A PROJECT REPORT

ON

“IMPACT OF IPO’S OVER INDIAN

CAPITAL MARKET”

For the partial fulfillment of the degree of

MASTER OF BUSINESS ADMINISTRATION

PROJECT SUPERVISOR: SUBMITTED BY:

MS. SACHITA YADAV VINOD

(FACULTY MBA) 07-MBA-160

MBA 4th SEM.

GURGAON INSTITUTE OF TECHNOLOGY & MANAGEMENT

AFFILIATED TO

(MAHARSHI DAYANAND UNIVEVSITY, ROHTAK)

(SESSION 2007-09)

1

PREFACE

Research project is an important part of management courses. Theoretical studies in classroom

are not sufficient to understand the functioning of complex and large size organizations,

managerial climate and the real problems coming in the way of management of Man, Material,

Machines and Money.

Looking at the complexities of the situation, students are required to work in a dissertation

project, which form part of the MBA programs conducted by most of the students of GITM,

MD University during the working on project undertake a practical universities and institute

imparting management education or theoretical project in order to analyze, interpret and report

on one or more management problem and situation.

The research project on IMPACT of IPO’s over Capital Market of India is an overview of the

Govt. regulations and provides a brief idea to investors in concern with the investment in

Primary Market.

It is helped that the activity carried out with dedication will open up new vistas for the budding

managers as well as grooms them to broadly share the responsibilities in future.

VINOD

2

GUIDE CERTIFICATE

I take great pleasure in certifying that project entitled “IMPACT of IPO’s Over Indian

Capital Market” has been completed by VINOD as partial fulfillment for degree of MBA,

under my supervision and guidance. The work speaks about the sincere effort of candidate and

thinks it is a quite satisfactory, should be accepted for evaluation (This has not been submitted

for award of any degree or other similar title or prizes.)

Project Guide

(Ms. Sachita Yadav)

3

DECLARATION

I VINOD Roll No. 07-MBA- 160 of MBA (Finance&Marketing) From Gurgaon

Institute of Technology & Management hereby declare that the project entitled “Impact of

IPO’s Over Indian Capital Market” is an original work and the same has not been submitted

to any other institute for the award of any other degree. The feasible suggestions have been

duly incorporated in consultation with the supervisor.

Signature of Supervisor Signature of Student

Forwarded By

Director of Institute

4

ACKNOWLEDGEMENT

It is not until you undertake a project like this one that you realize how massive efforts it really

is, or how much you must rely upon the selfless efforts and goodwill of others. I got an

opportunity to learn and experience ethics and environment of bank.

I wish to express my deep sense of gratitude to my guide Ms. Sachita Yadav , Lecturer in

Dept. of MBA GITM, GURGAON who in his benevolent guidance has enabled me to

accomplish my project .He has been a great source of inspiration all the way. Without his keen

interest, incessant, encouragement and invaluable suggestions this report couldn’t have attained

its present shape with zeal and enthusiasm.

My sincere thanks to all other faculty members and all the persons who are associated with this

project for their assistance. Several persons have made their valuable contribution to this work.

At this point, I also take the opportunity to thanks Mr. Anil Agarwal, HOD, department of

MBA, GITM, and GURGAON for providing their constant support and valuable feedback to

help me conduct the project, owing to the fact that I was new to the organization.

VINOD

5

TABLE OF CONTENTS

CHAPTER CONTENTS PAGE NO.

PARTICULARS

Title page 1

Preface 2

Guide Certificate 3

Declaration 4

Acknowledgement 5

1. CONCEPTUAL FRAMEWORK 8-49

Introduction to the project

Significance of the project

Financial & Capital market

Issues in primary market

Functionaries of IPO

Eligibility norms for making issue

Role of SEBI in issue

Pricing of issue

Book building methods of IPO

Performance of an IPO

2. REVIEW OF EXISTING LITERATURE 50-54

3. OBJECTIVES & RESEARCH METHODOLOGY 55-58

4. DATA ANALYSIS & INTERPRETATION 59-77

6

5. FINDINGS & RECOMMENDATIONS 78-83

6. CONCLUSION 84-86

APPENDIXES Bibliography Questionnaire

87-91

7

8

Introduction to the Project

The project which I have taken is “IMPACT of IPO’s over Indian Capital Market”. In

this I have studied that how an IPO is brought it into the market and how it gets listed into the

market. It also stated that what are functionaries and eligibility norms for an IPO to come into

the existence. The IMPACT of IPO’s over Capital Market is an analysis of various IPO’s which

have a great contribution in the development or growth of the Capital Market. It also explains

the preferences of Investors about investments in stock market. What is the criterion of investor

to choosing a particular IPO to invest and what the factors are that affects investor’s decision?

The primary market provides the channel for sale of new securities. Primary

Market provides opportunity to issuers of securities, Government as well as corporate, to raise

resources to meet their requirements of investment and/or discharge some obligation. They may

issue the securities at face value, or at a discount/premium and

These securities may take a variety of forms such as equity, debt etc. They may issue the

securities in domestic market and/or international market.

Background of the Study

In this year Initial Public Offerings (IPO’s) have increased somewhat. IPO’s provide an

easy way to increase initial investor’s wealth and to raise cash for future expansion of the

company. This was particularly noticeable in the technology related stocks in 1990s. In many

cases there were clear indications that IPO’s would not reach profitability in the foreseeable

future. However investors, anxious not to miss the boat, would invest in these offerings on the

expectation of capital gain as a result of an increase in the stock prices. This euphoria created a

hot market condition fuelling an increase in the stock prices until such a time that market

sentiment changed. IPO’s can be highly volatile and risky for investors but they can also

provide a very higher return if the proper investment strategy is implemented. The IPO risk are

two-fold, first is the short-term market fluctuation, second is the risk associated with a change

in market perception. Once market perception and investor expectation changes, price would

begin to decline precipitously.

9

This present study tries to find out the types of information, which are important for

assessing an IPO by small investors and in somehow others also. This presents study also

evaluates the effectiveness of the methods, strategies, and tools available to small investors to

process the information for assessment of the IPO.

IPO MARKET AT A GLANCE

IPO MARKET AT A GLANCE

When a company wants to go public, the first thing it does is hire an investment bank. A

company could theoretically sell its shares on its own, but realistically, an investment bank is

required - it's just the way SEBI’s works. Underwriting is the process of raising money by

either debt or equity (in this case we are referring to equity). One can think of underwriters as

middlemen between companies and the investing public. The biggest underwriters are Goldman

Sachs, Merrill Lynch, Credit Suisse First Boston, Lehman Brothers and Morgan Stanley.

The company and the investment bank will first meet to negotiate the deal. Items usually

discussed include the amount of money a company will raise, the type of securities to be issued,

and all the details in the underwriting agreement. The deal can be structured in a variety of

ways. For example, in a "firm commitment," the underwriter guarantees that a certain amount

will be raised by buying the entire offer and then reselling to the public. In a "best efforts"

agreement, however, the underwriter sells securities for the company but doesn't guarantee the

amount raised. Also, investment banks are hesitant to shoulder all the risk of an offering.

Instead, they form a syndicate of underwriters. One underwriter leads the syndicate and the

others sell a part of the issue.

Once all sides agree to a deal, the investment bank puts together a registration statement to be

filed with the SEC. This document contains information about the offering as well as company

info such as financial statements, management background, any legal problems, where the

money is to be used, and insider holdings. The SEC then requires a "cooling off period," in

which they investigate and make sure all material information has been disclosed. Once the

SEC approves the offering, a date (the effective date) is set when the stock will be offered to

the public.

During the cooling off period the underwriter puts together what is known as the red herring.

10

This is an initial prospectus containing all the information about the company except for the

offer price and the effective date, which aren't known at that time. With the red herring in hand,

the underwriter and company attempt to hype and build up interest for the issue. They go on a

road show - also known as the "dog and pony show" - where the big institutional investors are

courted. As the effective date approaches, the underwriter and company sit down and decide on

the price. This isn't an easy decision: it depends on the company, the success of the road show,

and most importantly, current market conditions. Of course, it's in both parties' interest to get as

much as possible.

Finally, the securities are sold on the stock market and the money is collected from investors.

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SIGNIFICANCE OF STUDY

A Corporate may raise capital in the primary market by way of an IPO.

IPO is the largest source of investment for the investors.

IPO is the largest source of funds with long or indefinite maturity for the company.

This study signifies the trends of IPO in India.

This study signifies the how to choose an IPO.

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Financial and Capital Markets

A financial market is a place where financial instruments are exchanged. Financial

market can be classified on the basis of the nature of instruments exchanged in the economy.

Such instruments can broadly divided in two parts i.e. claim instruments and currency

instruments. The subdivision of the major markets is shown in the following figure:

Financial Market

Securities Market Currency Market /

Forex Market

National Market International Market

Domestic Market Foreign Market

Capital Market Money Market

Equity Market Debt Market

Primary Market Secondary Market

Spot Market Derivative Market

Source: Investment Analysis & portfolio management

M.Ranganathan & R.Madhumathi

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1. Securities Market:

Securities are financial instruments that have been created to represent a legal obligation

to pay a sum in future in return for the current receipts of value and the security market is a

place or system where these securities are exchanged. Security market can be further

divided into domestic and foreign market.

2. Domestic Market:

Domestic market control exclusively to firms registered in a country. The country’s

regulatory authority such as RBI and SEBI regulated the functioning of money market and

capital market in domestic market.

3. Foreign Market:

Due to globalization each nation also allows firms registered outside the country to

participate in its economic activities for business expansion. These firms are controlled by

the foreign segments.

4. Capital Market:

Capital market claims both long term fixed claim securities and equity claim securities.

Capital market composed all marketable securities which taken place into the market for the

trading purposes.

5. Money Market:

Money markets are short-term debt instruments market. Debt is a fixed income security

and represents the borrowings of a market player.

6. Forex Market:

The foreign exchange market is an international currency exchange market. It caters to

the need of international mobility of funds. It exchanges the currency of one country to

another country.

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7. Spot Market:

Spot market denotes the current trading price of financial instruments. In the context of

time, the spot market may range between one day, two days, or a week.

8. Derivative Market:

The derivative market is a future market. Trade takes place here with the intention to

settle it at a later date. The derivative market has forward, future, options or other derivative

instruments trading.

Capital Market is one of the most important segments of the Indian Financial System. It is

the market available to the Companies for meeting their requirements of long-term funds. It

refers to all the facilities and the institutional arrangements for borrowing and lending funds. In

other words, it is concerned with the raising of money capital through long term investments.

The demand for long term capital comes predominantly from private sector manufacturing

industries, agriculture, and trade and Government agencies. While the supply of funds for the

Capital Market comes largely from individuals and corporate savings, banks, insurance

companies and other financing agencies and surplus government funds.

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Capital Market

Primary Market Secondary Market

Indian Capital Market is divided in further two parts:

Gilt-edged Market – A market for government and semi-govt. securities which is

backed by the Reserve Bank of India.

Industrial Securities Market – It refers to the market which deals in the equities and

debentures of corporate. It is further divided into two parts :

Primary Market – Deals with new securities.

