Day

22nd Day
1st Day

21th Day

Figure 2: Graphical Representation of Market Adjusted Short

Run Performance

Interpretation

From the above graph, we can observe that the market adjusted sort run performance of the
IPO rises between the first and the third trading day. The performance is the highest on the
3rd trading day.

Toward the end of the month, the market adjusted short run performance is falling which
shows that the returns of the IPO in comparison to the market returns is slowly decreasing.
Calculation of Abnormal Returns

Abnormal return is the difference between the actual return of a security and the expected
return. Abnormal returns are sometimes triggered by "events." Events
can include mergers, dividend announcements, company earning announcements, interest
rate increases, lawsuits, etc. all of which can contribute to an abnormal return. Events in
finance can typically be classified as information or occurrences that have not already been
priced by the market.

The abnormal returns and cumulative abnormal returns are calculated using the
below formulas.

Abnormal Return
= Actual Return
− Expected Return
Expected Return = α + β(Rm) Cumulative Abnormal Return
𝑛
= ∑ 𝐴𝑐𝑡𝑢𝑎𝑙 𝑅e𝑡𝑢𝑟𝑛𝑠
𝑡=1

Table5: Abnormal Returns

Mean
Mean T Statistic Cumulat T Statistic
Abnormal ive
Return Abnorm
al
Return
1st Day 0.110973429 3.676746088 0.110973429 3.676746088
2nd Day -0.001356318 -0.2009212 0.109617111 3.719650864
3rd Day 0.002410338 0.347329173 0.112027449 3.581725823
4th Day -0.015364303 -2.82861117 0.096663146 3.292774471
5th Day -0.003561295 -0.704068393 0.093101851 3.203551401
6th Day -0.00667685 -1.473656201 0.086425001 2.913613707
7th Day -0.006017799 -1.07247467 0.080407201 2.784940297
8th Day 0.001131914 0.211469888 0.081539116 2.996099875
9th Day 0.000258713 0.04035626 0.081797828 3.287126872
10th Day -0.002864881 -0.587957588 0.078932947 3.204838078
11th Day -0.012519802 -2.26514627 0.066413146 2.948515075
 12th Day -0.003812589 -0.78503934 0.062600557 2.863991811
13th Day -0.009548172 -2.393292513 0.053052385 2.590531479
14th Day -0.003914079 -1.068033435 0.049138305 2.637202943
15th Day -0.005091027 -1.025542605 0.044047278 2.685677785
16th Day -0.002804946 -0.471727879 0.041242333 2.725007987
17th Day -0.001502377 -0.269304445 0.039739956 3.186840388

18th Day -0.013449416 -2.272526489 0.02629054 2.49034637

19th Day -0.008632904 -1.738109719 0.017657636 2.233883785
20th Day -0.00625037 -1.110245764 0.011407266 1.405939814
21th Day -0.010790681 -1.834146816 0.000616585 0.112928156
22th Day -0.000616585 -0.112928156 -4.49944E-17 -2.869959313

Interpretation

From the above table, we can observe that there are significant abnormal returns delivered
by the IPO on the first trading day. The mean abnormal returns on the first trading day are
11.09%. From the second day, the abnormal returns are negative. At the end of the 22nd
trading day, it is observed that the cumulative abnormal returns are approximately equal to
zero.

The critical value of T at 95% confidence level is 2.009. It is observed that the calculated
T value for mean abnormal return is greater that the critical value for the first day only.
Therefore, only the first day Mean Abnormal Return are significant. The T statistic of the
mean cumulative abnormal returns is greater than the critical T Value for the first 19 trading
days. Therefore, only the first 19 days Mean Cumulative Abnormal Returns are significant.

Graphical Representation of Cumulative Abnormal Returns

 Mean Cumulative Abnormal Return
0.12

0.1

0.08

0.06

0.04

0.02

4th Day
5th Day
6th Day
7th Day
8th Day
9th Day
2nd Day
3rd Day

10th Day
11th Day
12th Day
13th Day
14th Day
15th Day
16th Day
17th Day
18th Day
19th Day
20th Day
21th Day
1st Day -0.02

Figure 3: Graphical Representation of Cumulative Abnormal

Returns

Interpretation

From the above graph, we can observe that the mean cumulative abnormal returns are
highest on the first trading day. The cumulative abnormal returns have been subsequently
falling. At the end of the month, the cumulative abnormal returns are approximately equal
to zero.

