“Lead lag relationship between rating of a company and performance of the

company on investor’s wealth”

Research paper

Submitted

To

National Conference
On
"Issues on Global Accounting; International Financial
Reporting Standard (IFRS)"
(UGC PROPOSED)
MINI TITLE: RISK MANAGEMENT

AUTHORS: (1) SHAIKH MOHAMMADIMRAN ABDULSAEED

(2) DR ANIL SINGH

February 2014

Email :(1) imran15381@yahoo.co.in (2)

Mobile no: (989068469) (9825419405)

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 Preface

There are many credits ranking company in India like, CRISIL, ICRA, Fitch Rating, Brickwork Rating etc.
This project is about CRISIL’s rating to the new listed companies on NSE from year 2008 to 2012. The first time
that a company’s shares are issued the public, the process is called initial public offer (IPO). The requirements of
IPO listing on BSE and NSE are also described. The research problem is “should the investors invest their money
on the bases of rating companies rank or not? “CRISIL is one of the best rating companies of India. From 2008 to
2013 almost 186 companies have submitted DRHP to SEBI but approximately 160 companies were listed. These
companies have been rated for the investment after studying the fundamental of the company by credit rating
agencies or companies like, CRISIL, ICRA and CARE. We had study all these companies’ prices and fundamental
to check the wealth of the investment. Technical charts of each company and share holding patterns are used as a
supportive base.

What is Book Building?

SEBI guidelines defines Book Building as "a process undertaken by which a demand for the securities proposed to
be issued by a body corporate is elicited and built-up and the price for such securities is assessed for the
determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document
or information memoranda or offer document". Book Building is basically a process used in Initial Public Offer
(IPO) for efficient price discovery. It is a mechanism where, during the period for which the IPO is open, bids are
collected from investors at various prices, which are above or equal to the floor price. The offer price is determined
after the bid closing date.

CRISIL,ICRA and CARE IPO Grade Assessment

5/5 Strong fundamentals
4/5 Above average fundamentals
3/5 Average fundamentals
2/5 Below average fundamentals
1/5 Poor fundamentals

Problem statement: - CRISIL, ICRA and CARE are one of the companies who give credit rank to the newly issued
company. Sometimes it happens that the rank is not suitable as per the performance of the company. So here, the
problem is should the investors invest their money as per the rank of CRISIL, ICRA and CARE’s rating?

Reviewing the literature:

In the finance literature, IPOs have been found on average to have large first-day returns (the percentage
difference between the first-day closing price and the offer price) of between 10% and 15%. This phenomenon is
referred to as IPO under pricing. Evidence of large first-day returns can be found in Logue (1973); Ibbotson (1975);
and Ibbotson, Sindelar, and Ritter (1994). Ibbotson and Ritter (1995) also provided an intensive survey and review
of IPO literatures. Overall, the first-day return phenomenon is explained by asymmetric infomation and adverse
selection that forces the issuer to set the price below the fundamental value. To induce the uninformed investor to
participate in an IPO, the issuer has to set the offer price below the intrinsic value. In contrast, to induce institutional
investors, the issuer has to set a high offer price. Nevertheless, after issuing, the price will move back to the intrinsic
value, leading to the under pricing or overpricing of the offer price. If the market is efficient, the first-day closing
price will reflect the IPO’s intrinsic value.

Several researchers used this idea to explain the firstday return phenomenon. Rock (1986) and Beatty and
Ritter (1986) developed the winner’s curse theory and explain that IPO first-day return occurs from the information
asymmetry between investors. Baron andHolmstrom (1980) and Baron (1982) explained that the IPO first-day return

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can occur from the information asymmetry between issuers and investment bankers. If investment bankers take
advantage of their superior knowledge of market conditions to underprice offerings, which permits them to expend
less marketing effort and to ingratiate themselves with buy-side clients, IPOs will be underpriced.

