Anusha Bansal - Main Body of Report

8/13/2019 Anusha Bansal - Main Body of Report

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Chapter 1

Introduction

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Chapter 1

Introduction

The decision to go public, or make an initial public offering (IPO) of equity, represents an

important landmark in a firms life cycle! " #ell functioning IPO market pro$ides e%it

options for stakeholders in young firms, access to lo# cost capital for gro#ing firms, and

greater access to capital for future e%pansion of large firms! &lo# of capital to firms can

stimulate gro#th in an economy! Thus, the performance of an IPO of a firm is under scrutiny

and under#riters often use a mechanism of 'underpricing to pro$ide a risk premium to the

in$estors for the uncertainty of returns!

a! Obecti$e

The phenomenon of underpricing go$erns the returns an IPO #ill generate in the secondary

market, and the purpose #as to study the factors that cause this underpricing and ho# they

affect it! *ainly the obecti$es are+

i! To study the relationship of different factors of secondary market #ith underpricing

of IPOs!

ii! To study industry#ise trend of IPO underpricing!

b! -cope

The study is confined to Indian IPOs and focuses on the factors of secondary market that

affect the IPO pricing across $arious industries!

c! .imitations

The sample si/e #as limited to the period 0anuary 223 4 "pril 21 in #hich there

#ere 23 IPOs!

"ll the IPOs are bookbuilt (no fi%ed price IPOs)!

Classification of IPOs on the basis of industry has been done purely by kno#ledgeand understanding of primary operation of the firms!

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Chapter

Initial Public Offerings

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Chapter

Initial Public Offering IPO

Initial public offering or IPO is a #ay for a company to raise capital through in$estors and

get listed in the stock e%change to become a publicly traded company for the first time! &or a

company, the cost of borro#ing money through IPO is less in comparison to other popular

options a$ailable in the market! Through IPO, company di$ersifies its equity base to large

number of in$estors! 5hen securities of a company is listed in stock e%changes, it also gets

benefited in term of brand building as its being discussed on almost day to day basis among

millions of in$estors and e%perts!

" company raising money through IPO is also called as the company 6going public!

&rom an in$estors point of $ie#, IPO gi$es a chance to buy shares of a company, directly

from the company at the price of their choice (in book built IPO7s)! *any a times there is a

big difference bet#een the price at #hich companies decides for its shares and the price on

#hich in$estor are #illing to buy share and that gi$es a good listing gain for shares allocated

to the in$estor in IPO!

&rom a companys perspecti$e, IPO help them to identify their real $alue #hich is decided

by millions of in$estors once their shares are listed in stock e%changes! IPO7s also pro$ide

funds for their future gro#th or for paying their pre$ious borro#ings!

In an IPO, the issuer obtains the assistance of an under#riting firm, #hich helps it determine

#hat type of security to issue, the best offering price and the time to bring it to market!

" company #ith the help of lead managers (merchant bankers or syndicate members)

decides the price or price band of an IPO!

Companies and lead managers do a lot of market research and road sho#s before they

decide the appropriate price for the IPO! Companies carry a high risk of IPO failure if they

ask for higher premium! *any a time in$estors do not like the company or the issue priceand don7t apply for it, resulting in an undersubscribed issue! In this case, companies either

re$ise the issue price or suspend the IPO!

a! .ife cycle of an IPO

The life cycle of an IPO is as follo#s+

1. Issuer Company - IPO Process Initialization

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1! "ppoint lead manager as book runner!

! "ppoint registrar of the issue!

8! "ppoint syndicate members!

2. Lead Manager's - Pre Issue Role - Part 1

1! Prepare draft offer prospectus document for IPO!! &ile draft offer prospectus #ith -9:I!

8! ;oad sho#s for the IPO!

3. !"I - Prospectus Re#ie$

1! -9:I re$ie# draft offer prospectus!

! ;e$ert it back to .ead *anager if need clarification or changes (-tep )!

8! -9:I appro$e the draft offer prospectus, the draft offer prospectus no#

becomes the Offer Prospectus!

