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INTRODUCTION
IPO stands for Initial Public Offering and means the new offer
of shares from a company which was previously unlisted. This is done by
offering those shares to the public, which were held by the promoters or the
private investors prior to the IPO. In the case when other investors or Promoter
held the shares the stake holding comes down to the extent their shares are
offered to the public. In other cases new shares are issued to the public and the
shares, which are with the promoters stay with them. In both cases the share of
the promoters in the total capital comes down.
For example say there are 100 shares in a company and 50 of these are offered
to the public in an IPO then in such a case the promoter s stake in the company
comes down from 100% to 50%. In another case the company issues 50
additional shares to the public and the stake of the promoter comes down
from 100% to 67%.
Normally in an IPO the shares are issued at a discount to what is
considered their intrinsic value and that s why investors keenly await IPOs and
make money on most of them. IPO are generally priced at a discount, which
means that if the intrinsic value of a share is perceived to be Rs.100 the shares
will be offered at a price, which is lesser than Rs.100 say Rs.80 during the
IPO. When the stock actually lists in the market it will list closer to Rs.100.The difference between the two prices is known as Listing Gains, which
an investor makes when investing in IPO and making money at the listing of
the IPO. A Bullish Market gives IPO investors a clear opportunity to achieve
long term targets in a short term phase.
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EXECUTIVE SUMMARY
As we all know IPO INITIAL PUBLIC OFFERING is thehottest topic in the current industry, mainly because of India being a developing
country and lot of growth in various sectors which leads a country to ultimate
success. And when we talk about countr ys growth which is dependent on the
kind of work and how much importance to which sector is given. And when we
say or talk about industries growth which leads the economy of country has to
be balanced and given proper finance so as to reach the levels to fulfill the
needs of the society. And industries which have massive outflow of work and a
big portfolio then its very difficult for any company to work with limited
finance and this is where IPO plays an important role.
This report talks about how IPO helps in raising fund for the
companies going public, what are its pros and cons, and also it gives us
detailed idea why companies go public. How and what are the steps taken bythe companies before going for any IPO and also the role of (SEBI) Securities
and Exchange Board of India the BSE and NSE , what are primary and
secondary markets and also the important terms related to IPO. It gives us idea
of how IPO is driven in the market and what are various factors taken into
consideration before going for an IPO. And it also tells us how we can more
or less judge a good IPO. Then we all know that scams have always been
a part of any sector you go in for which are covered in it and also few
recommendations are given for the same. It also gives us some idea about what
are the expenses that a company undertakes during an IPO.
IPO has been one of the most important generators of fundsfor the small companies making them big and given a new vision in past andit is still continuing its work and also for many coming years.
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RESEARCH OBJECTIVES OF THE STUDY
To evaluate can immediate performance of an IPO be relied upon forthe equityin the long run.
To analyze that More the subscription (times of issue size) of the IPO
more is the immediate performance.
To study the factors affecting IPO purchase decision of the Retail Investors.
Primary and Secondary markets
In the primary market securities are issued to the public and the proceeds go to the issuing company. Secondary market is term used for stock exchanges, where stocks are bought and sold after they are issued to the public.
PRIMARY MARKET
The first time that a compa nys shares are issued to the public, it is by a process called the initial public offering (IPO). In an IPO the companyoffloads a certain percentage of its total shares to the public at a certain price.
Most IPO S these days do not have a fixed offer price. Insteadthey follow a method called BOOK BUILDIN PROCESS, where the offer
price is placed in a band or a range with the highest and the lowest value (refer to the newspaper clipping on the page). The public can bid for the shares at any
price in the band specified. Once the bids come in, the company evaluates allthe bids and decides on an offer price in that range. After the offer price isfixed, the company allots its shares to the people who had applied for itsshares or returns them their money.
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SECONDRY MARKET
Once the offer price is fixed and the shares are issued to the
people, stock exchanges facilitate the trading of shares for the general public.Once a stock is listed on an exchange, people can start trading in its shares. In
a stock exchange the existing shareholders sell their shares to anyone who is
willing to buy them at a price agreeable to both parties. Individuals cannot
buy or sell shares in a stock exchange directly; they have to execute their
transaction through authorized members of the stock exchange who are also
called STOCK BROKERS.
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Why Go Public?