Secondary Market – Buying and selling of securities of existing Co’s.

What are IPO’s?

Primary Market is the door-way of corporate to enter in the Capital Market new issues /

fresh / subsequent securities. It deals with the issue of new securities in terms of Equity shares,

Preference shares, Debt Instruments, Central and state government projects, various public

sector industrial units and post trusts etc. Primary market consists issue of securities to public

which is popularly known as “Initial Public Offers” comes into the existence first time and

fresh.

Regulatory Framework

In India Capital Market is regulated by the Capital Market division and Department of

Economic Affairs, Ministry of Finance. It is responsible for:

Institutional reforms in securities markets.

Building regulatory and market institutions.

Strengthening investor protection mechanism.

Providing efficient legislative for securities markets.

Securities and Exchange Board of India Act, 1992 is regulatory authority established under

( SEBI Act 1992 ) in order to protect the investors interest in securities as well as for the

development of Capital Market. Some other laws are Securities Contracts (Regulation

16

Act) 1956 and Depositories Act 1996. SEBI has a direct control on the securities of the

corporate because it is necessary to be registered under the SEBI Act, governed by the

government of India and fully supported by the RBI.

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ISSUES IN PRIMARY MARKET

FINANCIALS OF IPO’s

Primarily, issues can be classified as a Public, Rights or preferential issues (also known as

private placements). While public and rights issues involve a detailed procedure, private

placements or preferential issues are relatively simpler. The classification of issues is illustrated

below:

Public issues can be further classified into Initial Public offerings and further public offerings.

In a public offering, the issuer makes an offer for new investors to enter its shareholding

family. The issuer company makes detailed disclosures as per the DIP guidelines in its offer

document and offers it for subscription. The significant features and figure are showed below:

18

RightsPublic

Issues

Private Placement

Preferential Issue

Private Placement

Further Public OfferingsInitial Public Offerings

Qualified Institutions Placement

Initial Public Offering (IPO) is when an unlisted company makes either a fresh issue of

securities or an offer for sale of its existing securities or both for the first time to the public.

This paves way for listing and trading of the issuer’s securities.

A follow on public offering (FPO) is when an already listed company makes either a fresh

issue of securities to the public or an offer for sale to the public, through an offer document. An

offer for sale in such scenario is allowed only if it is made to satisfy listing or continuous listing

obligations.

Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its

existing shareholders as on a record date. The rights are normally offered in a particular ratio to

the number of securities held prior to the issue. This route is best suited for companies who

would like to raise capital without diluting stake of its existing shareholders unless they do not

intend to subscribe to their entitlements.

A preferential issue is an issue of shares or of convertible securities by listed companies to a

select group of persons under Section 81 of the Companies Act, 1956 which is neither a rights

issue nor a public issue. This is a faster way for a company to raise equity capital. The issuer

company has to comply with the Companies Act and the requirements contained in Chapter

pertaining to preferential allotment in SEBI (DIP) guidelines which inter-alias include pricing,

disclosures in notice etc.

Private placement is an issue of shares or of convertible securities by a company to a selected

group of persons under Section 81 of the Companies Act, 1956 that is neither a rights issue nor

a public issue. This is a faster way for a company to raise equity capital. A qualified institutions

placement is a private placement of equity shares or securities convertible into equity shares by

a listed company to Qualified Institutions Buyers.

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Functionaries of an IPO

The functionaries in IPO are those concerned with the formation of joint stock

companies and the issue of their securities to the public. Public issue is essentially an exercise

involving active participation of number agencies.

The promoter, as a principal representative of the company, which is making the public

issue, should be clear in his mind about the number of agencies involved and their respective

roles in the entire exercise so as to be able to coordinate effectively the efforts of these

agencies. These functionaries are:

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Promoter

Financial

Publicity

Advertising

Others

Brokers

Bankers

Govt. /Statutor

yAgencie

s

Registrar

Managers

To TheIssue

IPO

ELIGIBILITY NORMS FOR MAKING THESE ISSUES

SEBI has laid down eligibility norms for entities accessing the primary market through public

issues. There is no eligibility norm for a listed company making a rights issue, as it is an offer

made to the existing shareholders who are expected to know their company. The main entry

norms for companies making a public issue (IPO or FPO) are summarized as under:

Entry Norm I (EN I): The Company shall meet the following requirements:

(a) Net Tangible Assets of at least Rs. 3 crores for 3 full years.

(b) Distributable profits in at least three years

(c) Net worth of at least Rs. 1 crore in three years

(d) If change in name, at least 50% revenue for preceding 1 year should be from the new

activity.

(e) The issue size does not exceed 5 times the pre- issue net worth

To provide sufficient flexibility and also to ensure that genuine companies do not suffer on

account of rigidity of the parameters, SEBI has provided two other alternative routes to

company not satisfying any of the above conditions, for accessing the primary Market, as

under:

Entry Norm II (EN II):

(a) Issue shall be through book building route, with at least 50% to be mandatory allotted to

the Qualified Institutional Buyers (QIBs).

(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a

compulsory market-making for at least 2 years OR

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Entry Norm III (EN III):

(a) The “project” is appraised and participated to the extent of 15% by FIs/Scheduled

Commercial Banks of which at least 10% comes from the appraiser(s).

(b) The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a

compulsory market-making for at least 2 years.

In addition to satisfying the aforesaid eligibility norms, the company shall also satisfy the

criteria of having at least 1000 prospective allotters in its issue

CATEGORY OF ENTITIES WHICH ARE EXEMPTED FROM THE AFORESAID

ELIGIBILITY NORMS

SEBI (DIP) guidelines have provided certain exemptions from the eligibility norms. The

following are eligible for exemption from entry norms.

(a) Private Sector Banks

(b) Public Sector Banks

(c) An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS

or a bank which was earlier a PFI and not less than 5% of the project cost is financed by

any of these institutions.

(d) Rights issue by a listed company

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SEBI’S ROLE IN AN ISSUE

Any company making a public issue or a listed company making a rights issue of value of more

than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The

company can proceed further on the issue only after getting observations from SEBI. The

validity period of SEBI’s observation letter is three months only i.e. the company has to open

its issue within three months period

SEBI does not recommend any issue nor does take any responsibility either for the financial

soundness of any scheme or the project for which the issue is proposed to be made or for the

correctness of the statements made or opinions expressed in the offer document.

It is to be distinctly understood that submission of offer document to SEBI should not in any

way be deemed or construed that the same has been cleared or approved by SEBI. The Lead

manager certifies that the disclosures made in the offer document are generally adequate and

are in conformity with SEBI guidelines for disclosures and investor protection in force for the

time being. This requirement is to facilitate investors to take an informed decision for making

investment in the proposed issue.

The investors should make an informed decision purely by themselves based on the contents

disclosed in the offer documents. SEBI does not associate itself with any issue/issuer and

should in no way be construed as a guarantee for the funds that the investor proposes to invest

through the issue. However, the investors are generally advised to study all the material facts

pertaining to the issue including the risk factors before considering any investment. They are

strongly warned against any ‘tips’ or news through unofficial means.

“DIP” guidelines

The primary issuances are governed by SEBI in terms of SEBI (Disclosures and Investor

protection) guidelines. SEBI framed its DIP guidelines in 1992. Many amendments have been

carried out in the same in line with the market dynamics and requirements. In 2000, SEBI

issued “Securities and Exchange Board of India (Disclosure and Investor Protection)

Guidelines, 2000” which is compilation of all circulars organized in chapter forms. These

guidelines and amendments thereon are issued by SEBI India under section 11 of the Securities

and Exchange Board of India Act, 1992. SEBI (Disclosure and investor protection) guidelines

23

2000 are in short called DIP guidelines. It provides a comprehensive framework for issuances

buy the companies.

SEBI ensure compliance with DIP

The Merchant Banker are the specialized intermediaries who are required to do due diligence

and ensure that all the requirements of DIP are complied with while submitting the draft offer

document to SEBI. Any non compliance on their part, attract penal action from SEBI, in terms

of SEBI (Merchant Bankers) Regulations. The draft offer document filed by Merchant Banker

is also placed on the website for public comments. Officials of SEBI at various levels examine

the compliance with DIP guidelines and ensure that all necessary material information is

disclosed in the draft offer documents.

Central Listing Authority (CLA) & role of SEBI in the processing of Offer documents for

an issue:

The Central Listing Authority’s (CLA) functions have been detailed under Regulation 8 of

SEBI (Central Listing Authority) Regulations, 2003 (CLA

Regulations) issued on August 21, 2003 and amended up to October 14, 2003.

In brief, it covers processing applications for letter precedent to listing from applicants; to make

recommendations to the Board on issues pertaining to the protection of the interest of the

investors in securities and development and regulation of the securities market, including the

listing agreements, listing conditions and disclosures to be made in offer documents; and; to

undertake any other functions as may be delegated to it by the Board from time to time.

SEBI as the regulator of the securities market examines all the policy matters pertaining to

issues and will continue to do so even during the existence of the CLA.

The CLA is not yet operational.

Difference between an Offer Document, RHP, A Prospectus and an Abridged Prospectus

“Offer document” means Prospectus in case of a public issue or offer for sale and Letter of

Offer in case of a rights issue which is filed Registrar of Companies (ROC) and Stock

Exchanges. An offer document covers all the relevant information to help an investor to make

his/her investment decision.

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“Draft Offer document” means the offer document in draft stage. The draft offer documents

are filed with SEBI, at least 21 days prior to the filing of the Offer Document with ROC/ SEs.

SEBI may specifies changes, if any, in the draft Offer Document and the issuer or the Lead

Merchant banker shall carry out such changes in the draft offer document before filing the

Offer Document with ROC/SEs. The Draft Offer document is available on the SEBI website

for public comments for a period of 21 days from the filing of the Draft Offer Document with

SEBI.

“Red Herring Prospectus” is a prospectus which does not have details of either price or

number of shares being offered or the amount of issue. This is used in book building issues

only. In the case of book-built issues, it is a process of price discovery and the price cannot be

determined until the bidding process is completed. Hence, such details are not shown in the

Red Herring prospectus filed with ROC in terms of the provisions of the Companies Act. Only

on completion of the bidding process, the details of the final price are included in the offer

document. The offer document filed thereafter with ROC is called a prospectus.

“Abridged Prospectus” means the memorandum as prescribed in Form 2A under sub-section

(3) of section 56 of the Companies Act, 1956. It contains all the salient features of a prospectus.

It accompanies the application form of public

“Lock-in”

“Lock-in” indicates a freeze on the shares. SEBI (DIP) Guidelines have stipulated lock-in

requirements on shares of promoters mainly to ensure that the promoters or main persons, who

are controlling the company, shall continue to hold some minimum percentage in the company

after the public issue.

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“Promoter” definition

The promoter has been defined as a person or persons who are in over-all control of the

company, who are instrumental in the formulation of a plan or programmed pursuant to which

the securities are offered to the public and those named in the prospectus as promoters(s). It

may be noted that a director / officer of the issuer company or person, if they are acting as such

merely in their professional capacity are not be included in the definition of a promoter.