%. Lead Manager - Pre Issue Role - Part 2

1! -ubmit the Offer Prospectus to -tock 9%changes, registrar of the issue and

get it appro$ed!

! erring Prospectus = IPO "pplication &orms are printed and posted to

syndicate members@ through #hich they are distributed to in$estors!

&. In#estor - "idding or t(e pu)lic issue

1! Public Issue Open for in$estors bidding!

! In$estors fill the application forms and place orders to the syndicate members

(syndicate member list is published on the application form)!8! -yndicate members pro$ide the bidding information to :-9AB-9

electronically and bidding status gets updated on :-9AB-9 #ebsites!

?! -yndicate members send all the physically filled forms and cheques to the

registrar of the issue!

! In$estor can re$ise the bidding by filling a form and submitting it to

-yndicate member!

D! -yndicate members keep updating stock e%change #ith the latest data!

3! Public Issue Closes for in$estors bidding!

*. Lead Manager - Price +i,ing1! :ased on the bids recei$ed, lead managers e$aluate the final issue price!

! .ead managers update the 7;ed >erring Prospectus7 #ith the final issue price

and send it to -9:I and -tock 9%changes!

. Registrar - Processing IPO pplications

1! ;egistrar recei$es all application forms = cheques from -yndicate members!

! They feed applicant data = additional bidding information on computer

systems!

8! -end the cheques for clearance!

?! &ind all bogus applications!

! &inali/e the pattern for share allotment based on all $alid bids recei$ed!

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D! Prepare 7:asis of "llotment7!

3! Transfer shares in the


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"n IPO accords se$eral benefits to the pre$iously pri$ate company+

9nlarging and di$ersifying equity base

9nabling cheaper access to capital

Increasing e%posure, prestige, and public image

&acilitating acquisitions (potentially in return for shares of stock)

Creating multiple financing opportunities+ equity, con$ertible debt, cheaper bank

loans, etc!

There are se$eral disad$antages to completing an initial public offering+

-ignificant legal, accounting and marketing costs, many of #hich are ongoing

;equirement to disclose financial and business information

*eaningful time, effort and attention required of senior management

;isk that required funding #ill not be raised

Public dissemination of information #hich may be useful to competitors, suppliers

and customers!

IPOs can be a risky in$estment! &or the indi$idual in$estor, it is tough to predict #hat the

stock #ill do on its initial day of trading and in the near future because there is often little

historical data #ith #hich to analy/e the company! "lso, most IPOs are of companies going

through a transitory gro#th period, #hich are subect to additional uncertainty regarding

their future $alues!

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Chapter 8

Company Profile

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Chapter 8

Company Profile

-tandard Chartered -ecurities (India) .imited is a leading broking company that helps retail

and institutional in$estors #ith their capital market in$estment requirements!

a! :irth of the Company

-tandard Chartered -ecurities (India) .imited is a #hollyo#ned subsidiary of -tandard

Chartered :ank (*auritius) .imited (-C:*), #hich acquired the company from -ecurities

Trading Corporation of India (-TCI) o$er 22E212! Prior to the acquisition, -tandardChartered -ecurities #as kno#n as HTI -ecurities .imited (HTI-9.)!

On "ugust 8, 223, -C:* agreed to acquire HTI-9. from -TCI in three tranches! "s a

part of first tranch, -C:* acquired ?J stake in HTI-9. on 0anuary 11, 22E, after #hich,

the name of the Company #as changed from HTI-9. to -tandard Chartered-TCI Capital

*arkets .imited #!e!f! 0anuary 13, 22E!

-C:* acquired further !J stake in the Company on ong Kong and

*umbai stock e%changes, ranks among the top 2 companies in the &T-9122 by market

capitalisation! The .ondonheadquartered Group has operated for o$er 12 years in some of

the #orld7s most dynamic markets, leading the #ay in "sia, "frica and the *iddle 9ast!