Determinants of IPO performance

Multiple regression analysis has been applied to examine the effect of issue price, over
subscription, profit after tax, post IPO promoters’ holdings and the market returns on the IPO
returns at the end of 22 trading days. several independent variables. The R square and the
adjusted R square generated by it indicates the proportion of variation in the dependent
variable explained by the independent variables
Findings
 Based on the daily IPO returns, the study found that the IPOs outperform the
markets on the first trading day (listing gain). The average stock return on
the first trading day were 13.52%, ranging from -23.15% to 82.16% with
standard deviation of 26.72%. For the similar 1st trading day, Index return on
average remains -0.0%, while it ranges from -20.31% to 6.25% with standard
deviation of 3.72%.
 It was found that the IPOs offered the highest returns on the third trading day. The
average returns were 14.52%, ranging from -19.22% to 117.55% with standard
deviation of 18.57%. For the similar 3rd. trading day, Index return on average is
0.09% and it ranges from -28.56% to 8.26% with standard deviation of 4.90%.
 The research found that there was a small fall in the IPO returns after the third
trading day. At the end of the month, the IPO returns was slightly lesser compared to
the returns on the listing day.
 It is found that the market adjusted short run performance starts falling from the 3rd.
trading day. This indicated that the returns of the IPO in comparison to the market
returns is slowly decreasing, which is due to the decrease in the abnormal returns.
From the ‘t’ test, it is found that the market adjusted short run performance is
significant.
 The wealth model signified that the IPOs have performed better than market during
the first month from listing.
 It is found that the abnormal returns are highest on the first trading day. The
cumulative abnormal returns have been subsequently falling. At the end of the month,
the cumulative abnormal returns are approximately equal to zero
 It is found that the critical value of ‘t’ at 95% confidence level is 2.009. It is
observed that the calculated ‘t’ value for mean abnormal return is greater that the
critical value for the first day only. Therefore, only the first day Mean Abnormal
 Return are significant.
 The T statistic of the mean cumulative abnormal returns is greater than the critical T
Value for the first 19 trading days. Therefore, only the first 19 days Mean
Cumulative Abnormal Returns are significant.
 From the results of the regression analysis, it is found that only over subscription
impacts the IPO performance. For 1 unit increase in the over subscription causes
0.102-unit increase in the IPO returns. The other factors namely, issue price, Profit
after Tax, market returns and promoters holdings do not influence IPO returns.

CHAPTER 5: CONCLUSION AND SUGESSTIONS

5.1 CONCLUSION

From the study we can conclude that an initial public offering is a great opportunity for
investors to earn good profits in the short run. The investors also use this as a speculative
opportunity and sell off their shares on the listing day. The abnormal returns are also
highest on the listing day after which the gradually decrease. One of the major factors an
investor should consider while applying for an IPO is the over subscription as it has a
significant impact on the performance of the Pushover, the positive return documented on the
listing day is not sustained thereafter. The short run post-listing performance i.e., three-months
return computed from the closing price on listing day turns negative and significant. This is
consistent with Garg et al. (2008) who computed long run underpricing using offer price/first
day opening price to closing price on 90th and 120th trading day and f in that Indian IPOs are
overpriced in the long run. As far as the medium run performance is concerned (except for
fixed-price IPOs), the one-year (250 days) performance has been negative and significant which
is consistent with the findings of Aggarwal and Rivoli (1990), and McGuiness (1993) for the
same period. The one-year return for f fixed-price IPOs is not significant (though negative). The
three-year (750 days) and five-year (1,250 days) returns have been negative and significant
except for fixed-price IPOs which is positive and significant for these two periods. Again, such
negative return documented over the medium and long run is consistent with various
international findings i.e., Aggarwal and Rivoli (1990), Aggarwal et al. (1993), Juszkiewicz et
al. (2005), and Álvarez and González (2005), to mention a few. However, the notable exceptions
are Ahmad-Saluki et al. (2007) who reported significant positive returns for Malaysian IPOs up
to three years post-listing and Madhusudan and Thiripalraju who found that the long run
performance of IPOs in India has also been positive and high. In recent years, the IPO market in
India has witnessed many landmark developments like the introduction of ASBA (Application
Supported by Blocked Amount), grading of IPOs, launching of IPO Index, introduction of
Anchor Investors, introduction of Safety Net for IPOs, derivatives, circuit filter, price–volume
tracking by the SEBI to detect price manipulations. Therefore, future studies on IPOs may link
to these developments. For example, the grading of IPOs which is based on the fundamentals of
the issuing company may be correlated to the initial as well as long run performance of the IPOs.
The listing day and long run performance of IPOs that have gone public after the launching of
S&P BSE IPO index in 2009 may be tested against the performance of this IPO index. Also, the
return from this index (which includes IPO stocks for up to two years from listing) may be tested
against the returns from a portfolio consisting of seasoned securities to see whether IPOs offer
better investment opportunities than seasoned securities to the investors. The important
implications of our study are that like in many other capital markets, companies in India time
their issues. They come out with their IPOs during the time when the market sentiment is high.
In the long run, the same IPOs which had initially offered positive return, underperform.
Considering the existence of such windows of opportunity for issuers, policy-makers must come
out with measures to protect the long run interest of investors. The retail investors while
investing in IPO shares should consider the fundamentals and prospects of IPO companies rather
than the prevailing market sentiments. Otherwise, they will incur loss due to the
underperformance of IPOs in the long run.

5.2 SUGGESTIONS

The scope for further research:

This study is focused on the short run performance of IPOs. A study can be
conducted on the performance of IPOs in the long run and the factors that influence
the long run performance.
A study can be conducted to understand the factors which influence the customers to
invest in an IPO and the various factors that are considered while evaluating the IPO.
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