Basically, going public (or participating in an "initial public
offering" or IPO) is the process in which a business owned by one or several
individuals is converted into a business owned by many. It involves the
offering of part ownership of the company to the public through the sale of
debt or more commonly, equity securities (stock).
Going public raises cash and usually a lot of it. Being publicly traded also opens
many financial doors:
Because of the increased scrutiny, public companies can usually get better rates
when they issue debt.
As long as there is market demand, a public company can always issue
more stock. Thus, mergers and acquisitions are easier to do because
stock can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it
possible to implement things like employee stock ownership plans,
which help to attract top talent.
Being on a major stock exchange carries a considerable amount of
prestige. In the past, only private companies with strong fundamentals could
qualify for an IPO and it wasn't easy to get listed.
The internet boom changed all this. Firms no longer needed
strong financials and a solid history to go public. Instead, IPOs were done by
smaller startups seeking to expand their businesses. There's nothing wrong
with wanting to expand, but most of these firms had never made a profit and
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didn't plan on being profitable any time soon. Founded on venture capital
funding, they spent like Texans trying to generate enough excitement to
make it to the market before burning through all their cash. In cases like this,
companies might be suspected of doing an IPO just to make the founders rich.This is known as an exit strategy, implying that there's no desire to stick
around and create value for shareholders. The IPO then becomes the end of the
road rather than the beginning.
How can this happen? Remember: an IPO is just selling stock. It's all about
the sales job. If you can convince people to buy stock in your company, you
can raise a lot of money
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INITIAL PUBLIC OFFERINGS:
The first offering of a companys shares to the public. The shares
offered may be existing ones held privately, or the company may issue new
shares to the public.
PARTIES INVOLVED IN THE IPO:
The promoters also should have a clear idea about the agencies to
coordinate their activities effectively in the public issue. The various parties
involved are:
The manager to the issue,
The registrars to the issue,
Underwriters,
Bankers,
Advertising agencies,
Financial Institutions and
Government /Statutory Agencies.
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The Managers To The Issue:
Lead managers are appointed by the company to manage the
initial public offering campaign. Their main duties are:
Drafting of prospectus
Preparing the budget of expenses related to the issue
Suggesting the appropriate timings of the public issue
Assisting in marketing the public issue successfully
Advising the company in the appointment of registrars to the issue,underwriters,
brokers, bankers to the issue, advertising agents etc.
Directing the various agencies involved in the public issue.
The merchant banking division of the financial institutions, subsidiary of
commercial banks, foreign banks, private sector banks and private agencies
are available to act as lead mangers. Such as SBI Capital Markets Ltd., Bank
of Baroda, Canara Bank, DSP Financial Consultant Ltd. ICICI Securities &
Finance Company Ltd., etc.
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The Registrar To The Issue:-
After the appointment of the lead managers to the issue, in
consultation with them, the Registrar to the issue is appointed.
Quotations containing the details of the various functions they
would be performing and charges for them are called for selection.
Among them the most suitable one is selected. It is always ensured that the
registrar to the issue has the necessary infrastructure like Computer, Internetand telephone.
The Registrars normally receive the share application from various collection
centers. They recommend the basis of allotment in consultation with the
Regional Stock Exchange for approval. Usually registrars to the issue retain
the issuer records at least for a period of six months from the last date of
dispatch of letters of allotment to enable the investors to approach the
registrars for redressal of their complaints.
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The Underwriters
Underwriting is a contract by means of which a person gives anassurance to the issuer to the effect that the former would subscribe to the
securities offered in the event of non-subscription by the person to whom they
were offered. The person who assures is called an underwriter. The
underwriters do not buy and sell securities. They stand as back-up supporters
and underwriting is done for a commission. Underwriting provides an
insurance against the possibility of inadequate subscription. Underwriters are
divided into two categories:
Financial Institutions and Banks
Brokers and approved investment companies.
The company after the closure of subscription list communicates
in writing to the underwriter the total number of shares/debentures under
subscribed, the number of shares/debentures required to be taken up by the
underwriter. The underwriter would take up the agreed portion. If the
underwriter fails to pay, the company is free to allot the shares to others or
take up proceeding against the underwriter to claim damages for any loss
suffered by the company for his denial.
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The Bankers To The Issue:
Bankers to the issue have the responsibility of collecting the
application money along with the application form. The bankers to the issue
generally charge commission besides the brokerage, if any. Depending upon
the size of the public issue more than one banker to the issue is appointed.