Another explanation by Benveniste and Spindt (1989) is that information asymmetry between investment
bankers and investors leads to IPO first-day return. Investment bankers, who use bookbuilding, may underprice
IPOs to induce regular investors to reveal information during the pre-selling period, which then can be used to assist
in pricing the issue. Moreover, Allen and Faulhaber (1989), Grinblatt and Hwang (1988), and Welch (1989)
developed the signaling theory to explain this phenomenon. This theory hypothesizes that underpriced IPOs leave
investors with a good taste, allowing the firms and insiders to sell future offerings at a higher price than would
otherwise be the case. Chemmanur (1993) showed that publicity is generated by a high first-day return. This
publicity could generate additional investor interest and brand awareness.

Tinic (1988) andHughes and Thakor (1992) explained that the frequency and severity of future class action
lawsuits can be reduced by first-day return because only investors who lose money are entitled to damages. Welch
(1992) illustrated that it can be explained when potential investors pay attention not only to their own information
about a new issue but also to (1) whether other investors are purchasing, (2) bandwagon effects, and (3)
informational cascades thatmay develop. Booth and Chua (1996) explained this phenomenon by ownership
dispersion. Mauer and Senbet (1992) explained that this phenomenon is from the incompleteness of market.

Another theory of underwriter price support, proffered by Rudd (1993), is based on the distribution of first-
day return. He finds that there is an unobserved left tail or left-skewed distribution of first-day return distribution
and attributes this to the support of underwriters. Along other lines, Aggarwal and Rivoli (1990) and Shiller (1990)
argued that this phenomenon can be explained by fad or investor’s optimism. Similarly, Teoh,Welch, and Wong
(1998) supported this argument by showing that investor over-optimism is based on accounting manipulation by the
issuers. In contrast, Rajan and Servaes (1997) evaluated analyst earnings forecasts of IPO firms and find that
investors are really overly optimistic about the long-term growth prospects of IPOs, inducing an upward bias in
analyst earning forecasts. Overall, there are two anomalies that support this theory, namely, hot issue markets and
long-run underperformance of IPO issuers.

Preparing of Research Design:-

Hypothesis:-

H : 0 = there is a relationship between ranking of an IPO and performance of the stock

H : 1 = there is a no relationship between ranking of an S

IPO and performance of the stock

Methods of data collection:-

Secondary Data:-

Secondary are those data which have been collected or analyzed by someone else. Secondary data can be collected
internet, journals, and magazine, government institute, trade reports and so on. In this research, the data which is
collected is secondary data and it is collected with the help of internet.

Sample design:-

A Sample is a segment of the population selected to represent the population as a whole.

In this research, sample is 100% of the population.

Objectives or Goals of the study:-

1) To know the whole procedure of IPO.
2) To find out the factors which influence the IPO listing process?
3) What the companies are looking from open new IPO in India?
4) To analysis of IPO future prospects.

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 5) To know the share holding pattern of companies.
6) To get the knowledge of CRISIL’s rating process and the validity of CRISIL’S rank.

Benefits of the study:-

1) Analyze the IPO to know the better scope to invest in IPO

2) The study will help the investors to find out in which way to invest in an IPO
3) The study will help the investor to minimize the probable loss of having investment in IPO
4) The study will help the investor in how much time to get out of selling IPO stock.
5) The study will help to know the speculation in a primary market.
6) This study will help the investors whether they should invest money as per CRISIL’s rank or not.
7)
Limitations of the study:-

1) The most important limitation is time period and money cost. This research will take much time and it also
contains money cost for research process.
2) The data collection in this research is secondary data. So it is dependant only on computer-an electronic
machine, which may create problem while doing research.
3) Many non-quantifiable factors also affect the research like, customer’s preferences about rank.
4) There may problem in implementation of decision.

Data Analysis And Interpretation (those companies only whose rating goes in opposite direction)