'Promoter Group' includes the promoter, an immediate relative of the promoter (i.e. any spouse

of that person, or any parent, brother, sister or child of the person or of the spouse). In case

promoter is a company, a subsidiary or holding company of that company; any company in

which the promoter holds 10% or more of the equity capital or which holds 10% or more of the

equity capital of the Promoter; any company in which a group of individuals or companies or

combinations thereof who holds 20% or more of the equity capital in that company also holds

20% or more of the equity capital of the issuer company. In case the promoter is an individual,

any company in which 10% or more of the share capital is held by the promoter or an

immediate relative of the promoter' or a firm or HUF in which the 'Promoter' or any one or

more of his immediate relative is a member; any company in which a company specified in (i)

above, holds 10% or more, of the share capital; any HUF or firm in which the aggregate share

of the promoter and his immediate relatives is equal to or more than 10% of the total, and all

persons whose shareholding is aggregated for the purpose of disclosing in the prospectus

"shareholding of the promoter group"

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Pricing Of an Issue

Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines

have provided that the issuer in consultation with Merchant Banker shall decide the price.

There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation.

The company and merchant banker are however required to give full disclosures of the

parameters which they had considered while deciding the issue price. There are two types of

issues one where company and LM fix a price (called fixed price) and other, where the

company and LM stipulate a floor price or a price band and leave it to market forces to

determine the final price (price discovery through book building process).

Fixed Price Offers

An issuer company is allowed to freely price the issue. The basis of issue price is disclosed in

the offer document where the issuer discloses in detail about the qualitative and quantitative

factors justifying the issue price. The Issuer company can mention a price band of 20% (cap in

the price band should not be more than 20% of the floor price) in the Draft offer documents

filed with SEBI and actual price can be determined at a later date before filing of the final offer

document with SEBI/Rocs.

“Price Discovery through Book Building Process”

Book Building method of IPO27

Book Building is basically a capital issuance process used in Initial Public Offer (IPO) which

aids price and demand discovery. It is a process used for marketing a public offer of equity

shares of a company. It is a mechanism where, during the period for which the book for the IPO

is open, bids are collected from investors at various prices, which are above or equal to the

floor price. The process aims at tapping both wholesale and retail investors. The offer/issue

price is then determined after the bid closing date based on certain evaluation criteria.

The Process:

The Issuer who is planning an IPO nominates a lead merchant banker as a 'book runner'.

The Issuer specifies the number of securities to be issued and the price band for orders.

The Issuer also appoints syndicate members with whom orders can be placed by the

investors.

Investors place their order with a syndicate member who inputs the orders into the

'electronic book'. This process is called 'bidding' and is similar to open auction.

A Book should remain open for a minimum of 5 days.

Bids cannot be entered less than the floor price.

Bids can be revised by the bidder before the issue closes.

On the close of the book building period the 'book runner evaluates the bids on the basis

of the evaluation criteria which may include -

o Price Aggression

o Investor quality

o Earliness of bids, etc.

The book runner and the company conclude the final price at which it is willing to issue

the stock and allocation of securities.

Generally, the number of shares is fixed; the issue size gets frozen based on the price

per share discovered through the book building process.

Allocation of securities is made to the successful bidders.

Book Building is a good concept and represents a capital market which is in the process

of maturing.

Guidelines for Book Building

28

Rules governing book building is covered in Chapter XI of the Securities and Exchange Board

of India (Disclosure and Investor Protection) Guidelines 2000.

BSE's Book Building System

BSE offers the book building services through the Book Building software that runs on

the BSE Private network.

This system is one of the largest electronic book building networks anywhere spanning

over 350 Indian cities through over 7000 Trader Work Stations via eased lines, VSATs

and Campus LANS

The software is operated through book-runners of the issue and by the syndicate

member brokers. Through this book, the syndicate member brokers on behalf of

themselves or their clients' place orders.

Bids are placed electronically through syndicate members and the information is

collected on line real-time until the bid date ends.

In order to maintain transparency, the software gives visual graphs displaying price v/s

quantity on the terminals.

Initial Public Offerings

Corporate may raise capital in the primary market by way of an initial public offer, rights issue

or private placement. An Initial Public Offer (IPO) is the selling of securities to the public in 29

the primary market. This Initial Public Offering can be made through the fixed price method,

book building method or a combination of both.

In case the issuer chooses to issue securities through the book building route then as per SEBI

guidelines, an issuer company can issue securities in the following manner:

a. 100% of the net offer to the public through the book building route.

b. 75% of the net offer to the public through the book building process and 25% through

the fixed price portion.

Difference between shares offered through book building and offer of shares through

normal public issue:

Features Fixed Price process Book Building process

Pricing Price at which the securities are

offered/allotted is known in

advance to the investor.

Price at which securities will be

offered/allotted is not known in advance to

the investor. Only an indicative price range is

known.

Demand Demand for the securities offered

is known only after the closure of

the issue

Demand for the securities offered can be

known everyday as the book is built.

Payment Payment if made at the time of

subscription wherein refund is

given after allocation.

Payment only after allocation.

Price Band

The red herring prospectus may contain either the floor price for the securities or a price band

within which the investors can bid. The spread between the floor and the cap of the price band

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shall not be more than 20%. In other words, it means that the cap should not be more than

120% of the floor price.

The price band can have a revision and such a revision in the price band shall be widely

disseminated by informing the stock exchanges, by issuing press release and also indicating the

change on the relevant website and the terminals of the syndicate members. In case the price

band is revised, the bidding period shall be extended for a further period of three days, subject

to the total bidding period not exceeding thirteen days.

Decision on the Price Band

It may be understood that the regulatory mechanism does not play a role in setting the price for

issues. It is up to the company to decide on the price or the price band, in consultation with

Merchant Bankers.

The basis of issue price is disclosed in the offer document. The issuer is required to disclose in

detail about the qualitative and quantitative factors justifying the issue price.

What is firm allotment?

A company making an issue to public can reserve some shares on “allotment on firm basis” for

some categories as specified in DIP guidelines. Allotment on firm basis indicates that allotment

to the investor is on firm basis. DIP guidelines provide for maximum % of shares which can be

reserved on firm basis. The shares to be allotted on “firm allotment category” can be issued at a

price different from the price at which the net offer to the public is made provided that the price

at which the security is being offered to the applicants in firm allotment category is higher than

the price at which securities are offered to public.

What is reservation on competitive basis?

Reservation on Competitive Basis is when allotment of shares is made in proportion to the

shares applied for by the concerned reserved categories. Reservation on competitive basis can

be made in a public issue to the Employees of the company, Shareholders of the promoting

companies in the case of a new company and shareholders of group companies in the case of an

existing company, Indian Mutual Funds, Foreign Institutional Investors (including non resident

Indians and overseas corporate bodies), Indian and Multilateral development Institutions and

Scheduled Banks.

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Preference While Doing the Allotment

The allotment to the Qualified Institutional Buyers (QIBs) is on a discretionary basis. The

discretion is left to the Merchant Bankers who first disclose the parameters of judgment in the

Red Herring Prospectus.

There are no objective conditions stipulated as per the DIP Guidelines. The Merchant Bankers

are free to set their criteria and mention the same in the Red Herring Prospectus.

Who is eligible for reservation and how much? (QIBs, NIBs, etc.)

A book built issue under entry Norm II shall offer not less than 50% to the QIBs and not less

than 25% to the retail investors. The rest may be allotted to the Non Institutional buyers or

High Net Worth individuals.

RETAIL INVESTOR DEFINITION

Retail individual investor’ means an investor who applies or bids for securities of or for a value

of not more than Rs.50,000.He can bid in a book-built issue for a value not more than

Rs.50,000.

Any bid made in excess of this will be considered in the HNI category.

“Online Bidding”

A company proposing to issue capital to public through the on-line system of the stock

exchange for offer of securities can do so if it complies with the requirements under Chapter

11A of DIP Guidelines. The appointment of various intermediaries by the issuer includes a

prerequisite that such members/registrars have the required facilities to accommodate such an

online issue process. An investor may place his bids through the online terminals offered by

some of the brokers.

Demat Account

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As per the requirement, all the public issues of size in excess of Rs.10 crore, are too made

compulsorily in the demat mode. Thus, if an investor chooses to apply for an issue that is being

made in a compulsory demat mode, he has to have a demat account and has the responsibility

to put the correct DP ID and Client ID details in the bid/application forms.

The investor can change or revise the quantity or price in the bid using the form for

changing/revising the bid that is available along with the application form. However, the entire

process of changing of revising the bids shall be completed within the date of closure of the

issue.

The investor is entitled to receive a Confirmatory Allotment Note (CAN) in case he has been

allotted shares within 15 days from the date of closure of the issue. The registrar has to ensure

that the demat credit or refund as applicable is completed within 15 days of the closure of the

issue.

Open book/closed book

Presently, in issues made through book building, Issuers and merchant bankers are required to

ensure online display of the demand and bids during the bidding period. This is the Open book

system of book building. Here, the investor can be guided by the movements of the bids during

the period in which the bid is kept open.

Under closed book building, the book is not made public and the bidders will have to take a call

on the price at which they intend to make a bid without having any information on the bids

submitted by other bidders.

Hard underwriting

Hard underwriting is when an underwriter agrees to buy his commitment at its earliest stage.

The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in case the shares

are not subscribed by investors, the issue is devolved on underwriters and they have to bring in

the amount by subscribing to the shares. The underwriter bears a risk which is much higher in

soft underwriting.

Soft underwriting

Soft underwriting is when an underwriter agrees to buy the shares at later stages as soon as the

pricing process is complete. He then, immediately places those shares with institutional players.

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The risk faced by the underwriter as such is reduced to a small window of time. Also, the soft

underwriter has the option to invoke a force Majeure (acts of God) clause in case there are

certain factors beyond the control that can affect the underwriter’s ability to place the shares

with the buyers.

Cut Off Price

In Book building issue, the issuer is required to indicate either the price band or a floor price in

the red herring prospectus. The actual discovered issue price can be any price in the price band

or any price above the floor price. This issue price is called “Cut off price”. This is decided by

the issuer and LM after considering the book and investors’ appetite for the stock. SEBI (DIP)

guidelines permit only retail individual investors to have an option of applying at cut off price.

Differential pricing

Pricing of an issue where one category is offered shares at a price different from the other

category is called differential pricing. In DIP Guidelines differential pricing is allowed only if

the securities to applicants in the firm allotment category are at a price higher than the price at

which the net offer to the public is made. The net offer to the public means the offer made to

the Indian public and does not include firm allotments or reservations or promoters’

contributions.

Basis of Allocation/Basis of Allotment

After the closure of the issue, the bids received are aggregated under different categories i.e.,

firm allotment, Qualified Institutional Buyers (QIBs), Non-Institutional Buyers (NIBs), Retail,

etc. The oversubscription ratios are then calculated for each of the categories as against the

shares reserved for each of the categories in the offer document. Within each of these

categories, the bids are then segregated into different buckets based on the number of shares

applied for. The oversubscription ratio is then applied to the number of shares applied for and

the number of shares to be allotted for applicants in each of the buckets is determined.Then, the

number of successful allot tees is determined. This process is followed in case of proportionate

allotment. In case of allotment for QIBs, it is subject to the discretion of the post issue lead

manager.