When the size of the issue is large, 3 to 4 banks are appointed as bankers to
the issue. The number of collection centers is specified by the central
government. The bankers to the issue should have branches in the specified
collection centers.
Advertising Agents:
Advertising plays a key role in promoting the public issue.
Hence, the past track record of the advertising agency is studied carefully.Tentative program of each advertising agency along with the estimated cost
are called for. After comparing the effectiveness and cost of each program
with the other, a suitable advertising agency if selected in consultation with
the lead managers to the issue. The advertising agencies take the responsibility
of giving publicity to the issue on the suitable media. The media may be
newspapers/ magazines/ hoardings/press release or a combination of all.
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The Financial Institutions
Financial institutions generally underwrite the issue and lend
term loans to the companies. Hence, normally they go through the draft of
prospectus, study the proposed program for public issue and approve them.
IDBI, IFCI & ICICI, LIC, GIC and UTI are the some of the
financial institutions that underwrite and give financial
assistance. The lead manager sends copy of the draft prospectus to the
financial institutions and includes their comments, if any in the revised draft.
Government And Statutory Agencies
The various regulatory bodies related with the public issue are:
Securities Exchange Board of India Registrar of companies
Reserve Bank of India (if the project involves foreign investment)
Stock Exchange where the issue is going to be listed
Industrial licensing authorities
Pollution control authorities (clearance for the project has to be stated inthe prospectus)
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COLLECTION CENTERS
Generally there should be at least 30 mandatory collection centers
inclusive of the places where stock exchanges are located. If the issue is not
exceeding Rs.10 Cr (excluding premium if any) the mandatory collection
centers are the four metropolitan centers viz. Mumbai, Delhi, Kolkatta and
Chennai and at all such centers where stock exchanges are located in the
region in which the registered office of the company is situated. The regional
divisions of the various stock exchanges and the places of their locations are
given in the following table:
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Table 1.2: Collection centres
Region Exchange City
Northern Ludhiana Stock Ludhiana Region Exchange Delhi
Delhi Stock Exchange Jaipur Jaipur Stock Exchange Kanpur U P Stock Exchange
Southern Hyderabad Stock Hyderabad Region Exchange Bangalore
Bangalore Stock Managlore Exchange Chennai
Mangalore Stock Coimbatore Exchange Cochin Madras Stock Exchange Coimbatore Stock Exchange Cochin Stock Exchange
Eastern Region Calcutta Stock Exchange Kolkatta Gawahati Stock Gawahati Exchange Patna Magadh Stock Exchange Bhubaneswar
Bhubaneswar Stock Exchange
Western Bombay Stock Mumbai Region Exchange Mumbai
National Stock Mumbai Exchange Indore OTCEL Stock Exchange Pune M P Stock Exchange Vadodara Pune Stock Exchange Ahmedabad
Vadodara Stock Rajkot Exchange Ahmedabad Stock Exchange Sauashtra Kutch Stock Exchange
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In addition to the collection branch, authorized collection agents may also be
appointed. The names and addresses of such agent should be given in the offer
documents. The collection agents are permitted to collect such applicationmoney in the form of cheques, draft, and stock-invests and not in the form of
cash. The application money so collected should be deposited in the special
share application account with the designated scheduled bank either on the
same day or latest by the next working day.
The application collected by the bankers to the issue at different centers are
forwarded to the Registrar after realization of the cheques, within a period of 2
weeks from the date of closure of the public issue. The applications
accompanied by stock-invests are sent directly to the Registrars to the issue
along with the schedules within one week from the date of closure of the
issue. The investors, who reside in places other than mandatory and
authorized centers, can send their application with stock-invests to the
Registrar to the issue directly by registered post with acknowledgement due
card.
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PLACEMENT OF THE IPO
Initial public offers are floated through Prospectus; Bought out
deals/offer for sale; Private Placement and Book Building.
PRICING OF ISSUES
The Controller of Capital Issues Act governed issue of capital prior to May
27, 1992 1947. Under the Act, the premium was fixed as per the valuation
guidelines issued. The guidelines provided for fixation of a fair price on the
basis of the net asset value per share on the expanded equity base taking into
account, the fresh capital and the profit earning capacity.
The repealing of the Capital Issue Control Act resulted in an era
of free pricing of securities. Issuers and merchant bankers fixed the offer
prices. Pricing of the public issue has to be carried out according to the
guidelines issued by SEBI.
