About Fortune Group:

Fortune Financial Services (India) Limited was incorporated in the year 1991 by
Mr. J. T. Poonja, Chairman and Mr.Nimish C Shah, Vice Chairman and Managing
Director. Fortune Group which comprises the holding company Fortune Financial
Services (India) Limited and its wholly-owned subsidiaries, is engaged in providing a
range of Financial Services right from Equities and Derivatives trading, Equity Research,
Commodities Trading, Portfolio Management Services, Distribution of Mutual Funds,
IPO & Insurance products and also Investment Banking Services.
 The main activities of the company are conducted through Fortune Financial
Services which is also the holding company & its wholly owned subsidiaries. A brief
snapshot of all the companies is outlined as under.

 M/s. Fortune Financial Services (India) Ltd.

M/s. Fortune Financial Services (India) Ltd. is listed on the Bombay Stock
Exchange Ltd and is SEBI registered Category I Merchant Banker. It has recently got
approval from SEBI to launch its Portfolio Management Services (PMS). FFSIL has four
business verticals viz. Fortune Equity Brokers (India) Limited, Fortune Commodities &
Derivatives (India) Ltd., Fortune Credit Capital Ltd. and Fortune Financial India
Insurance Brokers Limited.

 M/s. Fortune Equity Brokers (India) Ltd.

M/s. Fortune Equity Brokers (India) Ltd. is 100% subsidiary company of M/s.
Fortune Financial Services (India) Ltd. It offers broking services in the Cash and Future
& Option Segments of the National Stock Exchange of India Ltd and the Bombay Stock
Exchange Limited. It is also a Depository Participant of Central Depository Services
(India) Ltd

 M/s. Fortune Commodities & Derivatives (India) Ltd.

M/s. Fortune Commodities & Derivatives (India) Ltd. is subsidiary company of

M/s. Fortune Financial Services (India) Ltd. and engaged in the business of commodities
broking. It is having memberships with the MCX and NCDEX, two leading Indian
Commodities Exchanges.
 M/s. Fortune Credit Capital Ltd.

Fortune Credit Capital Ltd. is 100% subsidiary company of M/s. Fortune

Financial Services Ltd. It is formed for the purpose of financing, lending to the clients.
The Company has received license from RBI for NBFC operations.

 M/s. Fortune Financial India Insurance Brokers Limited.

M/s. Fortune Financial India Insurance Brokers Limited is 100% subsidiary

company of Fortune Financial India Insurance Brokers Limited and formed for the
purpose of providing insurance broking and related products and services.
1991
Mr. J.T. Poonja and Mr. Nimish C. Shah incorporated Fortune Financial Services (India)
Private Limited as a Non-Banking Financial Company (NBFC). Besides core investment
banking and corporate advisory services, Fortune's also focused on fund based activities
such as lease, hire purchase, bill discounting and inter-corporate loans

1992
Fortune declared dividend @10%

1993
Fortune became a SEBI registered Category - I Merchant Banker

Fortune declared dividend @12.5%

1994
In anticipation of a potential IPO, the name of the Company was changed to Fortune
Financial Services (India) Ltd.

Opened an office in New Delhi to increase the scope of activities

Fortune declared dividend @15

1995
Authorized Capital of Fortune was increased to Rs.600 lacs

Fortune made an Initial Public Offering (IPO) of 25 lac equity shares of Rs.10/- each at a
premium of Rs. 20/- per share aggregating to Rs.750 lacs. The issue was over subscribed
by 2.52 times

Fortune was listed on the Bombay Stock Exchange, Delhi Stock Exchange, Ahmedabad
Stock Exchange and Madras Stock Exchange
 Fortune opened a branch office in Bangalore

Fortune was associated with 10 issues aggregating to Rs.115 crores as Lead / Co-
managers

Fortune was involved with underwriting 113 issues for an aggregate amount of
Rs. 26 crores

Company received membership of National Stock Exchange (NSE). Fortune

promoted a separate company called Good Fortune Advisory Services Pvt. Ltd., to
operate this activity and invested Rs.10 lacs towards share capital

Fortune declared dividend @16%.

