TOPIC

A Project Submitted to
University of Mumbai for partial completion of the degree of
BACHELORS OF COMMERCE (ACCOUNTING AND
FINANCE)

Semester - III
Under the Faculty of Commerce
By
Full name of Student

ROLL NO.: -
Under the Guidance of

MS. TRUSHA V. SHINDE

Ramji Assar Vidyalaya Wadi Trust’s

Laxmichand Golwala College of Commerce and Economics,
M.G. Road, Ghatkopar (East),
Mumbai - 400077

February, 2023
 Ramji Assar Vidyalaya Wadi Trust’s
Laxmichand Golwala College of Commerce and Economics,
M.G. Road, Ghatkopar (East),
Mumbai - 400077

CERTIFICATE

This is to certify that ______________ has worked and duly completed her Project
Work for the degree of Bachelor of Commerce (Accounting and Finance) under the
Faculty of Commerce in the subject of ACCOUNTANCY and her project is
entitled, “XXXXXXXXXXXXX” 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 her own work and facts reported by his/ her personal findings and
investigations.

Name of the Guide

Ms. Trusha V. Shinde

Date of submission:
 DECLARATION BY LEARNER

I the undersigned NAME OF THE STUDENT here by, declare that the work
embodied in this project work titled “ XXXXXXXXXXXXXXXX ”forms
my own contribution to the research work carried out under the guidance of Ms.
Trusha V. Shinde 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.

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

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

NAME OF THE STUDENT

(NAME OF THE STUDENT)

Certified by

NAME OF THE GUIDE

Ms. Trusha V. Shinde
 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 the chance
to do this project.

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

I would also like to express my sincere gratitude towards my project guide Ms.
Trusha V. Shinde 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.
 INDEX

CHAPTER NO. TITLE OF THE CHAPTER PAGE NO.

1 Introduction

2 Literature Review

3 Research Methodology
● Objective of Study
● Scope of Study
● Limitation of Study
● Signification of the Study
● Data Collection, Analysis,
Interpretation

4 Conclusions and Suggestions

5 Annexure / Bibliography
 Introduction
A financial system is a system that allows the exchange of funds between
lenders, investorsand borrowers. It promotes savings and investment in the economy
and enlarges the resources flowing into the financial assets which are more productive
than the physical assets.
A financial market is a market in which people trade financial securities,
commodities and other fungible items of value at low transaction costs and at prices
that reflective supply and demand. Financial market has significant role to play in this
context because it is a part of the financial system. It provides the financial resources
needed for the long term and sustainable development of different sectors of the
economy.
Investors have access to a large number of financial markets and exchanges
representing a vast array of financial products. Some of these markets have always
been open to private investors; others remind the exclusive domain of major
international banks and financial professional until the very end of the twentieth
century. Financial market is divided into money market and capital market.
Primary market facilitate securities to the investors and assist the corporate
sector in arranging funds in the form of public issue, offer for sale, private placement
and right issue. Public issue can be further classified into initial public offer (IPOs)
and further public offer (FPO). An initial public offering (IPO) is a company’s first
offering of equity to the public. IPO is a major source of capital for firms.
IPO’s are important milestone in any company’s growth as it progresses from
being a start- up/private limited company to public limited. Successful IPO can
generate tremendous amount of wealth for company promoters as well as pre IPO
investors. Historically a majority of the IPO’s were under-priced with an aim to issue
abnormal profits on the listing thus attracting more investors to subscribe to their
stocks. Empirical studies have established the above in efficient markets.
Numerous research papers have studied the anomaly of underpricing and
abnormal returns yet they are insufficient to demystify the above. Hence this study
will analyse the short term and the long term performance of the Initial Public
Offerings and help the investors take an informed decision while investing for the
same.
 Stock market is one of the most lucrative investment avenues in India. People
invest in the stock market because it has the potential to generate handsome returns in
a small span of time. Investors trade in the stock market either through the primary
market or through the secondary market. The primary market involves investing in the
stock market by applying to the Initial Public Offering (IPO) of a company while the
secondary market involves purchasing and selling shares directly from the stock
exchange. This article, will walk you through the details of what is IPO, its concept
and everything related to it.

Definition Public Offering / IPO :

IPO stands for Initial Public Offering. It is the process by which a private
company can go public by selling its shares to the public. The company bringing it
can be a new company or an old company. With Initial Public Offering, the company
gets its shares listed on the stock exchange.
Companies float it to raise funds by issuing new shares to the public.
However, the existing shareholders can also sell their holding to the public without
the issue of fresh capital.
Let us now learn about IPO details and understand the process through which
the company brings it.

Process of IPO :
The first thing that a company does before bringing an IPO is to hire a
merchant banker to handle the process. An underwriting agreement is entered
between the merchant banker and the company to work out the various financial
details of the IPO. The merchant banker underwrites the shares of the company by
buying all or some part of the shares and sells it to the public. Later, both the parties
file registration statement with the Securities and Exchange Board of India (SEBI)
along with the underwriting agreement and necessary documents. SEBI then goes
through the details of the statement submitted to it and if the information submitted is
found correct, it allots a date to the company to announce its Initial Public Offering.
 The initial listing fee of the company is Rs. 50,000 and depending upon the
paid-up share capital of the company the subsequent annual listing fee is determined.
The company determines the price band of the shares and the merchant banker offers
its shares to the public. Many roadshows and awareness advertisements are done to
generate interest among the public to subscribe to the shares of the company.