At Premium: Companies are permitted to price their issues at premium in the
case of the following:
First issue of new companies set up by existing companies with the track record.
First issue of existing private/closely held or other existing unlisted
companies with three-year track record of consistent profitability.
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OFFER THROUGH PROSPECTUS
According to Companies (Amendment) Act 1985, application
forms for shares of a company should be accompanied by a Memorandum
(abridged prospectus).
In simple terms a prospectus document gives details regarding the company
and invites offers for subscription or purchase of any shares or debentures
from the public. The draft prospectus has to be sent to the Regional Stock
Exchange where the shares of the company are to be listed and also to all
other stock exchanges where the shares are proposed to be listed. The stock
exchange scrutinizes the draft prospectus. After scrutiny if there is any
clarification needed, the stock exchange writes to the company and also
suggests modification if any. The prospectus should contain details regarding
the statutory provisions for the issue, program of public issue opening,
closing and earliest closing date of the issue, issue to be listed at, highlights
and risk factors, capital structure, board of directions, registered office of the
company, brokers to the issue, brief description of the issue, cost of the
project, projected earnings and other such details. The board, lending financial
institutions and the stock exchanges in which they are to be listed should
approve the prospectus. Prospectus is distributed among the stock exchanges,
brokers and underwriters, collecting branches of the bankers and to the leadmanagers.
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How to evaluate an IPO ?
Whether you are buying stock from the secondary market or subscribing
to an initial public offering (IPO), make sure you have all the facts. That
means going through the small print in the IPO document with a fine-toothed
comb. Don't let market hype, investment trends or media reports influence
you. Following these parameters should help: Promoters. Who runs the
company? Professionals or a family? If the directors are well known, it gives a
company credibility. Check the credentials of the promoters, directors and key
managerial persons. See if they have at least five years' experience in the
company's line of business,
Industry outlook. There should be demand for the company's product or
service, with adequate profit potential.
Business plans. Check the progress made, and the money invested in
aspects such as land/office space, plant and machinery, utilities, regulatory
clearances, personnel, financing, projects in hand, sales and marketing,
technical and marketing tie-ups. High investments from promoters lend
credibility to the IPO plan, as do project appraisals by merchant bankers.
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Financials. Check if the company is over-leveraged in terms of the
equity and debt on its books, and whether the additional issue of equity is
justified. Check for consistency in revenue, profit growth and margins for at
least three years before the IPO. A steady growth rate suggests a
fundamentally sound company. More important, scale the historic trend into
future projections: A company with a PAT (profit after tax) of Rs 10 lakh will
find it difficult to reach a projected PAT of Rs 15 crore. Projections are based
on assumptions, which give promoters leeway to manipulate figures. A good
way to check if projections are true is to see whether the assumptions are
realistic, given the company's scope of operations, and check how it compares
with competitors' figures.
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RESEARCH METHODOLOGY
Research Methodology is a way to systematically solve the
problem. It includes all those steps that are generally adopted to solve theresearch problem. Thus, it refers to the systematic method consisting of
enunciating the problem, formulating a hypothesis, collecting the facts or data,
analyzing the facts and reaching certain conclusion either in the form of
solutions towards the concerned problems or in certain generalizations for some
theoretical formulation.
RESEARCH DESIGN
The research design in this study is Descriptive . Descriptive
research studies are those studies, which are concerned with describing the
characteristics of a particular individual, or of a group. The studies concerned
with narration of facts and characteristics concerning individual, group or
situation are all examples of descriptive research studies.
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DATA COLLECTION
Collection of data is a very important step because accuracy in data
is a factor of the method used for data collected. Thus there are two ways of
collecting appropriate data:
PrimaryData
SecondaryData
Primary Data are those, which are collected for the first time, thus happen to
be original in character. For the purpose of collection of primary data personal
interview of respondents were conducted. An unbiased, undisguised structured
questionnaire was prepared which was administered to the respondents for the
purpose of getting the information.
Secondary Data are those, which have already been collected by someone else.
For the purpose of the study, the data were collected from secondary sources
like We bsites of NSE, Economic Times & related companies, Jou rnals like The
Chartered Accountant, the Dalal Street, The Financial Analyst, Newspapers like
The Economic Times, The Times of India, The Financial Express etc. All of the
260 Companies were considered which had raised their public issues only in
National Stock Exchange (NSE) from 1 January 2003 To 31 December 2007
(compiling 5 years). Companys current stock price was taken as closing price
at 3.30 pm on 31 st December 2007.