1996
Fortune launched its consumer finance division with a primary focus on car
financing. Opened offices in Pune and Mangalore

Fortune handled 9 Investment Banking assignments in its capacity as Lead

Managers/ Co-Managers/ Advisors aggregating to Rs.176 crores. This included the issue
of Search Chem Industries Limited, a group company of United Phosphorus Limited

Fortune set up its in-house equity research division with a view to provide equity
research to corporate clients and support its corporate finance and investment banking
activities

Fortune started accepting fixed deposits from public. The fixed deposit schemes
of the Company is rated "FA" by CRISIL

Besides having a fixed deposit center in Mumbai, Fortune opened centers in

Madras, Bangalore and New Delhi

Fortune declared dividend @20%

 1997
In order to broaden its base in consumer finance, Fortune took up office
equipment finance in addition to car financing

Fortune extended its focus to External Commercial Borrowings, private

placement of Non-Convertible Debentures and Preference Shares for mobilizing funds
for its corporate clients

Opened offices at Chennai and Chandigargh to promote consumer finance and

corporate financing activities

Fortune declared dividend @22%

1998
Due to a downturn in the market conditions, Fortune's senior management
decided to suspend the NBFC activities effective from April 1998

The fixed deposit scheme of Fortune was rated "FA" by CRISIL on account of its
timely repayment of interest, repayment of the principal and the safety of the deposits

Fortune stopped accepting / renewing fixed deposits since April 1998

Fortune declared dividend @15%

1999
Fortune Financial became the 1st Indian company to go in for a buyback of its shares,
subsequent to the guidelines for Buyback of shares coming into effect from Jan 1999

Fortune offered to buyback 25% of its paid-up capital of Rs.549 lacs at an offer price of
Rs.10/- each per share as against the average quoted market price of Rs.5.65 per share.
An amount of Rs.114 lacs was reduced from the share capital consequent to the buyback
Successfully completed the second buyback and reduced Rs. 47 lacs from the share
capital

Fortune prepaid / repaid all its fixed deposit outstanding along with interest

2000
Acquired Corporate Membership of Bombay Stock Exchange Limited (BSE)

In addition to Investment Banking and Corporate Advisory Services, Fortune launched its
stock broking activities

Fortune concluded two major deals involving a FMCG company and a well know Media
Company's private placement of equity shares

2001
Fortune completed the private placement of equity shares of Popular Entertainment
Network Limited and clickforcotton.com, India's first cotton exchange portal

Managed few IPOs, take over offers and right issue despite adverse market conditions

Fortune also made a secondary market placement of equity shares for Goldstone
Technologies Ltd., and Mirc Electronics Limited

2002
Fortune commenced its full fledged broking operation by empanelling with leading FIs /
MFs / Banks

Fortune completed a major take over offer of Noble Explochem

Reserve Bank of India de-registered Fortune as a NBFC

Fortune's equity shares are voluntarily de-listed from Madras Stock Exchange
2003
Managed open offers of Gujarat JHM Hotels Ltd., Punjab Chemicals and
Pharmaceuticals Ltd.

Fortune's equity shares are voluntarily de-listed from Ahmedabad Stock Exchange Ltd

Fortune empanelled with three institutions for secondary market business

2004
Fortune empanelled with seventeen institutional clients for its secondary market business

Fortune was appointed as merchant bankers to manage an open offer by Zircon Traders
Ltd.