Reasons for floating an IPO :

Let us now understand the various reasons why a company floats an IPO.

● The main purpose of floating it is to raise money. Companies are in constant

need of funds to expand, upgrade or repay their loans. Depending upon the
requirements, a company floats it to raise funds.
● Through an Initial Public Offering, the shares of the company list on the stock
exchange. This increases the liquidity of stocks which promotes various employee
stock ownership plans.
● By going public, the credibility and brand value of the company increases. The
name of the company being flashed on the stock exchanges is a matter of pride for the
company.
● When the demand in the market is more, the company can issue higher
number of stocks. This opens the door for the company for mergers and acquisitions
as the stocks can be issued in exchange for the deal.

The above-mentioned are the reasons why a company floats an initial public
offering, let us know about the various checks you must do before investing in a
company’s offerings.

Things To Do Before Investing in an IPO :

● Check Company’s Background

Since the company is coming up with its Initial Public Offering, often there won't be
any historical data available to check your decision about investing in the company.
However, the company floating it does provide a prospectus. You must carefully
scrutinise and read all the details provided in it before arriving at any decision about
investing in the company.
● Check the Underwriters
The success of the IPO depends upon the big broker who is endorsing the new issue.
If the underwriters are well established then you may look at investing in such
offerings.

● Lock-in Period
Before applying for an IPO, you must read the contractual obligation of the
company’s executives and investors about the lock-in period of their shareholding.
Often, the prices of shares drop drastically after the company completes the offerings
as the shareholders of the company sell their shares in the open market once the lock-
in period ends.
The above points will help you in taking the right decision about investing in
an IPO. Let us now read about the points that you must be aware of before investing
in them.

Points to Remember Before Investing in an IPO :

● When you invest in an IPO, you invest in the business of the company. The
long term returns on the shares allotted to you will depend on the fortune and
performance of the company.
● The stock market is subject to volatility. Investing in Initial Public Offering
can reward you with unbelievably high returns but at the same time, they also have
the potential to erode the invested capital so be vigilant while investing.
● While applying for it, you must be aware of the fact that the company is not
liable to public investors to reimburse the capital.
Therefore, while investing, you must be aware of the potential risks and rewards. Let
us now read about the advantages and disadvantages of an IPO.

Need for the study:

IPO’s are often looked upon as a speculative opportunity to earn abnormal profits
onthe listing day. Companies which decide to go public face the added pressure of the
market which may cause them to focus more on short-term results rather than long-
term growth. the actions of the company's management also become increasingly
scrutinized as investors constantly look for rising profits. This may lead management
to perform somewhat questionable practices in order to boost earnings.
Before deciding whether or not to go public, companies must evaluate all of the
potential advantages and disadvantages that will arise and fix prices that are in the
best interest
of the company and investors. This study helps the investor to decide the suitable
investment strategy to get maximized returns.

Advantages of an IPO :

●The biggest advantage of an IPO is that it fulfills the financial needs of the company.
It is an easy option to acquire capital for its growth and fund a massive expansion.
With it, the company can invest in infrastructure and acquire new equipment. It also
helps in paying off its debts.
● With Initial Public Offering, the shares of the companies are available for
mergers and acquisitions. Also if the company wants to acquire any other company,
the shares of the company can act as a means of payment.
● It attracts talented employees because the company can offer them many stock
options and hire them at relatively lower wages.
● The owners of the company get the reward of their hard work by listing their
company on the stock exchange. In the IPO, they can get for themselves a certain
percentage of shares in the company and enjoy the prestige of being a listed company.
When a company lists its securities on a public exchange, the money paid by the
investing public for the newly-issued shares goes directly to the company (primary
offering) as well as to any early private investors who opt to sell all or a portion of
their holdings (secondary offerings) as part of the larger IPO. An IPO, therefore,
allows a company to tap into a wide pool of potential investors to provide itself with
capital for future growth, repayment of debt, or working capital. A company selling
common shares is never required to repay the capital to its public investors. Those
investors must endure the unpredictable nature of the open market to price and trade
their shares. After the IPO, when shares are trade market, money passes between
public investors. For early private investors who choose to sell shares as part of the
IPO process, the IPO represents an opportunity to monetize their investment. After the
IPO, once shares are traded in the open market, investors holding large blocks of
shares can either sell those shares piecemeal in the open market or sell a large block
of shares directly to the public, at a fixed price, through a secondary market offering.
This type of offering is not dilutive since no new shares are being created.

Once a company is listed, it is able to issue additional common shares in a number of

different ways, one of which is the follow-on offering. This method provides capital
for various corporate purposes through the issuance of equity (see stock dilution)
without incurring any debt. This ability to quickly raise potentially large amounts of
capital from the marketplace is a key reason many companies seek to go public.