The -tandard Chartered Group in India is also represented by -tandard Chartered :ank,

India7s largest international :ank #ith ? branches across 83 cities and India is one of the

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e! Offerings

"t -tandard Chartered -ecurities, the aim is to offer simplified in$estment solutions that

pro$ide longterm $alue to its customers! &or its institutional clients, it offers products such

as equity capital markets, equity and deri$ati$e broking! The retail di$ision caters to onlineas #ell as offline customers, offering products such as equity and deri$ati$e broking,

depository ser$ices, mutual funds and fi%ed income instruments!

-tandard Chartered -ecurities has a dedicated team of research analysts #ho #ork

independently to pro$ide in$estment and trading recommendation to its institutional and

retail customers! " net#ork of relationship managers and customer care e%ecuti$es offer

efficient e%ecution backed by indepth research and e%pertise to customers across the

country! It has a large net#ork #ith pan India presence in 8 locations through 82 branches

and D authorised centers!

-tandard Chartered -ecurities is registered as a trading and clearing member #ith :ombay

-tock 9%change .imited (:-9), Bational -tock 9%change of India .imited (B-9) and *CL

-tock 9%change .imited (*CL)! The Company is also registered as


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Chapter ?

.iterature ;e$ie#

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Chapter ?

.iterature ;e$ie#

The underpricing of IPOs has been documented e%tensi$ely in $arious researches! ;itter and

5elch (22), .oughran, ;itter and ;ydq$ist (1?), .ungq$ist and 5ilhelm (22)

among others, establish the global nature of this phenomenon across many countries and

capital markets! The regulatory setup and design of Indian IPOs pro$ides an opportunity to

make a distinct contribution to this literature!

Hnlike in the H- #here bookbuilding has been the preferred method of IPO price disco$ery

for more than t#o decades, the Indian IPO market did not use this method until 1!

>o#e$er, by 22D23, the bookbuilding mechanism came to dominate the fi%edprice

method and by then, more than E2J of the IPOs priced their shares using the bookbuildingmechanism! The Indian IPOs bookbuilding process is transparent and it is required by

regulation that the subscribers application information, by in$estor type, be a$ailable online

during the IPO bookbuilding period!

9mpirical e$idence on the pricing of initial public offerings indicates that IPOs are, on

a$erage, offered at prices that are belo# their subsequent secondary market trading prices!

&or e%ample, o$er the period from 1D2 to 1E3, Ibbotson, -indelar, and ;itter report that

a$erage IPO 'underpricing is 1D!83 percent! &urthermore, Ibbotson and 0affe (13) and

;itter (1E?) document that the ne# issues market e%hibit cycles of high initial returns

follo#ed by lo# or e$en negati$e initial returns! This e$idence is indicati$e of an

equilibrium phenomenon!

Bumerous theories ha$e offered se$eral e%planations for underpricing of initial public

offerings+

1! The in$estment bankers are better informed about the demand for the ne# issue than

the issuer! To compensate the in$estment banker for his superior kno#ledge, the

optimal contract bet#een the issuer and the in$estment banker results in

underpricing!

! " group of 'informed in$estors kno# more about the issuing firms prospects than

do 'uninformed in$estors! Gi$en their information, informed in$estors participate

only in IPOs that are underpriced! "s a consequence, uninformed in$estors recei$e a

disproportionate allocation of o$erpriced issues! Therefore, to keep uninformed

in$estors participating in the ne# issues market, issuers persistently underprice to

ensure them a normal rate of return!

8! "ccording to Ibbotson (13) and Tinic (1EE) underpricing may ser$e as 'implicit

insurance against legal liabilities of issuers and in$estment bankers resulting fromIPOs that, after the fact, turn out to be unprofitable in$estments!

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?! Papers by Chemmanur (1E) and Guenther (1) say that underpricing is

necessary to compensate in$estors for re$ealing pri$ate information!

:y contrast, papers by "llen and &aulhaber (1E), Grinblatt and >#ang (1E), and 5elch

(1E) argue that underpricing ser$es as a costly signal that separates high quality from lo#

quality firms!