Successfully completed the FCCB issues for Alok Industries Limited and United
Phosphorus Limited raising approximately US$ 110 million

Opened its branch at Hyderabad to promote stock broking activities

Fortune's shares are voluntarily de-listed from Delhi Stock Exchange

Subsidiary company started mutual fund distribution during FY 2003-04

2005
Fortune declared an interim dividend of 10% and final dividend of 5% during FY 2004-
2005 after gap of six years due to carry-forward losses

Fortune was associated with ECB/FCCB overseas fund raising for its Indian mid-sized
corporate clients in excess of US$ 250 million

Fortune was involved with varied domestic assignments - follow on issues, buyback
program, open offers and IPOs for Indian mid-sized corporate clients
Fortune proposes to increase its capital base by making a bonus issue during FY 2005-
2006

Opened a branch office in Goa

Commenced F&O operations on the National Stock Exchange (NSE)

2006
Shareholders of Fortune approved the issuance of bonus shares in the ratio of 1:1

Allotment of bonus shares was completed on March 31, 2006

Commenced DP Services
 Fortune Group Organizational Structure

CAPITAL MARKETSINVESTMENT BANKINGGROUP FUNCTIONS

Director
Arun Kumar
VISHAL TREHAN, COUNTRY HEAD Institutional Sales & Dealing

7 Compliance

Company Law & Compliance

Research

Affairs
Corporate
Treasury
Sales Operation
Sales Dealing

Head - IB
DH. Shinde
Equity Comm- Derivati-- Insuara Distrib-
ves
-nce ution Vijay Sanjay
odity Strategy K Sundaram Haroon N M SGM
Dugad M.
Head - Mansoori CS & Kumar-
Head Head
Treasury AH (Legal) Head

BB Tantri
Head- Kuldeep Vashist Fund Raising Sanjay Shah Vivek Sharma
Operation Dy.Head – Operation Advisory CS & Regulatory Dy. Head – HR
compliance & Leagal
Naveen Sharma Dhara Ballabh Issue Management
Zonal Head – Retail & Broking Dy.Head – RMS
V.N. Sharma Subbiah
(Northern Region) Secretarial Manickam
Merger &
Milind Karanjekar Corporate Account
Depository Acquisition
Vinay Shah & Taxation
State Head – Maharastra
N Ranganathan Corporate Advisory
Govindaraj Technology Services
Zonal Head – Southern Region
GV Srinivas Equity / Debt
Hitesh Turakhia Alternate Channels Syndication
State Head - Gujarat
Ranjit More
Operational Compliance
1.1 INTRODUCTION TO PROJECT TOPIC

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%.

 What is an IPO

An IPO is the first sale of stock by a company to the public. A company can raise
money by issuing either debt or equity. If the company has never issued equity to the
public, it's known as an IPO.
Companies fall into two broad categories: private and public.

A privately held company has fewer shareholders and its owners don't have to disclose
much information about the company. Anybody can go out and incorporate a company:
just put in some money, file the right legal documents and follow the reporting rules of
your jurisdiction. Most small businesses are privately held. But large companies can be
private too.

It usually isn't possible to buy shares in a private company. You can approach the owners
about investing, but they're not obligated to sell you anything.

Public companies, on the other hand, have sold at least a portion of themselves to the
public and trade on a stock exchange. This is why doing an IPO is also referred to as
"going public."

Public companies have thousands of shareholders and are subject to strict rules and
regulations. They must have a board of directors and they must report financial
information every quarter.

 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
.
1. Primary market

When a business entity needs money the

general course of action that it follows is
that it goes to the bank.
However banks may not be ready to provide
huge finance for a long time especially if
the returns are not fixed.
The best way to raise money is through
offer of shares and for this: PRIMARY
MARKET is the answer The Primary Market
deals with the new securities which were
previously not trade able to the public. The
main function is to facilitate the transfer of
resources from savers to entrepreneurs seeking to establish or to expand and diversify
existing events. The mobilization of funds through the Primary Market is adopted by the
state government and corporate sector. In other words the Primary Market is an integral
part of the capital market of a country and together with the securities market. The
development of security as well as the scope for higher productive capacity and social
welfare depends upon the efficiency of the Primary Market.

2. 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.
  DIFFERENT KINDS OF ISSUE:

Why go public??
Before deciding whether one should

complete an IPO, it is
important to
consider the positive

and negative effects that going public may have on their mind. Typically, companies go
public to raise and to provide liquidity for their shareholders. But there can be other
benefits. 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.
 Going public can also boost a company’s reputation which in turn, can help the
company to expand in the marketplace.