An IPO accords several benefits to the previously private company:

Enlarging and diversifying equity base Enabling cheaper access to capital

Increasing exposure, prestige, and public image

Attracting and retaining better management and employees through liquid equity
participation
Facilitating acquisitions (potentially in return for shares of stock)

Creating multiple financing opportunities: equity, convertible debt, cheaper bank

loans, etc.
Disadvantages of an IPO :

● IPO is a long process and it requires a lot of legal compliances. This distracts
the company from its core business and can dent the company's profits. Also,
companies are required to hire merchant bankers to ease the process of IPO and in
return, they charge hefty fees.

● In many cases, the business owners are not able to take as many shares for
themselves. Many a times they may not be able to sell their shares in the market due
to the lock-in period. Therefore, the business owners are sometimes at a loss when
they float an IPO.

● Securities and Exchange Board of India (SEBI) conducts many checks before
a company floats an Initial Public Offering. This process can be time consuming and
requires huge disclosures. Besides, the promoters are required to submit details that
may be used by competition and can hamper their business.

Initial public offering (IPO) or stock market launch is a type of public offering
in which shares of a company are sold to institutional investors[1] and usually also
retail (individual) investors.[2] An IPO is underwritten by one or more investment
banks, who also arrange for the shares to be listed on one or more stock exchanges.
Through this process, colloquially known as floating, or going public, a privately held
company is transformed into a public company. Initial public offerings can be used to
raise new equity capital for companies, to monetize the investments of private
shareholders such as company founders or private equity investors, and to enable easy
trading of existing holdings or future capital raising by becoming publicly traded.

After the IPO, shares are traded freely in the open market at what is known as the free
float. Stock exchanges stipulate a minimum free float both in absolute terms (the total
value as determined by the share price multiplied by the number of shares sold to the
public) and as a proportion of the total share capital (i.e., the number of shares sold to
the public divided by the total shares outstanding). Although IPO offers many
benefits, there are also significant costs involved, chiefly those associated with the
process such as banking and legal fees, and the ongoing requirement to disclose
important and sometimes sensitive information.
Details of the proposed offering are disclosed to potential purchasers in the form of a
lengthy document known as a prospectus. Most companies undertake an IPO with the
assistance of an investment banking firm acting in the capacity of an underwriter.
Underwriters provide several services, including help with correctly assessing the
value of shares (share price) and establishing a public market for shares (initial sale).
Alternative methods such as the Dutch auction have also been explored and applied
for several IPOs.

There are several disadvantages to completing an initial public offering:

Significant legal, accounting and marketing costs, many of which are ongoing
Requirement to disclose financial and business information Meaningful time, effort
and attention required of management Risk that required funding will not be raised
Public dissemination of information which may be useful to competitors, suppliers
and customers.
Loss of control and stronger agency problems due to new shareholders
Increased risk of litigation, including private securities class actions and shareholder
derivative actions.

History

The earliest form of a company which issued public shares was the case of the
publicani during the Roman Republic. Like modern joint-stock companies, the
publicani were legal bodies independent of their members whose ownership was
divided into shares, or partes. There is evidence that these shares were sold to public
investors and traded in a type of over-the-counter market in the Forum, near the
Temple of Castor and Pollux. The shares fluctuated in value, encouraging the activity
of speculators, or quaestors. Mere evidence remains of the prices for which partes
were sold, the nature of initial public offerings, or a description of stock market
behaviour. Publicani lost favour with the fall of the Republic and the rise of the
Empire.
In the early modern period, the Dutch were financial innovators who helped lay the
foundations of modern financial systems.[12][13] 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. The Dutch East India Company (VOC) became the
first company in history to issue bonds and shares of stock to the general public. 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. While the
Italian city- states produced the first transferable government bonds, they did not
develop the other ingredient necessary to produce a fully fledged capital market:
corporate shareholders. As Edward Stringham (2015) notes, "companies with
transferable shares date back to classical Rome, but these were usually not enduring
endeavors and no considerable secondary market existed (Neal, 1997, p. 61)."
In the United States, the first IPO was the public offering of Bank of North America
around 1783.
The term initial public offering (IPO) has been a buzzword on Wall Street and
among investors for decades. The Dutch are credited with conducting the first modern
IPO by offering shares of the Dutch East India Company to the general public. Since
then, IPOs have been used as a way for companies to raise capital from public
investors through the issuance of public share ownership.
Through the years, IPOs have been known for uptrends and downtrends in
issuance. Individual sectors also experience uptrends and downtrends in issuance due
to innovation and various other economic factors. Tech IPOs multiplied at the height
of the dot-com boom as startups without revenues rushed to list themselves on the
stock market.
The 2008 financial crisis resulted in a year with the least number of IPOs.
After the recession following the 2008 financial crisis, IPOs ground to a halt, and for
some years after, new listings were rare. More recently, much of the IPO buzz has
moved to a focus on so-called unicorns; startup companies that have reached private
valuations of more than $1 billion. Investors and the media heavily speculate on these
companies and their decision to go public via an IPO or stay private.
Underwriters and the Initial Public Offering (IPO) Process An IPO
comprehensively consists of two parts. The first is the pre-marketing phase of the
offering, while the second is the initial public offering itself. When a company is
interested in an IPO, it will advertise to underwriters by soliciting private bids or it
can also make a public statement to generate interest.
The underwriters lead the IPO process and are chosen by the company. A
company may choose one or several underwriters to manage different parts of the IPO
process collaboratively. The underwriters are involved in every aspect of the IPO due
diligence, document preparation, filing, marketing, and issuance.