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PERFORMANCE OF AN IPO

Any analyst can refer to a company's fundamentals without actually saying anything

meaningful. So what fundamentals are, how and why they are analyzed, and why fundamental

analysis is often a great starting point to picking good companies.

The Theory

The goal of analyzing a company's Performance is to find a stock's 'intrinsic value', a term for

what you believe a stock is really worth--as opposed to the value at which it is being traded in

the marketplace. If the intrinsic value is more than the current share price, analysis is showing

that the stock is worth more than its price and that it makes sense to buy the stock.

Although there are many different methods of finding the intrinsic value, the premise behind all

the strategies is the same: a company is worth the sum of its discounted cash flows. This means

that a company is worth all of its future profits added together. And these future profits must be

'discounted' to account for the time value of money, that is, the force by which the $1 one

receive in a year's time is worth less than $1 one receive today.

The idea behind intrinsic value equaling future profits makes sense if one thinks about how a

business provides value for its owner(s). If a small business, the worth of that business is the

money one can take from the company year after year (not the growth of the stock). And one

can take something out of the company only if you have something left over after you pay for

supplies and salaries, reinvest in new equipment, and so on. A business is all about profits,

which is the basis of intrinsic value.

Discounted Cash Flow – DCF

A valuation method used to estimate the attractiveness of an investment opportunity. DCF

analysis uses future free cash flow projections and discounts them to arrive at a present value,

which is used to evaluate the potential for investment. Most often discounted by the weighted

average cost of capital.

If the value arrived at through DCF analysis is lower then the current cost of the investment, the

opportunity may be a good one. 

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Basic Formula:

DCF models are powerful but they do have shortcomings. DCF is merely a mechanical

valuation tool. Small changes in inputs can result in large changes in the value of a company.

Instead of trying to project the cash flows to infinity, a terminal value approach is taken in the

valuation. A simple annuity is used to estimate the terminal value past 10. This is done because

as time goes on, it is harder to come to a realistic estimate of the cash flows.

One of the assumptions of the discounted cash flow theory is that people are rational, that

nobody would buy a business for more than its future discounted cash flows. Since a stock

represents ownership in a company, this assumption applies to the stock market. But still stocks

exhibit volatile movements. It doesn't make sense for a stock's price to fluctuate so much when

the intrinsic value isn't changing by the minute.

The fact is that many people do not view stocks as a representation of discounted cash flows,

but as trading vehicles. They don’t care what the cash flows are if they can sell the stock to

somebody else for more than what you paid for it. Cynics of this approach have labeled it the

"greater fool theory," since the profit on a trade is not determined by a company's value, but

about speculating whether one can sell to some other investor (the fool). On the other hand, a

trader would say that investors relying solely on fundamentals are leaving themselves at the

mercy of the market instead of observing its trends and tendencies.

This debate demonstrates the general difference between a technical and fundamental investor.

A follower of technical analysis is guided not by value, but by the trends in the market often

represented in charts. Both fundamental and technical analysis has limitations. The answer is

neither. As we mentioned in the introduction, every strategy has its own merits. In general,

fundamental is thought of as a long-term strategy, while technical is used more for short-term

strategies.

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Putting Theory into Practice

The idea of discounting cash flows seems okay in theory, but implementing it in real life is

difficult. One of the most obvious challenges is determining how far into the future one should

forecast cash flows. It's hard enough to predict next year's profits, so it is difficult for one to

predict the course of the next 10 years. What if a company goes out of business? What if a

company survives for hundreds of years? All of these uncertainties and possibilities explain

why there are many different models devised for discounting cash flows, but none completely

escapes the complications posed by the uncertainty of the future.

Qualitative Analysis

Fundamental analysis has a very wide scope. Valuing a company involves not only crunching

numbers and predicting cash flows but also looking at the general, more subjective qualities of

a company.

Management

The backbone of any successful company is strong management. The people at the top

ultimately make the strategic decisions and therefore serve as a crucial factor determining the

fate of the company. To assess the strength of management, investors can simply ask the

standard five W's: who, where, what, when, and why.

Who?

One should do some research, and find out who is running the company. Among other things,

one should know who the company's CEO, CFO, COO, and CIO are. Then one can move onto

the next question.

Where?

One need to find out where these people come from, specifically, their educational and

employment backgrounds. One should find out if these backgrounds make the people suitable

for directing the company in its industry. A management team consisting of people who come

from completely unrelated industries should raise questions. If the CEO of a newly-formed

mining company previously worked in the healthcare industry, small investors should find out

whether he or she has the necessary qualities to lead a mining company to success.

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What and When?

It is necessary to know what the management philosophy is. In other words, in what style do

these people intend to manage the company? Some managers are more personable, promoting

an open, transparent, and flexible way of running the business. Other management philosophies

are more rigid and less adaptable, valuing policy and established logic above all in the decision-

making process. One can discern the style of management by looking at its past actions. One

should ask himself if he agrees with this philosophy, and if he can see it working for the

company, given its size and the nature of its business.

Once one knows the style of the managers, it is now time to find out when this team took over

the company. Jack Welch, for example, was CEO of General Electric for over 20 years. His

long tenure is a good indication that he was a successful and profitable manager; otherwise, the

shareholders and the board of directors wouldn't have kept him around. If a company is doing

poorly, one of the first actions taken is management restructuring, which is change in

management due to poor results. If one sees a company continually changing managers, it may

be a sign to invest elsewhere.

At the same time, although restructuring is often brought on by poor management, it doesn't

automatically mean the company is doomed. For example, Chrysler Corporation was on the

brink of bankruptcy when Lee Iacocca, the new CEO, came in and installed a new management

team that renewed Chrysler's status as a major player in the auto industry. So, management

restructuring may be a positive sign, showing that a struggling company is making efforts to

improve its outlook and is about to see a change for the better.

Why?

A final factor to investigate is why these people have become managers. One should Look at

the manager's employment history, and try to see if these reasons are clear. Does this person

have the qualities needed to make someone a good manager for this company? Has he or she

been hired because of past successes and achievements, or has he or she acquired the position

through questionable means, such as self-appointment after inheriting the company?

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Know What a Company Does and How it Makes Money

A second important factor to consider when analyzing a company's qualitative factors is its

product(s) or service(s). How does this company make money? What is the company's business

model?

Knowing how a company's activities will be profitable is fundamental to determining the worth

of an investment. One of the biggest lessons taught by the dotcom bust of the late '90s is that

not understanding a business model can have dire consequences. Many people had no idea how

the dotcom companies were making money, or why they were trading so high. In fact, these

companies weren't making any money; it's just that their growth potential was thought to be

enormous. This led to overzealous buying based on a herd mentality, which in turn led to a

market crash. But not everyone lost money when the bubble burst: Warren Buffet didn't invest

in high-tech primarily because he didn't understand it. Although he was ostracized for this

during the bubble, it saved him billions of dollars in the ensuing dotcom fallout. One needs a

solid understanding of how a company actually generates revenue in order to evaluate whether

management is making the right decisions.

Industry/Competition

Aside from having a general understanding of what a company does, one should analyze the

characteristics of its industry, such as its growth potential. A mediocre company in a great

industry can provide a solid return, while a mediocre company in a poor industry will likely to

cause loss.

Market share is another important factor. One should look at how Microsoft thoroughly

dominates the market for operating systems. Anyone trying to enter this market faces huge

obstacles because Microsoft can take advantage of economies of scale. This does not mean that

a company in a near monopoly situation is guaranteed to remain on top, but one should be

careful about a risky venture.

Barriers against entry into a market can also give a company a significant qualitative advantage.

If compared, for instance, the restaurant industry to the automobile or pharmaceuticals

industries. Anybody can open up a restaurant because the skill level and capital required are

very low. The automobile and pharmaceuticals industries, on the other hand, have massive

barriers to entry: large capital expenditures, exclusive distribution channels, government

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regulation, patents, and so on. The harder it is for competition to enter an industry, the greater

the advantage for existing firms.

Brand Name

A valuable brand reflects years of product development and marketing. For example the most

popular brand name in the world: Coca-Cola. Many estimate that the intangible value of Coke's

brand name is in the billions of dollars! Massive corporations such as Proctor and Gamble rely

on hundreds of popular brand names like Tide, Head & Shoulders. Having a portfolio of brands

diversifies risk because the good performance of one brand can compensate for the lower

performance of another.

Assessing a company from a qualitative standpoint and determining whether one should invest

in it are as important as looking at sales and earnings. This strategy may be one of the simplest,

but it is also one of the most effective ways to evaluate a potential investment.

The Concept of Technical Analysis With Reference To Initial Public Offerings

Technical Analysis

Technical analysis is the polar opposite of fundamental analysis, which is the basis of every

method explored so far in this tutorial. Technical analysts, or technicians, select stocks by

analyzing statistics generated by past market activity, prices, and volumes. Sometimes also

known as chartists, technical analysts look at the past charts of prices and different indicators to

make inferences about the future movement of a stock's price.

Philosophy of Technical Analysis

UNDERLYING THEORIES OF TECHNICAL ANALYSIS:

Chart analysis (also called technical analysis) is the study of market action, using price charts,

to forecast future price direction. The cornerstone of the technical philosophy is the belief that

all factors that influence market price--fundamental information, political events, natural

disasters, and psychological factors--are quickly discounted in market activity. In other words,

the impact of these external factors will quickly show up in some form of price movement,

either up or down.

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The most important assumptions that all technical analysis techniques are based upon can be

summarized as follows:

1. Prices already reflect, or 'discount', relevant information. In other words, markets are

efficient.

2. Prices move in trends.

3. History repeats itself.

Technical analysis is a method of evaluating securities by analyzing statistics generated by

market activity, past prices, and volume. Technical analysts do not attempt to measure a

security's intrinsic value; instead they look for patterns and indicators on stock charts that will

determine a stocks future performance.

Technical analysis has become popular over the past several years, as more and more people

believe that the historical performance of a stock is a strong indication of future performance.

The use of past performance should not come as a big surprise. People using fundamental

analysis have always looked at the past performance by comparing fiscal data from previous

quarters and years to determine future growth. The difference lies in the technical analyst's

belief that securities move with very predictable trends and patterns. These trends continue

until something happens to change the trend, and until this change occurs, price levels are

predictable.

Pure technical analysts couldn't care less about the elusive intrinsic value of a company or any

other factors that preoccupy fundamental analysts, such as managements, business models, or

competition. Technicians are concerned with the trends implied by past data, charts, and

indicators and they often make a lot of money trading companies they know almost nothing

about.

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Technical Analysis as a Long-Term Strategy

Technical analysts are usually very active in their trades, holding positions for short periods in

order to capitalize on fluctuations in price, whether up or down. A technical analyst may go

short or long on a stock, depending on what direction the data is saying the price will move. If a

stock does not perform the way a technician thought it would, he or she wastes little time

deciding whether to exit his or her position, using stop loss orders to mitigate losses. Whereas a

value investor must exercise a lot of patience and wait for the market to correct it’s under

valuation of a company, the technician must possess a great deal of trading agility and know

how to get in and out of positions with speed.