1.2 IPO – ADVANTAGES AND DISADVANTAGES:

 The decision to take a company public in the form of an initial public offering
(IPO) should not be considered lightly. There are several advantages and disadvantages
to being a public company, which should thoroughly be considered. This memorandum
will discuss the advantages and disadvantages of conducting an IPO and will briefly
discuss the steps to be taken to register an offering for sale to the public. The purpose of
this memorandum is to provide a thumbnail sketch of the process. The reader should
understand that the process is very time consuming and complicated and companies
should undertake this process only after serious consideration of the advantages and
disadvantages and discussions with qualified advisors.

Advantages of going public:

 Increased Capital
A public offering will allow a company to raise capital to use for various
corporate purposes such as working capital, acquisitions, research and development,
marketing, and expanding plant and equipment.

 Liquidity
Once shares of a company are traded on a public exchange, those shares have a
market value and can be resold. This allows a company to attract and retain employees by
offering stock incentive packages to those employees. Moreover, it also provides
investors in the company the option to trade their shares thus enhancing investor
confidence.

 Increased Prestige
Public companies often are better known and more visible than private
companies, this enables them to obtain a larger market for their goods or services. Public
companies are able to have access to larger pools of capital as well as different types of
capital.

 Valuation
 Public trading of a company's shares sets a value for the company that is set by
the public market and not through more subjective standards set by a private valuator.
This is helpful for a company that is looking for a merger or acquisition. It also allows the
shareholders to know the value of the shares.

 Increased wealth
The founders of the company often have the sense of increased wealth as a result
of the IPO. Prior to the IPO these shares were illiquid and had a more subjective price.
These shares now have an ascertainable price and after any lockup period these shares
may be sold to the public, subject to limitations of federal and state securities laws.

Disadvantages of going Public:

 Time and Expense

Conducting an IPO is time consuming and expensive. A successful IPO can take
up to a year or more to complete and a company can expect to spend several hundreds of
thousands of dollars on attorneys, accountants, and printers. In addition, the underwriter's
fees can range from 3% to 10% of the value of the offering. Due to the time and expense
of preparation of the IPO, many companies simply cannot afford the time or spare the
expense of preparing the IPO.

 Disclosure
The SEC disclosure rules are very extensive. Once a company is a reporting
company it must provide information regarding compensation of senior management,
transactions with parties related to the company, conflicts of interest, competitive
positions, how the company intends to develop future products, material contracts, and
lawsuits.
 In addition, once the offering statement is effective, a company will be required
to make financial disclosures required by the Securities and Exchange Act of 1934. The
1934 Act requires public companies to file quarterly statements containing unaudited
financial statements and audited financial statements annually. These statements must
also contain updated information regarding nonfinancial matters similar to information
provided in the initial registration statement. This usually entails retaining lawyers and
auditors to prepare these quarterly and annual statements. In addition, a company must
report certain material events as they arise. This information is available to investors,
employees, and competitors.

 Decisions based upon Stock Price

Management's decisions may be effected by the market price of the shares and the
feeling that they must get market recognition for the company's stock.

 Regulatory Review
The Company will be open to review by the SEC to ensure that the company is
making the appropriate filings with all relevant disclosures.

 Falling Stock Price

If the shares of the company's stock fall, the company may lose market
confidence, decreased valuation of the company may effect lines of credits, secondary
offering pricing, the company's ability to maintain employees, and the personal wealth of
insiders and investors.