Steps to an IPO include the following:

1. Underwriters present proposals and valuations discussing their services, the
best type of security to issue, offering price, amount of shares, and estimated
time frame for the market offering.
2. The company chooses its underwriters and formally agrees to underwriting
terms through an underwriting agreement.
3. IPO teams are formed comprising underwriters, lawyers, certified public
accountants (CPAs), and Securities and Exchange Commission (SEC) experts.
4. Information regarding the company is compiled for required IPO
documentation.
a. The S-1 Registration Statement is the primary IPO filing document. It has two
parts: The prospectus and the privately held filing information. The S-1
includes preliminary information about the expected date of the filing. It will
be revised often throughout the pre-IPO process. The included prospectus is
also revised continuously.
5. Marketing materials are created for pre-marketing of the new stock issuance.
a. Underwriters and executives market the share issuance to estimate demand
and establish a final offering price. Underwriters can make revisions to their
financial analysis throughout the marketing process. This can include
changing the IPO price or issuance date as they see fit.
b. Companies take the necessary steps to meet specific public share offering
requirements. Companies must adhere to both exchange listing requirements
and SEC requirements for public companies.
6. Form a board of directors.
7. Ensure processes for reporting auditable financial and accounting information
every quarter.
8. The company issues its shares on an IPO date.
a. Capital from the primary issuance to shareholders is received as cash and
recorded as stockholders' equity on the balance sheet. Subsequently, the
balance sheet share value becomes dependent on the company’s stockholders'
equity per share valuation comprehensively.
9. Some post-IPO provisions may be instituted.
a. Underwriters may have a specified time frame to buy an additional amount of
shares after the initial public offering (IPO) date.
b. Certain investors may be subject to quiet periods. Investing in an Initial Public
Offering (IPO)

When a company decides to raise money via an IPO it is only after careful
consideration and analysis that this particular exit strategy will maximize the returns
of early investors and raise the most capital for the business. Therefore, when the IPO
decision is reached, the prospects for future growth are likely to be high, and many
public investors will line up to get their hands on some shares for the first time. IPOs
are usually discounted to ensure sales, which makes them even more attractive,
especially when they generate a lot of buyers from the primary issuance.
Initially, the price of the IPO is usually set by the underwriters through their
pre- marketing process. At its core, the IPO price is based on the valuation of the
company using fundamental techniques. The most common technique used is
discounted cash flow, which is the net present value of the company’s expected future
cash flows.
Underwriters and interested investors look at this value on a per-share basis.
Other methods that may be used for setting the price include equity value, enterprise
value, comparable firm adjustments, and more. The underwriters do factor in demand
but they also typically discount the price to ensure success on the IPO day.
It can be quite hard to analyze the fundamentals and technicals of an IPO
issuance. Investors will watch news headlines but the main source for information
should be the prospectus, which is available as soon as the company files its S-1
Registration. The prospectus provides a lot of useful information. Investors should
pay special attention to the management team and their commentary as well as the
quality of the underwriters and the specifics of the deal. Successful IPOs will typically
be supported by big investment banks that have the ability to promote a new issue
well.
Overall, the road to an IPO is a very long one. As such, public investors
building interest can follow developing headlines and other information along the way
to help supplement their assessment of the best and potential offering price.
The pre-marketing process typically includes demand from large private
accredited investors and institutional investors, which heavily influence the IPO’s
trading on its opening day. Investors in the public don’t become involved until the
final offering day. All investors can participate but individual investors specifically
must have trading access in place. The most common way for an individual investor
to get shares is to have an account with a brokerage platform that itself has received
an allocation and wishes to share it with its clients.

RESEARCH METHODOLOGY
Research methodology carries the information regarding the project and what all it
includes and at the same time it shows from the introduction to the conclusion of the
study made by person on the particular topic. The researcher has collected all the
information by help of research methodology tools i.e. Primary Data and Secondary
Data.

PRIMARY DATA
The primary data collected by the researcher is by “INFORMAL
INTERVIEW METHOD”. So it helps the researcher to collect so much of data for
project work.

SECONDARY DATA
The books referred by researcher. Internet surfed by the Researcher. Both of this as
specified in bibliography.
The short term returns are calculated for the listing day using the traditional method
of calculating returns , i.e. The difference between the closing price on the first day of
trading and offer price and divided by the offer price. The result figure was multiple
by 100 to set the figure
in percentage.