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SAMPLE SIZE
In this research, a sample of 100 persons is taken.
SAMPLING TECHNIQUE
All the respondents who were easily accessible and willing to share
the information were administered the structured questionnaire to get the
desired information. A non-probability sampling technique i.e. convenience
sampling technique was used.
STATISTICAL TOOLS USED
Different statistical tools have been used in the study.
Eg. Mean, Standard Deviation, Correlation, Standard Error, Z Test,Likert Scale.
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FINDINGS AND CONCLUSION
From the forgoing analysis followings were the findings :
Immediate performance of IPO can be relied upon for the equity in the long run
was rejected . It was proved from the fact that over last five years, there existed
statistically insignificant positive correlation between percentage change in the
issue price & list price of the IPO and percentage change in the issue price &
current market price of the same. Therefore, We can conclude that immediate
performance of a particular IPO can not be relied upon for the equity in the long
run.
More the subscription (times of issue size) of the IPO, more is the immediate
performance, was accepted. As there existed statistically significant positive
correlation between subscription (times of issue size) of the IPO and its
immediate performance at the time of listing. Thus, we can judge that the IPO
will give high immediate returns, by the times of its oversubscription.
Out of 100, 53 investors i.e. Maximum Investors are in share trading for 2 to 10
years. Out of 100, 62 investors i.e. Maximum Investors are investing Less than
Rs. 1,00,000 in the share market.
price & list price of the IPO and percentage change in the issue price & current
market price of the same. Therefore, We can conclude that immediate
performance of a particular IPO can not be relied upon for the equity in the long
run.
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More the subscription (times of issue size) of the IPO, more is the immediate
performance, was accepted. As there existed statistically significant positive
correlation between subscription (times of issue size) of the IPO and its
immediate performance at the time of listing. Thus, we can judge that the IPOwill give high immediate returns, by the times of its oversubscription.
Out of 100, 53 investors i.e. Maximum Investors are in share trading for 2 to
10 years. Out of 100, 62 investors i.e. Maximum Investors are investing Less
than Rs. 1,00,000 in the share market.
Out of 100, 43 investors i.e. Maximum Investors are interested in
investing Secondary Securities than IPOs.
Maximum of the Investors who have yearly income less than Rs. 2,00,000 opt
for Margin Funding.
Maximum of the Investors who have yearly income between Rs. 2,00,000 to
Rs. 5,00,000 opt for Hybrid Type of Investment consisting of margin funding
and self.
Maximum of the Investors who have yearly income more than Rs. 5,00,000
opt for self.
Out of 100, 77 investors i.e. maximum of the Investors invest in IPOs for
Listing Gains.
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Out of 100, 69 investors i.e. maximum of the Investors who invest in the share
market have Professional Knowledge about Share Market.
Since null hypothesis is rejected in case of all the Factors so sample mean > population mean.
Investors evaluate an IPO maximum from Promoters of the company,
prevailing Market Trend & Recent IPO performance & Issue Size of the IPO
and minimum from Suppliers of the company, Listing in Well Known Stock
exchanges & Media Advertisements..
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RECOMMENDATIONS
Initial return given by the IPO should not be treated as indication of itssuccess or failure in the long run. Investors of the secondary market must
take part in the primary markets as it has been seen that IPO activity in
Indian Stock Market has been tremendously growing. And IPO is the safest
stock market investment.
Over subscription should be treated as indication of success of the issue.
Whole amount for shares applied should be received in advance from
QIBs just like retail investor so that they can quote real worth of the
company in terms of money that they are ready to pay for it.
Investors must analyze all the sectors before investing in the IPO, in
order to get maximum returns.
Investors should take into consideration the promoters of the business,
the prevailing market trend & Recent IPO performance before investing
in an IPO.
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Whole amount for shares applied should be received in advance from QIBs
just like retail investor so that they can quote real worth of the company in
terms of money that they are ready to pay for it.
Investors must analyze all the sectors before investing in the IPO, inorder to get maximum returns.
Investors should take into consideration the promoters of the business,
the prevailing market trend & Recent IPO performance before investing
in an IPO.
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