Support and Resistance

Among the most important concepts in technical analysis are support and resistance. These are

the levels at which technicians expect a stock to start increasing after a decline (support), or to

begin decreasing after an increase (resistance). Trades are generally entered around these

important levels because they indicate the way in which a stock will bounce. They will enter

into a long position if they feel a support level has been hit, or enter into a short position if they

feel a resistance level has been struck.

Technicians have hundreds of indicators and chart patterns to use for picking stocks. However,

it is important to note that no one indicator or chart pattern is infallible or absolute; the

technician must interpret indicators and patterns, and this process is more subjective than

formulaic.

Technical analysis is unlike any other stock picking strategy--it has its own set of concepts, and

it relies on a completely different set of criteria than any strategy employing fundamental

analysis. However, regardless of its analytical approach, mastering technical analysis requires

discipline and savvy, just like any other strategy.

Some technical analysts claim they can be extremely accurate a majority of the time. There are

many instances of investors successfully trading securities with only the knowledge of its chart

and without even understanding what the company does. Technical analysis is a terrific tool,

but most agree that it is much more effective when combined with fundamental analysis.

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TYPES OF INFORMATION REQUIRED TO ASSESS A COMPANY’S IPO

The Initial Public Offering or IPO market as it is known, received a new lease of life in FY04-

05. With high profile issues like, NTPC and TCS opening at more than 3 and 10 times their

issue price respectively, investors are flocking to the IPO market like never before. Companies,

which had earlier shied away from the capital market, are now returning with a vengeance to

satiate the appetite of investors.

But one shouldn’t just jump for an IPO as soon as it is announced. Here an attempt has been

made to outline some issues that experts’ advice investors should look at before them making

investment decision.

Adequate research is, without a doubt, the most effective way to identify and stay away from

the IPO disasters waiting to happen. The prospectus, which contains nearly all aspects of a

company's business and game plan, is the first place any investor interested in purchasing a new

issue should look.

Before investing in an IPO, small investors are suggested by experts to run a check on the

following factors:

Lead Managers to the issue

Second-tier investment banks -- Investment banks hired by a company to handle an IPO must

do a fair amount of due diligence, so it's always comforting when the names on the front of a

prospectus are well-known and well-regarded. Of course, even the best banks take out some

turkeys. Plus, a number of small regional banks have solid reputations.

The Lead Managers act as a catalyst as they attempt to bring in some credibility to the offer and

their accountability is also very high. It is to be remembered that the lead managers’ credibility

could act only as an indicator to the proposed issue, but does not assure success. There have

been poor issues from good merchant bankers in the past.

For the purpose of security, one can look for category one lead managers for judging the

quality of the issue that includes DSP Merrill Lynch, HSBC Securities and Kotak Mahindra

among others.

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Promoter holding in the company--- participation from financial institutions or a venture

capital firm

Issues where post-issue promoters’ holding is more than 80% may indicate a lack of liquidity in

the stock since there are fewer shareholders trading fewer shares.

One should be careful of companies that have issued shares on a preferential basis to promoters

in high proportion, so as to increase their stake in the company. Also small investors should

find out if this is an offer for sale or a genuine Initial Public Offering. In case of offer for sale,

the issuing company may not benefit totally.

Small investors should look for companies in which venture capital firms or financial

institutions have participation or substantial interest. Also look for the shareholding pattern.

This would indicate the risk profile of the company and the expectation of the institution from

the company. In case of institution, look for nationalized banks and all India level financial

institution such as ICICI, IFCI IDBI etc.

Small investors should be careful of companies whose cost of project and means of finance

have not been appraised by banks or financial institutions.

Selling stockholders -- It's usually a bad sign when a large number of shares in an IPO come

from selling stockholders, meaning pre-offering investors who are cashing out. Not only does it

mean that the company won't receive the money from the sale of those shares, but it also should

make one wonder why investors would want to sell their shares so quickly if a company's

prospects are strong. In fact, investors usually prefer that management retain a sizable stake in

the firm after the offering is completed. The number of selling stockholders is found in a

section called "The Offering," while management's total stake can be found in "Principal and

Selling Stockholders."

Where is the company investing money?

If the major portion of fund mobilized is being invested in land, buildings (the so-called green

field issues), small investors should be careful.

If the company is utilizing a portion of issue proceeds towards retiring high-cost debts, it would

benefit the company in terms of lower interest outflow and therefore higher profitability. Also

check the proportion of money that is being invested in new projects that it is venturing into.

This would give some judgment on the estimated profitability of the company.

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If a company plans majority of the money to pay off debt or dole out a huge dividend to pre-

IPO investors, watch out. That means people buying shares in the IPO are in essence paying for

the company's past, not its future. Also be careful when a company says it's allocating most of

the money for general corporate purposes. It's comforting if a company has more specific ideas

about where your money will be invested -- acquisitions, advertising, capital formation,

research and development, etc. Found in "Use of Proceeds

Which sector does the company operate? What is the growth prospect of the company vis-

à-vis the sector?

The growth of the company in proportion to the growth of the market in which it operates has

to be seen. Also small investors should look out for its market share or the projected market

share vis-à-vis domestic competition. For example, figures of global software market or Indian

software market do not indicate the exact future growth potential of the company since it is

inclusive of all products and services. Export projection of the sector need not necessarily

reflect the export potential of the company. See what the company is exporting and export

income as a percentage of sales.

Each sector has its own internal and external factors that influence the operation of the

company. For example, software sector is vulnerable to high employee turnover.

Promoter’s experience

Whether the promoters have previous experience in transforming organizations from the grass

root level in the same industry to a successful business? What is the experience they have in the

sector the company is operating in or any other sector. Promoter experience is very crucial.

Also small investors should check out the profitability of any subsidiary or affiliate company in

which promoters has a stake or substantial interest. This would enable them to ascertain the

management’s efficiency in terms of managing organizations.

Small investors should check for litigations against the promoters, nature of litigation and the

promoter’s extent of liability, if any.

Declining revenue -- If revenue for a company's most recent fiscal year is down from the year-

ago period, it may be time to run as far away as possible. Revenue for companies looking to go

public should be growing rather significantly. Even slowing revenue growth is a warning sign.

At the very least, read a company's explanation for the revenue slowdown, found later in the

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prospectus. Revenue totals can be found in "Summary Consolidated Financial Data" or

"Selected Consolidated Financial Data." The explanation behind the results is found in

"Management's Discussion and Analysis of Financial Condition and Results of Operations."

Declining margins -- Along the same lines as declining revenue, declining operating margins

are not a good sign. It means the company is becoming less and less profitable. However, if a

company is in a fast-changing, highly competitive industry, it may need to sacrifice

profitability for market share and brand equity. Again, read the explanation behind the

shrinking margins. Margin totals found in "Summary Consolidated Financial Data" or

"Selected Consolidated Financial Data." Explanation behind results can be found in

"Management's Discussion and Analysis of Financial Condition and Results of Operations."

Working capital deficit -- This is when a company's liabilities, or debts, are greater than its

assets. This is not uncommon for a new issue, but it should be explained and should disappear

on an "as adjusted" basis after the completion of the offering. Details can be found in

"Summary Consolidated Financial Data" and an explanation is in "Liquidity and Capital

Resources."

Other financial red flags -- A number of other problems can be found on a company's balance

sheet or income statement. Things such as inventories or accounts receivable rising more

rapidly than revenue, high interest expenses, or extraordinary charges should be explained.

Found in "Selected Consolidated Financial Data" with more detail in the "Index to

Consolidated Financial Statements."

Over-reliance on one customer -- A clear danger sign. Several IPO’s have imploded after the

companies announced they were losing one of their major customers. Of course, like all of

these warning signs, there are exceptions. Found in "Risk Factors."

Supplier reliance -- A company can be too reliant on its suppliers as well as its customers.

Make sure a firm can switch from one supplier to another rather easily. Suppliers that double as

competitors are another danger. Found in "Risk Factors."

Competition -- Given that monopolies are illegal, competition will always be there, but you

better watch out if some well-run, well-capitalized firms are on the list. One name that jumps

quickly to mind: Microsoft. Found in "Risk Factors" and "Business."

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Other risk factors -- Patent disputes, heavy indebtedness, and litigation are just some of the

other more dangerous risks. Read the entire "Risk Factor" section carefully, but don't get overly

discouraged.

Too-small pie -- No matter how effective a company is at selling widgets, there needs to be

enough people willing to buy those widgets at high-enough prices. A company's target market

should be large and rapidly growing. This information can be found in the "Business" section.

Declining valuation -- Pre-offering an IPO be priced so they get a huge return on their initial

investment, often as much as 10 times. You can find out what those original investors paid on

average for their shares in the section entitled "Dilution." Compare that to the offering price. If

the two prices are close, then one can bet pre-IPO investors at one point were too optimistic

about the valuation for the company. While it may seem like a good deal to buy a company for

about the same price as earlier investors, there's a reason for the lower valuation. On very rare

occasions, IPO investors can actually pay less on average than the company's pre-offering

backers

Will the money invested yield maximum returns? Are the profit projections achievable?

Small investors should ask these questions:

What is the sales growth projected by the company vis-à-vis others in the sector and the

industry growth rate? If the market is growing at 20%, it does not mean that the company

would grow by 20%. Let’s take a hypothetical example. X Company manufactures paints.

Assume that the market is growing at 12% per annum. If sales of the company grew by, let’s

say 6%, it means that the company is growing at the rate of 0.5 x the industry growth. This

would help small investors in ascertaining growth potential of the company.

Are the margins projected comparable with other companies in the same sector?

Are there any unusual costs or unusual rise in other income (recurring/non-recurring)?

Some companies show an unusual rise in their sales and net profits by 5-10 times.

Justify this by comparing the sales growth figure.

Small investors should check the competitive scenario of the industry. If the company is

claiming that it is competing with e-enabled service providers, small investors should

check out what type of e-enabling services they provide. Addressing competition at a

macro level may reflect the exact picture.

47

How do small investors justify the price of the issue?

To justify pricing, Small investors should compare:

The price to earnings ratio (this is price that the issue is offered upon earnings per share)

which would throw light on the pricing of the issue.

operating margins (this is the income from operation less expenses from operation),

Market capitalization (it is the number of share multiplied by the price at which it is

offered) with the current companies in the sector that are listed in the market.

Does the company enjoy tax benefits?

Companies with foreign exchange earnings are entitled to certain exemptions. If the company’s

factory is in backward regions, they are entitled for subsidies as well as some tax exemptions.

Lower incidence of tax benefits companies as their cash flows are increased to that extent.

They may move the market; they may know the people who move the market (just to clarify

institutions, not individuals, move the market). Experts are not saying short-term horizons are

bad, but an individual investor should realize they are playing a tough game. It may be wise to

set a longer time frame, find good companies, let the hedge funds obsess on quarterly

fluctuations and wait for the market to recognize your good companies. Sometimes it happens

sooner that one expects!