To measure the raw return of IPOs, whether an investor gained or lost by buying the
share during the IPO on offer date and selling at the prevailing price on the opening
day the following formula has been used
Ri = p1-p0 * 100 …………..(1) p
Where

Ri = subscribers initial return (hereafter raw return) P1 = closing price on the first day
of trading
P0 = offer price

If Ri is more than zero, one can interpret that short term returns were positive and the
issues were under-priced, if Ri is less than zero, one can interpret that short term
returns were negative and the issues were overpriced, and if Ri was zero, it means
there were no returns Market adjusted excess returns

(MAERs):

The returns measured by eq. (i) would be valid in a perfect market, wherethere is no
time gap between the application closing date and first day of trading but in India this
time gap is quite long. During this period, a major change could occur in market
conditions.
As there was a lag between offer date and listing date, the price observed in the
market onthe listing day may be different from the offer price as a result of the overall
market
movements, the researcher also computed market adjusted returns of the IPOs for the
sameperiod. Therefore, the initial return estimated by eq. (i) is adjusted for market
return as under;
MAER= p1-p0 – m1-m0 * 100
p0 m0 Where
P1 = closing price on the first day of trading P0 = offer price
M1 = market index on the first day of trading M0 = market index on the offer date
MAERit = market adjusted excess return Annualizing factor

Since for different companies, the time taken to list varies so in order tonormalize it
annualized return has been taken into consideration. Annualized return has been
calculated by multiplying raw return and MAER with annualizing factor. Annualizing
factor has been computed as under :

Annualizing factor = 360 After market trading lead time

Financial technique used to measure long term performance (including initial returns)
of IPOs :
To evaluate long-term performance of Indian IPOs, long-term returns (including
initial returns) has been measured. These figures were compared with the market
index (NSE-nifty) in order to calculate long term MAERs. The following formula has
been applied for this purpose
Rit = [{Pit/Pio}-1] x 100 Rmt = [{Nmt/Nmo}-1] x 100 MAERit = Rit - Rmt Where,
Pit = price of the share of firm i at time tPio = offer price of share of the ith

firmNmt = nifty at time t Nmo = nifty on the offer day

Rit = raw return of firm i at time t

Rmt = return on market index during period t MAERit = market adjusted excess
returns
As mentioned earlier, annualised long run returns (including initial returns) have
been calculated by taking annualized factor.
Financial technique used to measure long term performance (excluding initial returns)
of IPOs:
To calculate the long term performance (excluding initial returns) of Indian IPOs,
measured
by the difference between the closing price of the first day of trading and price
occurring at different time intervals i.e. At the end of one month, three months, six
months and one year, two years, three years after listing. These figures were also
compared with market index (NSE- nifty)

in order to calculate long term MAERs. In this case, annualised long run returns
(excluding initial returns) have not been calculated because there was no listing delay
time in this case.

OBJECTIVE OF STUDY

Objective is the one of the important part of any subject/project.

Following are the objectives of the study of “A STUDY ON INITIAL PUBLIC
OFFER (IPO) IN INDIAN MARKET”

➢ To analyze the pattern of IPOs under pricing across time, issue size and
market segment.
➢ To identify factors that affects short-run under pricing of IPOs in India.
➢ To examine the relationship between mispricing of IPOs managed /co-
managed by investment banks vis-a -vis change in their market share during a
given period.
➢ To identify the factors that influences the performance of IPOs in long run.
➢ To find out the performance of Indian IPOs for short period, i.e. from the date
of offer to thepublic to the date of their first day of trading after listing on
stock exchange.
➢ To measure the long term performance of Indian IPOs including and
excluding initial returns.
LITERATURE

REVIEW
The published work relating to the topic is reviewed by the Researcher. The relevant
literature is reviewed on the basis of Books, Periodicals, News Papers and Websites.

The detailed review is given below:-

Arwah Arjun Madan (2003), in his article ‘Investments in IPOs in the Indian Capital
Market’, published in Bima quest conclude that in the long run (five-year after
listing), there is a drastic fall in the return on IPOs returns; returns are found to be
negative from the second to the fifth year of listing.

Anand Adhikari (2010), “New Listings – Pied Pipers of Primary Market” published in
Business Today point out that companies with unique business models got listed in
the year 2009-10 and made their investors rich.

AtulMehra (2010) “IPO Boom”, Business Today, point out those promoters are in
hurry to IPO because they do not want to be left out.

Aggarwal, R., P. Conroy (2000), “Price Discovery in Initial Public Offerings and the
Role of the Lead Underwriter”, Journal of Finance, conclude that the price discovery
process of initial public offerings (IPOs) using a unique dataset. The first quote
entered by the lead underwriter in the five-minute preopening window explains a
large proportion of initial returns even for hot IPOs. Significant learning and price
discovery continues to take place during these five minutes with hundreds of quotes
being entered. The lead underwriter observes the quoting behaviour of other market
makers, particularly the wholesalers, and accordingly revises his own quotes. There
is a strong positive relationship between initial returns and the time of day when
trading
starts in an IPO.
Ansari Abdul Aziz and Jane Samiran (2009), in their article “Stock Price Decision of
Indian Investors”, published in The Indian Journal of Commerce concluded that
rational traders are using both fundamental analysis and technical analysis as stock
selection tools, which does not support the view of finance theorist.