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Chapter

*aor ;easons for Hnderpricing

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Chapter

*aor ;easons for Hnderpricing

"pparently, the prime focus of the e%planations offered for underpricing of initial public

offerings has been the role that is played by three maor factors+

"symmetric information

Incomplete spanning

-easoning effect

Gi$en the paucity of operating histories of most issuing firms, it is a reasonable and logical

perspecti$e that at least a portion of the obser$ed underpricing can be traced to the influence

of asymmetric information factors! "nother phenomenon is of incomplete spanning of

primary issues in the secondary market! :y imperfect spanning it is meant that there does

not e%ist a secondary market firm (or portfolio of firms) #hose technology perfectly

replicates the stochastic returns to the issuing firms technology! 9qui$alently it can be said

that there does not e%ist a perfect substitute for the IPO in the secondary market!

In fact, the absence of a perfect substitute for a ne# issue in the secondary market should, in

most instances, gi$e rise to a positi$e initial return e$en if there is no asymmetry ofinformation bet#een the parties in$ol$ed in ne# issues!

"s IPOs enter the secondary market place, the degree of incomplete spanning diminishes for

subsequent IPOs #ith related technologies! This industry or 'seasoning effect results in

lo#er underpricing for subsequent IPOs!

Thus, these principals of the secondary market collecti$ely establish a price differential

consistent #ith obser$ed underpricing!

"lso, paper by -chipper and -mith (1ED) report that stocks of a subsidiary of a corporation,

that ha$e a #ellestablished operating history, #ould predict lo# or no underpricing! &or

e%ample, most IPOs in the genetic engineering industry are by young startup companies #ith

entirely ne# technology! :y contrast, almost all financial firms (e!g! banks and sa$ings and

loans) going public for the first time ha$e both a #ellestablished operating history and a

large number of comparable firms in the secondary market! -ome papers present little or no

underpricing for these latter firms!

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a! *arket -tructure

The trading of IPOs takes place in t#o distinct markets 4 the primary market and the

secondary market! The primary market constitutes the offering stage of IPOs, and it is here

that IPO oering pricesare established! The larger, more centrally accessible secondarymarket constitutes the )idding stageof IPOs, #here IPOs and all 'seasoned assets publicly

trade! -ince the secondary market price cannot be obser$ed in actuality at the same time as

the primary market price, empiricists measure IPO underpricing by initial returns reflecting

prices at t#o different points in time 4 the offering stage and the subsequent aftermarket bid

stage!

*arkets are partially segmented in that the primary market is accessible only to primary

in$estors #ho are a subset of the uni$erse of in$estors! :y contrast, the secondary market is

accessible to all market participants! This characteri/ation is a reasonable appro%imation of

the actual #orkings of the IPO market!

b!


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benefits of limited in$estor participation! -uch benefits may arise from a strategy on the part

of in$estment bankers to target sales to kno#ledgeable in$estors! &or e%ample, :en$eniste

and -pindt (1E) argue that in$estment bankers sell ne# issues repeatedly to the same

in$estors, thereby learning information about ne# issue demand from 'regular in$estors in

IPOs!

e! .egal and ;egulatory Constraints

In addition to limitations in distribution net#orks, legal restrictions and regulatory

constraints also limit in$estor access to the IPO market! " large proportion of all publicly

traded equity is held by institutional in$estors@ ho#e$er, many of these in$estors are subect

to institutional restrictions, such as prudentin$esting rules, that se$erely limit their

opportunities to participate in IPOs! Casual empiricism suggests that there may be certain

in$estors, such as $enture capitalists, #ith no such legal and regulatory restrictions! To the

e%tent that they face no restrictions, they are potentially classified as primary in$estors #ho

ha$e unrestricted access to both the primary and secondary markets!

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Chapter D


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Chapter D


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Chapter 3

;esearch *ethodology

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Chapter 3

;esearch *ethodology

To in$estigate the effect of secondary market on the underpricing of IPOs, the entire

population of bookbuilt IPOs from 0anuary 1, 223 to *arch 81, 21 (fi$e years and t#o

months) has been taken for study! These are the IPOs #hich #ere offered during the

aforesaid period!