At first glance, this fourth ingredient may sound like common sense, but far too often investors

simply do not practice the risk-mitigation tactic of avoiding big mistakes. Somewhat

instinctively, investors seem to hunt for big game – defending against losses is, well, boring.

But, if small investor can manage to avoid losses, he is really doing wonders for his average.

Small investors should balance search for high-return stocks with a vigorous effort to identify

red flags. Familiarize with the downside. This is harder because it is not as much fun as looking

for growth. After small investor has found a company he thinks can be a great investment, you

should resist the temptation to plunge ahead, and instead start to look for the company’s

potential difficulties. Develop a checklist of possible red flags and work down this list before

every investment.

48

If the red flags start to pile up, small investors should have to find the discipline to let the

opportunity go, at least for the moment. One of the hardest things in investing is to find a

company, get infatuated with it, get all geared up to buy the stock and then, upon discovering a

big red flag, find that you have to take a pass.

Small investors should be very careful about daily news. Most of it is noise. They need to ask

themselves just one question about every piece of news regarding their potential investment:

how does this news impact the fundamental prospects of this business? Most of the news that

falls into their lap is suspect.

All companies issue press releases that are understandably favorable. Much of the daily

commentary that pushes through the media onto your television or newspaper is highly trendy –

commentators are finding patterns that do not really exist and turning tips into news flashes.

All good investors get conditioned to be on the prowl for new information. However, on the

flipside of this is the key skill is of tuning out noise disguised as useful information. The talking

heads on cable television can seem dazzling as they rove from analyzing biotech to financials to

transportation to technology. How can they be experts on so many subjects? Well, they aren’t.

One starts to believe in an illusion when he thinks that he really knows his companies. All good

investors want to know as much as possible about their investments, but a company is like an

onion one can never fully peel. Every piece of information is valuable and if one has it, the

odds are tilted a bit in his favor, enhancing the hedge against failure. But, remember, one

reason making an educated investment based on incomplete information.

49

50

REVIEW OF EXISTING LITERATURE

India is a developing country and the growth of every country always depends on their

Market conditions into the Economy. Financial Market is the place which facilitates the transfer

of funds from surplus sectors (lenders) to deficit sectors (borrowers). Normally households

have investable funds or savings, which they lend to borrowers in the corporate and public

sectors whose requirement of funds far, exceeds their savings. A financial market consists of

investors or buyers of securities, borrower’s or seller’s of securities, intermediaries and

regulatory bodies. Financial Market always consists the Capital Market which has a productive

contribution in long-term investments.

A number of recent studies have examined the theory and evidence on IPO activity: why firms

go public, why they reward first-day investors with considerable under pricing, how

underwriters choose these first-day investors, and how IPO’s performing in the long run. Our

perspective on the literature is three-fold:

First, we believe that many IPO phenomena are not stationary. The long-run performance of

IPO’s is particularly sensitive to choice of sample period, but not necessarily how one would

expect it to be. Second, we believe research into IPO share allocation issues is the most

promising area of research in IPO’s at the moment. Third, we argue that asymmetric

information is not the primary driver of many IPO phenomena. Instead, we believe future

progress in the literature will come from non-rational and agency conflict explanations. We

describe some promising such alternatives.

Presented at the Atlanta AFA meetings on Friday, January 4, 2002. We thank Tim Loughran,

Maureen O’Hara, and Donghang Zhang for comments, and Kenneth French for supplying

factor returns. The authors maintain a more extensive bibliography of IPO-related work at

http://www.iporesources.org.. This website further contains links to many IPO-related sites and

some reasonably up-to-date information on aggregate IPO activity and IPO working papers.

The last two decades have seen an active market for initial public offerings (IPO’s) of

equity securities in the U.S. and around the world. This market activity has been accompanied

by a growing empirical and theoretical literature documenting and explaining the patterns.

Indeed, given the size of the IPO market relative to, say, the bond market, a disproportionate

51

amount of attention has focused on IPO’s. But if one measures market size by the extent of

uncertainty or potential misvaluations, this attention is warranted. Bonds are rarely misvalued

by more than a few basis points, whereas the increase from the offer price of an IPO to its first

closing market price can exceed several hundred percent. Thus, a substantial amount of money

is at risk. In this article, we review some of the literature on IPO activity, pricing, and

allocations. Space constraints require us to be selective. Indeed, an entire book by Jenkinson

and Ljungqvist (2001) is devoted to IPO’s.

According to Mahesh Vyas, MD & CEO, Centre for Monitoring Indian Economy Pvt

Ltd:

'Total resources raised from the primary capital markets accounted for just 8 per cent of total

capital formation in 2006-07'

The equity markets crashed 20 per cent in January and the volatility of daily returns has trebled

since then. The Reliance Power IPO closed below its issue price on the listing day.

Consequently, at least four companies shelved their plans to raise monies through the IPO

route. Many more are believed to have done the same. Nevertheless, the investments boom

currently under way would continue unhindered. Here are the reasons why:

The primary capital market does not contribute significantly to investments in India. Total

resources raised from the primary capital markets accounted for only 8 per cent of total capital

formation in 2006-07. If we exclude the resources raised through private placement of shares

and debt raised by banks, this share would fall to less than 4 per cent.

Funds raised through the issuance of shares constitute a small proportion of the total resources

raised by companies. Funds raised through the issuance of fresh capital (face value and

premium included) accounted for about 14 per cent of the total resources raised by

manufacturing companies during the four years ended March 2007.

Banks are flush with funds and ready to provide credit. Thus, alternate sources of funds are

easily available. Between April 2007 and January 2008, commercial banks raised fresh deposits

worth Rs 509,582 crore (Rs 5,095.82 billion).

52

According to CMIE's CapEx database, about 250 projects account for nearly half the total

investments on hand in the country. This includes the large power projects, steel projects,

infrastructure projects, refineries and SEZs. Only 14 of these projects have filed for an IPO.

The investments envisaged by them account for only 6 per cent of the total investment

envisaged by the 250 projects.

Evidently, in all measurable ways, the equity markets - primary and, therefore, secondary are

not important in the current investments boom. The capital markets did play a much bigger role

in investments in the mid-1990s. Resources raised from the markets accounted for 18.5 per cent

of India's capital formation in 1993-94 and 1994-95. But that boom that went bust pretty soon,

while the current one looks a lot more robust.

According to Budget 2008, India: The government realized the need for a regulated

environment and started to promote its necessity in capital markets. Spearheading this was the

establishment of The Securities and Exchange Board of India (SEBI) which became active in

1992. SEBI was assigned the role of monitoring and regulating the working of stockbrokers,

bankers to an issue, merchant bankers, portfolio managers, and other intermediaries who are

associated with stock markets. The effects of these structural changes are apparent from the

trends in the resources raised from primary market, which includes public issues, rights issues,

private placements and overseas issues

53

The Primary market 'Cycle'

(Rs bn) FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07

Public Issues 134.6 188.9 249.1 182.6 157.8 122.1 144.5 159.0

(% y-o-y growth)   40.3% 31.9% -26.7% -13.6% -22.6% 18.3% 10.0%

Rights Issues 121.6 129.1 115.7 61.3 26.6 20.0 36.1 16.2

    6.2% -10.4% -47.1% -56.5% -24.7% 80.2% -55.2%

Private Placement 18.7 79.8 115.4 65.3 104.8 347.9 251.9 403.2

    326.0% 44.5% -43.4% 60.4% 231.9% -27.6% 60.0%

Overseas Issues 7.5 79.9 78.8 25.7 56.8 11.0 181.0 39.9

    959.2% -1.3% -67.4% 120.7% -80.6% 1540.7% -78.0%

Total 282.4 477.7 558.9 334.9 346.0 501.1 613.5 618.2

    69.1% 17.0% -40.1% 3.3% 44.8% 22.4% 0.8%

Source: CMIE

According to www.greymarket.co.in, a website that tracks the potential listing value of an

issuer’s stock from its offer price, the Reliance Power Ltd IPO will command about 30%

premium on listing.

Reliance Power, an arm of the Reliance-Anil Dhirubhai Ambani Group, received bids worth

Rs7.5 trillion, against the issue size of Rs11,560 crore, and will have about 4.2 million

shareholders when it gets listed. Other big global IPO’s in January include Petrol Rabigh Co. of

Saudi Arabia that raised $1.2 billion and Vietcombank of Vietnam that netted $673 million.

Both China and the US witnessed huge declines in IPO proceeds—China slid 72.6%, while the

US dropped 46.1%.

The total value of public issues in India in 2008 could be worth Rs75, 000 crore, according to

New Delhi-based Prime Database, a primary market data provider. “We are expecting 150-175

public offers to collectively raise Rs75, 000 crore,” said chief executive Prithvi Haldea.

54

55

OBJECTIVES OF STUDY

To know about the role of IPO’s in the growth of Capital Market and make an analysis

on the basis of real world situations.

To get knowledge about the investor’s Philosophy to choose a particular IPO to invest

or their awareness.

To know how an issue comes into the market and what it contributes into the market.

SCOPE OF THE STUDY

To study about the various functionaries and eligibility norms related to the IPO’s.

To know about the various statutory norms which requires for a new issues?

To provide another better investment alternative to retail investor, rather than other

investment instruments.

To act as the decision support instrument while investing in IPO.

Providing better understanding of stock market, another investment alternative, through

IPO, among the investors.

To determine the investors perspective and their responses towards IPO

56

Research Methodology

Research Methodology is a way to solve the problem scientifically and systematically. It

includes not only the Research Methods but also the comparison of the logic behind the

method we use in the context of our research study and explain why we are using a particular

method and why not others.

Methods of Data Collection:

Primary Data: It is collected by Questionnaire and Personal Interviews.

Secondary Data: These are taken by existing literatures, magazines and govt.

periodicals.

Research Design: Research design is a conceptual structure within which research is

conducted. It constitutes the blueprint for collection, measurement and analysis of data. This

study is basically on Descriptive Research.

Analysis of Data:

The term analysis refers to the computation of certain measures along with searching

for patterns of relationship that exist among data groups.

Analysis Tools:

Tabulation

Graphs

The Basis of Sampling: -

In the case of survey of small investors, Convenience Sampling is chosen.

Sample Size

Small investors –50

Population Area- Hisar

57

STEPS FOLLOWED IN COMPLETING THE SECONDARY SOURCE

SURVEY:-

Libraries at (a) Indian Council for Applied Economic Research (ICAER), (b) Indian Institute of

Technology, (IIT) Delhi, (c) Council of scientific and industrial Research (CSIR) (d) PHD

chamber of commerce, are visited. Management / books, journals are consulted (e) Indian

journal of Finance.

Internet sites containing information on motivation are surfed.

DATA PROCESSING METHODOLOGY

Once the primary data have been collected, they are (I) edited – inspected, corrected and

modified.

Tabulation – bring similar data together and totaling them in meaningful categories.

Questionnaires are edited both in the field and later in home. Field editing took place just often

the interview.