Bhupal Sing (2009), in his article “Changing Contours of Capital flows to India,
published in Economic and Political Weekly, pointed out that the most striking
feature of change in the cross-border capital flows to

emerging market economies during the 1990s is the emergence of portfolio equity
inflows. It was further stated that portfolio investment in India started in 1993 by way
of the equity and debt investment by FIIs in the Indian Stock Markets and Global
offerings of ADRs and
GDRs by the Indian Corporate. The FIIs turnover accounts for a significant share of
the cash segment turnover of stocks. The stocks have potential for large volatility in
the asset prices.

Chowdhry, B., V. Nanda, in their article “Stabilization, Syndication, and Pricing of

IPOs”, published in Journal of Financial and Quantitative Analysis point out that in
the after-market trading of an IPO, the underwriting syndicate, by standing ready to
buy back shares at the offer price (“price stabilization”), compensates uninformed
investors ex post for the adverse selection cost they face in bidding for IPOs. This
dominates ex ante compensation by under pricing. The reason is that stabilization
exploits ex post information about investor demand whereas under pricing must be
based on ex ante information. However, liquidity and syndication costs constrain the
use of stabilization which, in equilibrium, generates some under pricing as well. We
develop a model that formalizes this intuition and generates several empirical
implications.

Dhananjay Rakshit (2008), in his article “Capital Market in India and Abroad –A
Comparative Analysis”, published in Indian Journal of
Accounting, December, concluded that Indian Market is being continuously preferred
by the foreign investors and the only cause of concern is its high analyzed volatility.

DhruvGogoi (2010), in his article “Big, Bold and Beautiful?” published in the
Business world, pointed out that Coal India’s IPO has raised great expectations
among investors. India could herald global IPO recovery, published by FE Bureau, in
The Financial Express according to the Eanst & Young, Institutional Investor IPO
survey, 2009, IPOs in these emerging markets would show recovery from the
economic downturn by the year end. Of the over 300 institutional investors surveyed,
as much as 57% believed India and Brazil are the most likely to lead the recovery, in
terms of new forms entering the local capital market by the end of 2009. IPO activity
in the last two quarters confirms that markets are making an early recovery, notably in
emerging economies of India, China and Brazil. A stable government and booming
sensex has led to the revival of IPO activity.

Jagannadham Thunuguntla (2011) in his article “IPOs: More Misses Than Hits”,
published in the Dalal Street Investment pointed out that, the age old philosophy of
understanding the company and sticking to the basics should be given due respect. Let
the buyer be made aware that the investor has to put a price tag to his hard earned
money. There is a need for investor education and awareness and the connections
should be on a stable income than a becoming rich overnight.

Jain, B. A., O. Kini (1994), in their article “The Post-Issue Operating

Performance of IPO Firms”, published in Journal of Finance point out that the change
in operating performance of firms as they make the transition from private to public
ownership. A significant decline in operating performance subsequent to the initial
public offering (IPO) is found. Additionally, there is a significant positive relation
between post- IPO operating performance and equity retention by the original
entrepreneurs but no relation between post-IPO operating performance and the level
of initial under pricing
Jain, B. A., O. Kini (1995) in their article “Venture Capitalist Participation and the
Post-Issue Operating Performance of IPO Firms”, published in Managerial Decision
Economics mention that by comparing the post-issue operating performance of
venture capitalist- backed IPOs with a matched sample of non-venture capitalist-
backed IPOs. We find that venture capitalist-backed IPO firms exhibit relatively
superior post-issue operating performance compared to non- venture capital backed
IPO firms. Further, the market appears to recognize the value of monitoring by
venture capitalists as reflected in the higher valuations at the time of the IPO. Finally,
we find that proxies for the quality of venture capitalist monitoring are positively
related to post-issue operating performance.

James H. Lorie, Peter Dodd and Mary Hamilton, Kimpton (1997), in their book, “The
Stock Market – Theories and Evidence”, IFCAI Publication, Hyderabad, pointed out
that the value of a corporations stock is determined by expectations regarding future
earnings of the corporation and by the rate at which those earnings are discounted. In
a world of no uncertainty, all securities would offer a certain return equal to the real
rate of return in capital.

Jay R. Ritter (1998) in their article “Initial Public Offerings”, published in the
Contemporary Finance Digest summaries that Companies going public, especially
young companies, face a market that is subject to sharp swings in valuations. Pricing
deals can be difficult, even in stable market conditions, because insiders presumably
have more information than potential outside investors. To deal with these potential
problems, market participants and regulators insist on the disclosure of material
information.

Jignesh B. Shah and SmitaVarodkar in their article “Capital Market: Trends in India
and abroad – impact of IPO Scam an Indian Capital Market”, published in the
Souvenir, All India Accounting Conference, November, S. D. School of Commerce,
Gujarat University, Ahmadabad, concluded that the recent IPO Scam indicates that
even a highly automated system will not prevent malpractices. But steps should be
taken by SEBI to restrict such IPO Scam by applying know your customer (KYC) and
unique identification number to market players and investors.
K. C. John Sasi Kumar in their article “Indian Primary Market – A Review”,
published in International Journal of Contemporary Business Studies, concluded that
the performance of IPO’s has been cheering to the investors. Retail investors can go
for the IPO market for safe and secured investment. Even though the recent economic
development has slowed the process of IPO issue we could expect speedy recovery of
both the economy and IPO activities.