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"lso, 'Correlation nalysis has been used to establish relationship among the si%

determinants of underpricing!

c! erring Prospectus

Tools used for data analysis+

-P--

9$ie#s

*- 9%cel 223

6erring Prospectus (;>P)!

The 6age of the firm is calculated as the difference in year of the firm going publicand the year of its incorporation! The earliest year of incorporation has been taken

e$en if the firm #as incorporated in a different name than the one in #hich it #ent

public!

The 6time of offering is measured in months, #here 0anuary 223 is month 1 and

*arch 21 is month D8!

To calculate 6beta coefficient,


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predicted rising returns for the coming year! :ut in year 22E, the capital markets in India

recei$ed a blo# from the recession that hit the H- but ad$ersely affected the capital markets

all o$er the #orld!

d! Industry#ise Classification

"ll the 23 IPOs ha$e been classified into 12 industries 4

1! :anks and other financial ser$ices

! >ealthcare and Pharmacy

8! IT

?! Telecomm and *edia

! ;ealty and Infrastructure

D! Po#er and 9nergy

3! Te%tiles

E! "uto and its ancillaries

! ;etail

12! Others

&urther, in order to classify all IPOs and to gi$e them a numeric representation in order for it

to be used in calculations, IPOs ha$e been numbered from 1 to 12 based on the industry to

#hich it belongs (in the same order of numbering as mentioned abo$e)!

-P-- tool has been used to conduct correlation analysis among the si% determinants! It has

also been used to run regression analysis using dummy $ariables!

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Chapter E

"nalysis

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Chapter E


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a! IPO Initial ;eturns

IPO initial returns are calculated as 4

ln (PAP1)

#here, P1is the offer price and Pis the closing price of the IPO on first day of trading in the

secondary market (:-9 price)!

b! -ystematic and ;esidual ;isks


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#as obtained from the erring Prospectus #as used! Thus, 12 industry categories #ere identified 4 :anks =

financial ser$ices, healthcare = pharmacy, IT, telecomm = media, realty = infrastructure,

po#er = energy, te%tiles, auto = ancillaries, retail, and others!

a)le 2presents descripti$e statistics on sample IPOs grouped by industry category! The

table sho#s mean and median initial return, aftermarket beta and residual risk, offering si/e,

company age, and the minimum and ma%imum time of offering! Time is measured in

months, #here 0anuary 223 is month 1 and *arch 21 is month D8!

Inferences from Table +

1) There is some $ariability of a$erage underpricing across industry groups, #ith the

lo#est amount, 8! percent, associated #ith healthcare and pharmacy industry, and

the highest amount, ?!1 percent, associated #ith IT industry!

) There is some o$erpricing as #ell that can be seen particularly in the te%tiles

industry, #ith the a$erage o$erpricing being 1!3 percent!

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8) The a$erage initial return for the entire sample of 23 IPOs is 11!2 percent and the

median is E! percent! It sho#s that the distribution of initial returns has a positi$e

ske#!

?) The ma%imum o$erpricing for the entire sample of 23 IPOs is 11D! percent and

ma%imum underpricing is 1! percent! The $ariability pan IPOs is thus, quite high!

) 9$ery industry has at least 1 IPO #ith a negati$e initial return! "ccordingly, there is

some 'o$erpricing, and it is e$ident across industries!

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Chapter

;esults

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Chapter

;esults

" multiple regression frame#ork is used to test the predictions of $arious theories presented

in the re$ie#ed research papers! &irstly, a preliminary analysis is done by e%amining the

simple correlations bet#een sample underpricing and access and risk pro%ies! Panel " of

a)le 3 presents Pearson correlation coefficients calculated bet#een initial returns (I;),


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Inferences from Table 8, Panel "+

1) 9$ery pair#ise correlation coefficient bet#een I; and the $arious e%planatory

$ariables is not statistically significant at the percent le$el, e%cept the one bet#een

I; and TI*9! That correlation coefficient (2!12) is significant at reasonable

confidence le$els (2!22D)!