The collected data are placed into an order. Percentages of respondents answered similarly are

calculated and placed in a table. Then this is interpreted. This involved drawing conclusion

from the gathered data. Interpretation changes the new information immerging from the

analysis into information that is pertinent or relevant to the study

.

58

59

Data Analysis and Interpretation

India enjoyed a major boom of IPO’s in mid 1990’s. This hot period comes to in end in

1995-56 with a fall in stock market and downstream in the economy. Investors who subscribed

at the time of boom suffered losses and the primary market comes into the stable condition in

last 1990’s. It was because of the Software’s Companies who done well in the global

competition and stock market recognizes these new economy stocks with high valuations.

There are 22 Stock Exchanges in India and the first being the Bombay Stock Exchange,

which began formal trading in 1875 and being the oldest one in the Asia. The first exchange to

be based on an open electronic limit order book was the National Stock Exchange (NSE) which

started trading debt instruments in June 1994 and equity in November 1994. Currently there are

17 India’s Stock Exchanges who have adopted open electronic limit order.

The Indian Capital Market has performed well in 2007. It has raised US $8.3 billion

through 95 Initial Public Offers (IPO’s). According to Earnest and Young Report

“Globalization-Global IPO Trend Report 2007” India was the fifth largest market in the world

in terms of the number of IPO’s and the seventh largest in terms of the proceeds for the year. It

was the real estate sector who took the maximum advantage of the bullish stock market trends

in 2007 and realty firms picked up 42.7% of their capital through IPO’s.

During current decade there have been remarkable reforms in the India Economic

scenario. Consequently NIM has made enormous progress in recent years, moving away from

fixed- price offering to price discovery through a screen-based auction for IPO’s. This has

reflected a quest to discover the price through an open fair, competitive auction, which is done

in a fully transparent way, where all investors participate in an equal setting, and the investment

bankers’ or other influences do not vitiate the allocation of shares. The increase in fund

mobilization from NIM in India has been exceptionally well. The rise in fund mobilized from

Rs. 14042 crore in 1991-92 to Rs. 114577 crore is not a small achievement from any standard.

Though some time unfair trade practices, IPO scam and political and economic instability has

deteriorated the faith of retail investor in primary market. Now they need strong IPO analysis

before investing their hard earned money. This paper is an effort to critically study the growth

trends of NIM in India: category wise and ownership wise. Paper also insight the impact of IPO

60

scam on the growth of NIM, recent effort of market regulator (SEBI) to make NIM efficient

and transparent and throw light on the appropriate way to evaluating the primary issues.

Growth pattern of New Issue Market:

The Indian Economy has been working under the New Economic Policy Since 1991, the

introduction of Liberalization, Privatization and Globalization policies has resulted in

tremendous economic growth generally adhering to 8% on an average in current decade (since

1999-00). The NIM has also registered the remarkable achievement in its credit in India. The

capital raised from capital market was Rs.679.9 billion in 1999-00, has gone up to Rs.1145.8

billion in 2006-07, this is not a small fund which has been garnered through this segment of

capital market.

Figure shows the NIM rose in India:

Fund raised from NIM in India

679.9

499.9 483.7423.8

528.9609.9

788.3

1145.8

0

200

400

600

800

1000

1200

1400

Years

Rs.

in B

illio

n

Series1 679.9 499.9 483.7 423.8 528.9 609.9 788.3 1145.8

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

61

Aggregate pattern on capital issues in India:

This is the study of capital issues during 1999-00 to 2005-06(7 years) with a view to

find out the fluctuation in capital issues as well as various factors for such fluctuations. This

study is made with the help of no. of issue made during 7 years as well as the total amount of

public issues. Figure shows the Aggregate pattern on Capital issues in India:

Years No. of Issues % of change Amt.(Rs.Cr.) % of change

1999-00 616 100 69974 100

2000-01 574 -6.8 77383 10.6

2001-02 405 -29.4 47419 -38.7

2002-03 501 23.7 42786 -9.8

2003-04 566 12.9 57220 33.7

2004-05 816 44.2 74986 31

2005-06 1211 48.4 118395 57.9

Total 4689 488163

Average 670 69737.57

After the Kethan Parikh scam in March 2001, the no. of issues declined in 2001-02 by 29.4%.

The market came on track once again in the 2002-03 with increase in 23 percent in the total no.

of issues.

62

Analysis of growth trends of NIM:

1. Ownership pattern of Capital issues:

This section shows the dominance of different sector in NIM, on the basis of ownership pattern

of capital of issues. The pattern of ownership is broadly classified into two categories viz:

public or private sector. The data related with capital issues has been given in following table:

Public Sector Private Sector Grand Total

Year No of Issue Amt.Cr No.ofIssue Amt Cr. No of Issue Amt.Cr.

1999-00 158 48677 458 25937 616 69937

2000-01 144 44000 430 19613 574 77383

2001-02 158 57770 247 12585 405 47419

2002-03 130 29223 371 13563 501 42786

2003-04 107 39581 459 17640 566 57220

2004-05 81 31397 735 43589 816 74986

2005-06 87 48582 1124 69813 1211 118395

Total 865 299230 3824 202740 4689 501970

Average 124 42747 546 28963 670 71710

During the last seven years, the public sector has grown with an average of 61.6 % per annum

as the amount of issue is concerned. While private sector grew with 38.38 % per year.

63

2. Category wise fund mobilization:

The main objective of study is to examine the dominance of types of issue during the period of

last four years. For this purpose, total fund mobilized can be classified in six categories viz:

IPO, FPO, Right Issues, Overseas Issues, and Private Placement etc.

Year 2003-04 2004-05 2005-06 2006-07

IPO’s 3191 14662 10808 23713

FPO’s 14616 6769 12868 1309

Right Issues 1006 3616 4126 3710

Overseas 7046 25973 47975 61950

Private Placement 48428 55409 81847 83622

Others 5701 6004 6143 12288

Total 79988 112433 163767 186592

Observations are:

Fund Mobilization of Indian companies through debt and equity issues in the FY 2006-

07 grew only 14 percent in each of the three financial years.

Fund rose through IPO’s in India increased by 120% and fund mobilized overseas grew

29 %.

Indian companies have become more dependent on overseas market than domestic one

to mobilize resources.

Indian Companies raised a record of Rs.186592 Cr. In 2006-07 through public issues or

others. In other terms the fund mobilized in 2006-07 was Rs.22826 Cr. More than the

Rs. 163766 Cr. raised in FY 2005-06.

Private debt placements account for 45 percent of total fund mobilization. Overseas

placement account for 37 percent, while public offers including initial and follow on

offers account for a 15 percent share. Qualified Institutional Placements allowed

recently accounted for 3 percent.

64

3. Impact of IPO scam on the growth of NIM in INDIA:

IPO scam is the opening of multiple demat accounts in order to cover a large numbers of shares

with motivate to make huge money thereby cheating the retail investors and regulator alike

(Gangadhar and Reddy Indian Journal of Accounting Dec.2006) Some of the demat accounts

that were used to manipulate allotments in the initial public offer of ‘Yes Bank’ and ‘HDFC’

were opened during 2003, but not in the year 2005 as was earlier believed. The first IPO in

which the key operators have participated was that of Maruti Udhyog Limited in June 2003.

According to SEBI, the number of fictitious demat account opened were not high. The IPO

scam of 2005 could not put much negative impact on the fund mobilization because in spite of

this, total fund mobilized reached to Rs.118395 Cr. with number of issues 1211.

4. Evaluating Primary Issues from Investors point of view:

Promoters of the company and their background.

Details of management structure and top executives.

Details of the operations of the company.

Risk profile of the company and its business.

Financial statements and accounting policies.

Purpose of issue.

Basis for issue price.

65

DATA ANALYSIS & PRESENTATION

1) What is Your Occupation?

OCCUPATION NO. OF RESPONDENTS

Businessman 15

Salaried 25

Others 10

Total 50

15

25

10

0

5

10

15

20

25

30

Businessman Salaried Others

Series1

66

2) What is your annual income?

< 1 lakh 1-4 lakh 4-10 lakh 10 lakh or Above

7 22 15 6

7

22

15

6

0

5

10

15

20

25

< 1 lakh 1-4 lakh 4-10lakh

10 lakhor Above

Series1

67

3). Investing in initial public offerings (IPO) of companies is very important for

small Investors.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 32 64

Somewhat Agree 10 20

Neither Agree or Disagree 5 10

Disagree 3 6

Total 50 100

64%

20%

10%6%

Agree

Somewhat Agree

Neither Agree orDisagree

Disagree

Interpretation:

64 % small investors in favor of that, IPO Investment is very important.

68

4) I do a thorough study of market and company before investing in IPO.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 5 10

Somewhat Agree 8 16

Neither Agree or Disagree 3 6

Disagree 34 68

10%

16%

6%

68%

Agree

Somewhat Agree

Neither Agree orDisagree

Disagree

Interpretation:

68 % Small investors don't go for thorough study of the market before IPO investment.

69

5). I am completely dependent on the advice of my share broker/ experts/ friends and

relatives for investment in IPO.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 40 80

Somewhat Agree 5 10

Neither Agree or Disagree 3 6

Disagree 2 4

80%

10%

6% 4%

Agree

Somewhat Agree

Neither Agree orDisagree

Disagree

Interpretation:

80 % Small investors are dependent on expert help before IPO investment.

70

6). Market sentiment and specific industry analysis is very important for IPO investment.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 35 70

Somewhat Agree 10 20

Neither Agree or Disagree 3 6

Disagree 2 4

70%

20%6% 4%

Agree

Somewhat Agree

Neither Agree orDisagree

Disagree

Interpretation:

Overwhelming majority (70%) believes that market sentiment and specific industry analysis is

very important.

71

7). I know the importance of fundamental analysis and technical analysis of an IPO.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 32 64

Somewhat Agree 12 24

Neither Agree or Disagree 4 8

Disagree 2 4

64%

24%

8% 4%

Agree

Somewhat Agree

Neither Agree orDisagree

Disagree

Interpretation:

Overwhelming majority (64%) believes that fundamental analysis and technical analysis in an

IPO is important.

72

8). I do my own market research and analysis before investing in an IPO.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 6 12

Somewhat Agree 4 8

Neither Agree or Disagree 2 4

Disagree 38 76

12%

8%

4%

76%

Agree

Somewhat Agree

Neither Agree orDisagree

Disagree

Interpretation:

Only 12% investors are serious about doing their own research.

73

9). I follow the fundamental analysis and technical analysis carried out by experts before

investing in an IPO.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 35 70

Somewhat Agree 5 10

Neither Agree or Disagree 2 4

Disagree 8 16

70%

10%

4%

16%Agree

Somewhat Agree

Neither Agree orDisagree

Disagree

Interpretation:

Large majority (70%) follows the expert fundamental and technical analysis.

74

10). Overall I have gained from research before investing in IPO.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 33 66

Somewhat Agree 10 20

Neither Agree or Disagree 2 4

Disagree 5 10

33

10

25

0

5

10

15

20

25

30

35

Agree SomewhatAgree

NeitherAgree orDisagree

Disagree

Series1

Interpretation:

66% of investors believe that one can gain from research on IPO.