Madhumita Gosh, Vice President (PM & Research) Unicon Financial

Intermediaries in her article “IPOs: More Misses Than Hits”, published in the Dalal
Street Investment Journal, pointed out that, in the recent past a majority of IPOs
haven’t performed well because valuation wise they are priced more than the
fundamentals. This has happened mainly due to the greed of promoters, who want to
price their issue invariably at a much higher price. In such cases merchant bankers’
role also comes under scanner as they usually don’t give proper advice to the
promoters in the wake of losing the business.

Mahesh Nayak, (2010) in his article, ‘Of Primary Concerns’, published in the
Businessworld, point out that, IPOs have grown in size and

entered their own brave new world. Further he states that raising money in India’s
booming economy cannot be a onetime affair; if a company does not maintain a good
relationships with investors and rewards them well it may not able to go back to them
when it want to raise money later.

M. S. Narasimhan and L. V. Ramana in their article “Pricing of Initial Public

Offerings: Indian Experience, with equity issues”, published in Portfolio
Management, Research Series in Applied Finance, the ICFAI Journal of Applied
Finance concluded that:
a) Homogeneity in the degree of under pricing across time periods is observed.
b) The extent to which premium issues are underpriced is greater than in the case
of the first trading day.
c) Under pricing is not related to the time interval between the offer day and the
first trading day. They further concluded that companies offering their stock at
a premium prefer to play it safe in spite of the freedom granted to them
operating at suboptimum levels to derive a satisfaction of the issue being fully
subscribed may be a major factor in determining the pricing process.

Minakshi Malhotra (1997), in her article, “Free Pricing of Equity :- The Indian
Experience”, Published in the Journal of Accounting and Finance Spring, 1997
pointed out that the period immediately after the introduction of free pricing
witnessed charging of very high premium over par values and as compared to what
would have been suggested by CCI. The majority of the issues failed to qualify the
market test of performance as is revealed by the price behaviour of premium issues
after a lapse of six months.

Nitish Ranjan& T P Madhusoodanan in their article “IPO under pricing, issue

mechanism and size” published in the Social Science Research Network E Library
pointed out that IPOs in India have yielded abnormal returns in the very short term.
The abnormal performance is also indicative of pricing errors in the issue process.
The issues are under-priced whether the mechanism is fixed price or book building;
we find that small size issues are more likely to be under priced than larger issues. We
formulate a model with homogenous investor beliefs to show that size is an important
factor and that the under pricing is inversely proportional to size. This mechanism
also suggests that IPOs will always be underpriced. However, in the presence of
informed investors, a signaling equilibrium doesn’t exist and optimally high value
firms don’t signal their value as aggressively as the lower value firms.
Despite such aggressiveness, the lower value firm ends up leaving money on the
table, while the high value firm issue doesn’t leave money

on the table. The model can explain hot (cold) markets by increased (decreased)
sensitivity of the uninformed investor to the signaling by the firm. The hot/cold
markets also influence the probability of a high/low value firm coming up with an
IPO as imputed by the wider market.
Prithvi Haldea, CMD, Prime Database in his article “IPOs: More Misses Than Hits”,
published in the Dalal Street Investment Journal pointed out that, IPOs in India have
become an instrument of trading rather than investment and a majority of people are
parking their money into such IPOs just to make a fast buck at the time of listing. So,
in my view, they are not the investors who are investing money as per the valuations
of the company by taking a long term horizon.

Rajendra Kanoongu, in his article “IPOs: More Misses Than Hits”, published in the
Dalal Street Investment Journal, stated that, investors should wait for the project
implementation of the company to take place and then take a real value of stock. If
they are looking for listing then they better not to apply in the IPO and rather buy
from the secondary market. They also mentioned major reasons for the
underperformance of new issues; one is the uncertain market trend, wherein investors
are not in a position to take a call whether the pricing is right or wrong. Secondly, the
investors themselves, who are waiting for the listing gain and want to exit on the first
day. And thirdly, to a certain extent there were ambitious valuations and though I will
not say it is very high but were optimistic.

Rajiv Bhuva in his article “IPO BOOM - Fever Pitch” published in Business Today;
pointed put that the year 2010 becomes record year for IPOs because so many
companies comes with huge issue size for the investors. Reena Agarwal in her article
“Allocation of initial public offerings and flipping activity”, published in Journal of
Financial Economics concluded that, there is a general perception that the large
trading volume in initial public offerings is mostly due to “flippers” that are allocated
shares in the offering and immediately resell them. On average, however, flipping
accounts for only 19% of trading volume and 15% of shares offered during the first
two days of trading. Institutions do more flipping than retail customers and hot IPOs
are flipped much more than cold IPOs. Institutions do not quickly flip cold IPOs to
take advantage of price support activities by the underwriter. Explicit penalty bids are
rarely assessed against flippers.