Sr. Name Of The Company Current Issue Price Grading Result

No Market Price
1 Repco Home Finance Limited 306 172 Grade 3 (True
False Or
2 V-Mart Retail Limited 276 210 Grade 3 False
3 Bharti Infratel Limited 165 220 Grade 4 False
4 Speciality Restaurants Limited 112 150 Grade 4 False
5 Tribhovandas Bhimji Zaveri Limited 130 120 Grade 3 False
6 Onelife Capital Advisors Limited 182 110 Grade 1 False
7 Tree House Education & Accessories Limited 223 135 Grade 3 False
8 Rushil Decor Limited 50.6 72 Grade 2 False
9 Muthoot Finance Limited 145 175 Grade 4 False
10 Ptc India Financial Services Limited 13.4 28 Care,Icra,Crisil 4 False
11 Lovable Lingerie Limited 310 205 Grade
Ipo3 3 False
12 Acropetal Technologies Limited 5.55 90 Grade 3 False
13 Omkar Speciality Chemicals Limited 114 98 Grade 3 False
14 C. Mahendra Exports Limited 187 110 Grade 2 False
15 Punjab & Sind Bank 43 120 Grade 4 False
16 A2z Maintenance - 400 Grade 4 False
17 Moil Limited 211 375 Grade 5 False
18 Ashoka Buildcon Limited 59.6 324 Grade 4 False
19 Tecpro Systems Limited 14.2 355 Grade 4 False
20 Va Tech Wabagh Limited - 1310 Grade 4 False
21 Cantabil Retail India Limited 18.1 135 Grade 2 False
22 Orient Green Power Company 10.3 47 Grade 4 False
23 Ramky Infrastructure Limited 39.8 450 Grade 3 False

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24 Prakash Steelage Limited 106 110 Care Grade 2 False
25 Sks Microfinance Limited 194 985 Care Grade 4 False
26 Hindustan Media Ventures Limited 130 166 Grade 4 False
27 Jaypee Infratech 18.9 102 Grade 3 True
28 Sjvn Limited 20.7 26 Grade 4 False
29 Mandhana Industries 232 130 Grade 3 False
30 Talwalkars Better Value Fitness 143 128 Grade 3 False
31 United Bank Of India 26.9 66 Grade 3 & 4 False
32 Hathway Cable & Datacom 266 240 Grade 3/5 False
33 Infinite Computer Solutions 148 165 Grade 4 False

findings :-

1. it is found from the study that out of 186 companies rated by CRISIL,ICRA and CARE more than 60
companies rating comes false

2. it is found from the study by seeing the chart of all these companies most of 35% of the companies have
maintain the issues from the date of issue till next three month.

3. it is found from the study that these all false rated companies have strong buying of high net worth
individuals and after 6 to 9 month of the listing they sell their stake.

4. it is found from the study that all those companies whose prices fallen down, there prices have not
recovered even 50% from their lows in one , two or three years

5. it is found from the study that. all those stoke which have fallen they were from the small cap categories.

6. it is found from the study that 25% of the stock is trading at the value of 10 to 30% from their issues prices,
this is implied that investors doesn't gain anything but losses heavy amount,

conclusion
In Short it is Found Out From The Study That, For Investing In An IPO Investor Need To Consider So
Many Factors. Investor Should Not Depend Only On Grade Of The Company. Yes They May Consider Rate
Of The Companies But Other Criteria Should Also Be Focused.

H : 0 rejected as many of 30% of the rating goes false

H: 1 accepted and implied that investors should not trust the rating of the rating company.

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 BIBLIOGRAPHY
Website Referred S
1. http://www.icra.in/RatingMethodology.aspx
2. http://nseindia.com/products/content/equities/ipos/historical_ipo.htm
3. http://www.icra.in/Content.aspx?cid=U5GCSUTHLH0C5116GAACDHKLFWJ1YDXI2JPYEXR3F1YIN6WPU7
4. http://crisil.com/ratings/rating-process.html

References:

1. Allen, F and Faulhaber, G. R. (1989) “Signalling by underpricing in the IPO market”, Journal of Financial
Economics, Vol. 23, No. 2, pp 303-323.
2. Barkham, R. J. (1997) “The financial structure and ethos of property companies: An empirical analysis”,
Construction Management and Economics, Vol. 15, pp 441-456.
3. Barkham, R. J. and Purdy, D. E. (1992) “Property company financial reporting: Potential weaknesses”,
Journal of Property Valuation and Investment, Vol. 11, No. 2, pp 133-144.
4. Baron, D. P. (1982) “A model of the demand for investment bank advising and Distribution services for
new issues”, Journal of Finance, Vol. 37, pp 955-76.
5. Beatty, R. P. and Ritter, J. R. (1986) “Investment banking, reputation, and the under pricing of initial public
offerings.” Journal of Financial Economics, Vol. 15, pp 213-32.