75

11) I am prepared to spend time and effort to be an informed investor in share

market.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 34 68

Somewhat Agree 8 16

Neither Agree or Disagree 3 6

Disagree 5 10

34

8

35

0

5

10

15

20

25

30

35

40

Agree SomewhatAgree

NeitherAgree orDisagree

Disagree

Series1

Interpretation:

68% investors according to my survey are prepared to spend time to be informed.

76

12). I am prepared to learn the basic analytical tools of IPO analysis.

ANSWER NO. OF RESPONDENT TOTAL %

Agree 30 60

Somewhat Agree 8 16

Neither Agree or Disagree 4 8

Disagree 8 16

30

8

4

8

0

5

10

15

20

25

30

35

Agree SomewhatAgree

NeitherAgree orDisagree

Disagree

Series1

Interpretation:

60% of investors are prepared to learn basic analytical tools of IPO analysis

77

78

FINDINGS

Majority of respondents don't believe that:

1. For small investors, IPO Investment is very important.

2. Most Small investors don't go for thorough study of the market before IPO investment.

3. Most Small investors are dependent on expert help before IPO investment.

4. Overwhelming majority believes that market sentiment and specific industry analysis is

very important.

5. Overwhelming majority believes that fundamental analysis and technical analysis in an

IPO is important.

6. Only a minority are serious about doing their own research.

7. Large majority follows the expert fundamental and technical analysis.

8. Majority believe that one can gain from research on IPO

9. Large Majority investors are prepared to spend time to be informed.

10. A significant percentage of investors are prepared to learn basic analytical tools of IPO

analysis.

79

Indian Exchanges Host Billion-Dollar IPO’sThe strength of India’s economy, stock market, corporate profits, energy sector, and private

equity fuel IPO’s in 2006 and 2007.

In 2006, India’s IPO market raised US$7.23 billion, through 78 IPO’s. IPO activity has

been fairly broad-based, although energy companies dominated with more than 50%

share of funds raised.

India’s greater number of larger deals has been driven by the growth of Indian

corporations and their need for additional capital for potential acquisitions.

The localization trend in India is evidenced by several billion-dollar IPO’s in 2006.

In 2006, India’s largest IPO, Reliance Petroleum raised US$1.8 billion, followed by the

oil production and exploration company, Cairn Energy, which raised US$1.3 billion –-

both companies listed on domestic exchanges only.

Cross-border activity and the role of foreign capital continue to grow.

Foreign institutional investors make up three-fourths of new funds flowing into the

market.

Growing numbers of Indian companies are listing abroad, especially London, Singapore

and Luxembourg, primarily for higher valuations and visibility.

Enabling relatively easy access to global institutional capital, Qualified Institutional Placements

(QIPs) have enjoyed immediate popularity.

According to analysts, QIPs are more efficient, cost- and time-effective, and investor-

and issuer-friendly.

The private equity rush into India has lead to a potential for many IPO exits.

In 2006, private equity firms invested more than $7 billion in India.

Top global private equity funds such as Carlyle, Blackstone, Texas Pacific and Warburg

Pincus, as well as local funds, have been key drivers of the strength of Indian IPO markets.

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RECOMMENDATIONS

Though the move to make IPO assessment mandatory has drawn some critical comments, the

need for a tool to help investors make better-informed decisions and judge the quality of issues

hitting the market is undisputed.

An IPO assessment brings four major pluses. Firstly, it improves information content through a

professional and independent assessment.

Secondly, it is relief for individual investors from information overload. Thirdly, it provides

disincentives for weak companies to come to the market in the hope of raising easy capital.

And fourthly, it brings about greater level of investor sophistication.

Professional and independent assessment

The public issue report, which is part of the IPO assessment will provide focused company

information to investors and will create awareness about the fundamental strengths and

weaknesses of the company.

Dissemination of fundamental information will help investors allocate resource better. The

report will be a key input in the investment decision, in a manner similar to what a credit rating

is for a debt investor.

Relief from information overload

In a situation where issues are bunched in the pursuit of optimum market timing and

disclosures are voluminous and complex, a service that analyses and interprets these

disclosures independently, quickly and in manner that facilitates a comparative study will be

extremely useful in cutting through the clutter.

The usefulness would be particularly high for small investors as it will serve as a guide on the

strengths of the company coming out with the issue.

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Disincentives for weak companies

Given the improved quality of information content in the marketplace after the introduction of

IPO assessments, there will be a stratification of the market on fundamental lines.

Fundamentally sound companies will command commensurate valuations, while companies

whose fundamentals are not very strong will be impeded in building up speculative demand

among investors, and will need to offer pricing, which will adequately compensate investors for

the risks they take.

Increased investor sophistication

In today's markets, with free pricing, it is just as easy to lose money on listing as it is to make it.

An independent and informed opinion on the fundamental quality of the company, along with

clear and concise information, will go a long way towards making the process far more

scientific. With a clear view on the quality and risk drivers of the company the investor is

getting into, he can choose the level of risk he is comfortable with.

He will then take investment decisions, which reflect his outlook on factors such as product

prices and input costs and are in line with his target portfolio composition. Such analysis is

today beyond all but the most sophisticated investors.

The assessment is not a recommendation to buy - or not buy - a stock. It is, instead, a powerful

tool to assist the investor in making up his mind about the quality of a company offered as an

IPO investment option.

Need for rating

The need to rate equity offerings emerges from the fact that majority of retail investors do not

read the offer document and even where they do they may not fully comprehend the

implications of all the disclosures made in the document.

Ratings from independent agencies are aimed at helping investors separate good floats from

risky ones.

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Limitations of this Study

Investors was biased sometimes it’s not an easy for a researcher to make a productive

decisions on the basis of sample survey within a group of 50.

Time and cost constraints, which are beyond the human limitation, have also a barrier

on the study.

It’s not possible thing to include all the peoples in research because market conditions

are not stable they are changing time to time and affects the consumer preferences.

Some time it happened that the information given by the consumer not right and that

affects the research study.

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84

CONCLUSION

An IPO is the first sale of stock by a company to the public.

Broadly speaking, companies are either private or public. Going public means a

company is switching from private ownership to public ownership.

Going public raises cash and provides many benefits for a company.

The dot-com boom lowered the bar for companies to do an IPO. Many startups went

public without any profits and little more than a business plan.

Getting in on a hot IPO is very difficult, if not impossible.

The process of underwriting involves raising money from investors by issuing new

securities.

Companies hire investment banks to underwrite an IPO.

The road to an IPO consists mainly of putting together the formal documents for the

SEBI and selling the issue to institutional clients.

The only way for you to get shares in an IPO is to have a frequently traded account with

one of the investment banks in the underwriting syndicate.

Most of the strategies discussed in this report use the tools and techniques of

fundamental analysis, whose main objective is to find the worth of a company, or its

intrinsic value.

In quantitative analysis, a company is worth the sum of its discounted cash flows. In

other words, it is worth all of its future profits added together.

Some qualitative factors affecting the value of a company are its management, business

model, industry, and brand name.

Value investors, concerned with the present, look for stocks selling at a price that is

lower than the estimated worth of the company, as reflected by its fundamentals.

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Growth investors are concerned with the future, buying companies that may be trading

higher than their intrinsic worth but show the potential to grow and one day exceed their

current valuations.

Income investors, seeking a steady stream of income from their stocks, look for solid

companies that pay a high but sustainable dividend yield.

This is the duty of our market regulator SEBI to come forward with the innovative and

progressive measures and avoid the malpractices and security market scam such as

Harshad Mehta, Khetan Parikh and IPO scam 2005.

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Appendixes

Bibliography

Securities and Exchange Board of India. 2006/07 Report. Annual Report. India : SEBI

Bhalla, V.K.2005. “Investment Management.” In Security Analysis and Portfolio

Management, 12th Edition, S.CHAND publication.

Fischer, Donald E.2003. “Security Analysis and Portfolio Management.” Sixth Edition,

Pearson Education Publication.

The Times of India 1st February, 2008.

http://www.rediff.com/money/2008/feb/27debate.htm

http://www.equitymaster.com/detail.asp?date=08/03/00&story=8

http://www.livemint.com/2008/02/01234801/IPOs-in-India-buck-global-tren.html

http://economictimes.indiatimes.com/articleshow/msid-2774868,prtpage-1.cms

http://www.blonnet.com/2008/01/23/stories/2008012350700800.htm

www.sebi.gov.in

www.nseindia.com

www.rbi.org.in

www.blonet.com

www.economictimes.com

www.icicidirect.com

www.investopedia.com

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CMIE, Capital market special issues 2005-06.

Ritter, Jay R. (Spring 1998). “Initial Public Offerings” Contemporary Finance Digest

2(1), 5-30.

Rock, K. (1986). “Why new issues are under priced” Journal of Financial Economics

15, 187-212.

Aggarwal, R., N. R. Prabhala, and M. Puri, 2002, “Institutional Allocation in Initial

Public

Journal of Financial Economics, 65, 167—201.

Indian Journal of finance, “An Analysis of Growth trends, recent development and

evaluation of primary market” Feb-March 2008.

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Questionnaire

Name : ……………………………………………………………

Address : …………………………………………………… …………………………………………………………….

Phone No. : ……………………………………………………………

Email Id : ……………………………………………………………

Tick your option for individual question.

Please tick your option in the form of:

4—Agree 3--Somewhat Agree

2—neither Agree or Disagree 1-Disagree

A) What is Your Occupation?

Businessman

Salaried

Others

B) What is your annual income?

< 1 lakh

1-4 lakh

4-10 lakh

10 lakh or above.

89

1). Investing in initial public offerings (IPO) of companies is very important for small

investors.

[(4)—(3)—(2)—(1)]

2) I do a thorough study of market and company before investing in IPO.

[(4)—(3)—(2)—(1)]

3). I am completely dependent on the advice of my share broker/ experts/ friends and relatives

for investment in IPO.

[(4)—(3)—(2)—(1)]

4). Market sentiment and specific industry analysis is very important for IPO investment.

[(4)—(3)—(2)—(1)]

5). I know the importance of fundamental analysis and technical analysis of an IPO.

[(4)—(3)—(2)—(1)]

6). I do my own market research and analysis before investing in an IPO.

[(4)—(3)—(2)—(1)]

90

7). I follow the fundamental analysis and technical analysis carried out by experts before

investing in an IPO.

[(4)—(3)—(2)—(1)]

8). Overall I have gained from research before investing in IPO.

[(4)—(3)—(2)—(1)]

9). I am prepared to spend time and effort to be an informed investor in share market.

[(4)—(3)—(2)—(1)]

10). I am prepared to learn the basic analytical tools of IPO analysis.

[(4)—(3)—(2)—(1)]

Any other thing you want to share about IPO

……………………………………………………………………………………………………

……………………………………………………………………………………………………

……………………………………………………………………………………………………

………………………………………………………………………………

Date:

Place: Signature:

Declaration: This sample survey is conducted for academic purpose and your views will

be kept strictly confidential. Please fill in the questionnaire as objectively as possible.

Your cooperation is vital for the study findings.

Thank You

91