Saurabh Ghosh (2004) in his article “Boom and Slump Periods in the Indian IPO
Market”, published in the Reserve Bank of India Occasional Papers concluded that
the Indian IPO market experienced a dramatic swing in terms of volume of new IPOs.
The IPO volume series was auto correlated over the entire period and especially
during the hot period. This shows a firm’s decision to go public over the last decade
depended on the number of other companies that were getting listed over the previous
months. The autocorrelation in the under pricing series was weak as compared to the
IPO volume series. Turning to the

interrelation of volume and initial return, the empirical exercise (Granger causality
test) found no significant relation between IPO volume and initial returns during the
hot and cold period. This suggests that Indian Issuers’ did not depend on the
information content of the initial returns while taking their decision to go public. A
key reason for these findings could be that, unlike the developed countries, it took a
long time (more than six months on an average) for Indian companies to get actually
listed on the stock market after the promoters decided to go public. Under pricing
derived from the price changes over the six months (or more) perhaps also captured
the changing investors’ expectation with the availability of new information rather
than investors’ optimism perse. So Indian corporate bodies might have depended
more on long lasting market sentiments to decide on the timing of their IPOs.

Subhojit Banerjee and Devesh Ranjan Tripathi in their article “Comparative

Perspective of Foreign Banks in India:- Strategies and Trends” published in the Indian
Journal of Accounting, pointed out that the Indian Equity Market has been of interest
to many foreign investors in the recent times. With Indian Capital Markets performing
far better than their Asian Counterparts are fast becoming hot destinations for
investors far and near.
Subrahmanyam, A., S. Titman (1999) in their article “The Going Public Decision and
the Development of Financial Markets”, published in the Journal of Finance
mention that stock price efficiency, the choice

between private and public financing, and the development of capital markets in
emerging economies. Generally, the advantage of public financing is high if costly
information is diverse and cheap to acquire, and if investors receive valuable
information without cost. The value of public firms generally depends on public
market size, which implies that there can bea positive externality associated with
going public, so that an inferior equilibrium can exist where too few firms go public.
Sunil Damania in his article “Primary Issues” published in Dalal Street, mention that,
the primary market has been always been a great area of interest for retail investors.
But over the last few years the quality of IPOs and their issue prices have been a
matter of concern. Due to this investors are losing faith in the IPO system and this is a
very dangerous sign for the country. For any new investor to enter the market, the
primary market is the first step. If that first experience of investment is not a happy
one, it is unlikely that investors would continue investing in the market. Vaidyanathan
R. & Alok Pande (2008) in their article “Determinants of IPO under pricing in the
national stock exchange of India”, published in the Social Science Research Network
E-Library pointed out the degree of under pricing in the Indian stock markets has
reduced over the years which is good for the firms getting listed as under pricing is an
indirect cost to the firm. A unique contribution of this study is that the after market in
India regards the final offer price which has been set after book building as a credible
signal for the firm’s under pricing. Another important parameter driving the under
pricing

positively is the listing delay whereas the money spent on marketing the issue is not
reducing the under pricing of the firms significantly. This study also finds that the
gains from IPOs get diffused within one month of the listing of the firms and on an
average the gains in one month after listing are lesser than those of the market.
Vikkraman P. and K. C. JohnSasi Kumar (2009) in their article “Investor’s preference
on IPOs in India” presented in the Global Business & Management Forum (GBMF)
Second International Conference, Dhaka, Bangladesh, find out the fundamental risk
and returns involved in investment of IPOs and the performance of initial public
offers for the last five years. The researcher assumes that the investments in IPOs are
very safe, risk free, and make good returns. It was found from the research that returns
out of IPOs during the short period is very promising.
Vineet Kohli (2009) in his article “Do Stock Markets Allocate Resources

Efficiently? An Examination of Initial Public Offerings”, published in the Economic

& Politically Weekly, concluded that high prices of new equity issues are not related
to their future operating performance. It was shown that investors neglect the low
profitability aspect of new issues and over emphasize their growth performance. The
expectation of growth at the time of issue is not met subsequently.
These conclusions have some important implications for the design of the financial
system. It is often argued that a market-based financial system should be promoted
since a bank-based system (especially the one with large presence of public sector
banks) does not allocate

resources to their profitable use. The large nonperforming assets of public sector
banks are often cited as evidence of poor evaluation in the bank-based system. It was
seen in this paper that equity markets in India have mainly financed lower
profitability firms on the expectation that their earnings will grow in future. However,
this expectation has not been realized subsequently as both profitability and growth of
issuing firms have fallen in the post-issue period. This suggests that stock markets in
India have suffered from excessive optimism and poor evaluation.

Conclusion:

The above mentioned article will help you learn about IPO right from what it means
to how to invest in them and what are the risks and benefits associated with investing
in them.
Investing in newly launched public companies can be extremely rewarding. However,
you must also know that it can be risky and at the same time profits are not
guaranteed.
Having said that, over the years, Initial Public Offerings have offered good returns to
investors. You may consider investing in it after researching about the company and
its management. Every month a lot of IPOs list on the stock exchange, all you have to
do is find the companies with higher potential and invest in them. Remember, an
informed investor always performs better than one who is not.