) Thus, as predicted by theoretical analysis, IPO underpricing is negati$ely related to

the TI*9 in #hich the offering occurred during the sample period! This result is

consistent #ith the 6seasoning prediction!

8) There is significant correlation bet#een independent $ariables ;9-;I-K and -IS9!

:igger the si/e of IPO offering smaller is the residual risk!

?) There is significant correlation bet#een independent $ariables "G9 and -IS9! "n

older company is more likely to go public #ith a bigger si/e of IPO offering!

) There is significant correlation bet#een independent $ariables :9T" and TI*9! "s

the time of offering increases, the systematic risk associated #ith the IPO also

increases as substitutes are already a$ailable in the market for the IPO! This

phenomenon has been described as the 6industry effect!

Panel : of Table 8 reports ;s andFstatistics from regressions of I;, :9T", ;9-;I-K,

-IS9, "G9, and TI*9 on industry dummy $ariables!

; indicates the 6goodness of fit of a model!Ftest is used to test the o$erall significance of

a multiple regression! P $alue tests the significance of the results, in this study at a

confidence le$el of percent!

Only the regression of -IS9 on industry dummy $ariables is significant at percent le$el,

indicating that there are significant differences in the $alues of -IS9 across industry groups!

>ere, industry classification e%plains 2 percent of the $ariation in the si/e of IPO offerings!

Goodness of fit is also highest in the case of regression of -IS9 on industry dummy

$ariables (2 percent)!

In order to estimate the influence of the other $ariables on initial returns, the follo#ing

regression model is estimated+

I; N 2 1-IS9 "G9 8TI*9 ?:9T"

;9-;I-K UiIBOT


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) Fariable "G9 is statistically significant in the 6>ealthcare and Pharmacy industry,

and its coefficient is negati$e! "s predicted by studies, increasing industry

underpricing is associated #ith decreasing age! Thus, firms in >ealthcare and

Pharmacy industry #hich ha$e shorter operating history are more likely to ha$e

underpricing!

8) "lthough the coefficient of TI*9 is negati$e in almost e$ery industry, it is positi$e

and significant in the 6Te%tiles industry but the $alue of coefficient is nearly /ero! It

means the impact of seasonality is found only in the Te%tile Industry!

?) The $alue of ;9-;I-K is statistically significant in industries 6>ealthcare and

Pharmacy, 6IT and 6;ealty and Infrastructure! 9%cept in IT, the coefficient of

;9-;I-K is positi$e in the other t#o industries indicating that #ith increasing

underpricing in these t#o industries is associated #ith increasing residual risk!

) "s it can be seen the number of IPOs in each industry is fe# as #ell as the time

period of the study is short, leading to a fe# erratic results inconsistent #ith prior

researches!

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Chapter 12

Conclusion

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Chapter 12

Conclusion

This proect pro$ides an empirical in$estigation of the role of secondary market in the

pricing of initial public offerings! Htili/ing a segmented market approach, #herein IPO

offering $alues are determined in the primary market and aftermarket bid prices are

determined in the centrally accessed secondary market, #e deri$e a price differential in

the primary and secondary markets that is consistent #ith IPO underpricing! The price

differential reflects a primary risk premium that captures both limited in$estor

accessibility of the IPO in the primary market and the risk associated #ith imperfect

substitutability of the IPO in the secondary market!

"s seen in the results, follo#ing can be concluded+

The difference bet#een an IPOs secondary market $alue and initial offer $alue

is attributable to a primary market risk premium that is a function of incomplete

spanning of the initial issue by secondary market assets and the degree of

in$estor access to the primary market!

"s IPOs enter the secondary market place, the degree of incomplete spanning

diminishes for subsequent IPOs #ith related technologies 4 seasoning effect!

Thus, three principal determinants #ere identified 4 access, substitution,

seasoning!

This phenomenon could also be #itnessed in the industry#ise study!

Documents

Anusha Bansal - Main Body of Report