 Vulnerability
If a large portion of the company's shares are sold to the public, the company may
become a target for a takeover, causing insiders to lose control. A takeover bid may be
the result of shareholders being upset with management or corporate raiders looking for
an opportunity. Defending a hostile bid can be both expensive and time consuming.
1.3 SIGNIFICANCE OF IPO:
Investing in IPO has its own set of advantages and disadvantages. Where on one
hand, high element of risk is involved, if successful, it can even result in a higher rate of
return. The rule is: Higher the risk, higher the returns.
The company issues an IPO with its own set of management objectives and the
investor looks for investment keeping in mind his own objectives. Both have a lot of risk
involved. But then investment also comes with an advantage for both the company and
the investors.
The significance of investing in IPO can be studied from 2 viewpoints – for the
company and for the investors. This is discussed in detail as follows:

SIGNIFICANCE TO THE COMPANY:

When a privately held corporation needs additional capital, it can borrow cash or
sell stock to raise needed funds. Or else, it may decide to “go public”. "Going Public" is
the best choice for a growing business for the following reasons:
 The costs of an initial public offering are small as compared to the costs of
borrowing large sums of money for ten years or more,
 The capital raised never has to be repaid.
 When a company sells its stock publicly, there is also the possibility for
appreciation of the share price due to market factors not directly related to the
company.
 It allows a company to tap a wide pool of investors to provide it with large
volumes of capital for future growth.
SIGNIFICANCE TO THE SHAREHOLDERS:

The investors often see IPO as an easy way to make money. One of the most
attractive features of an IPO is that the shares offered are usually priced very low and the
company’s stock prices can increase significantly during the day the shares are offered.
This is seen as a good opportunity by ‘speculative investors’ looking to notch out some
short-term profit. The ‘speculative investors’ are interested only in the short-term
potential rather than long-term gains.
1.4 Objective of the Study:

 To analyze and evaluate the complex IPO process.

 To study and incorporate the legal requirements of an IPO.

 Pricing of an issue through the Book-Building Method.

 Understand the IPO performance.

 Understand the relationship between IPO Grade and IPO performance.

1.5 Hypothesis:

 Null Hypothesis (H0): There is no relationship between IPO grade and Stocks
returns

 Alternate Hypothesis (H1): There is relationship between IPO grade and Stocks
returns
1.6 Limitation of the Study:

 The project duration is not enough to get the thorough knowledge of IPO.

 Because of time limitation I have taken only last five year data to compare the
IPO performance.

 Due to confidentiality it is difficult to get in-depth data.

LITERATURE REVIEW:
 This section describes five key studies that have researched different forms of
going public. This chapter also provides a brief account of a study which analyzed
spreads, in addition to outlining a study which analyzed the impact of Internet technology
on investment banking.

1. Kenji and Smith (2009)

Kenji and Smith (2004) study the benefits and drawbacks of auctions versus book
building as a method of IPO issuance in Japan. Their reason for choosing Japan as a test
environment was due to the fact that book building has been a legal way of going public
in Japan since 1997. Previously, auctioning was the only way that a company could go
public in Japan. In their research, Kenji and Smith use the total issue cost as a percentage
of the value of the issue to measure the benefits and drawbacks of the different methods
of going public.

The data that is used in this paper is a sample of 484 IPOs by companies that are
listed on the JASDAQ or JASDAQ-OTC markets during a five-year period from 1995 to
1999. This included 321 auction IPOs and 163 book built IPOs. However, due to varying
market conditions during the years spanning from 1995 to 1999, the research has been
divided into two different sections. The first uses all the data from the whole sample
period, whereas the second section uses data only from the years 1996 through 1998,
when the market was characterized by very stable market conditions. This provides a
fairly similar setting for both auctions (January 1996 – September 1997) and book built
(October 1997 - December 1998) IPO data sets. Firm data that is used include: sales
revenue, equity to book value, shares outstanding, firm age, as well as number of
employees. Issue data includes offering date, number of shares issued, amount raised,
offer price, first after market price, and other offering details. Total issue cost in their
research is defined as the first aftermarket price instead of actual issue price.

During the whole period, the total issue cost against the aftermarket price in book
built IPOs is an average of 28,04%, whereas the auction priced cost is only 8,17%.
However, the second sample (1996-1998) notes values of 15,3% and 7% respectively.
The data demonstrates that the book building method provides more flexibility, making
small issues appear to be more feasible, and decreasing the cost of going public for larger
companies.
The empirical analysis demonstrates that under the auctions-only system, issuers
are older and larger than book built issuers. The analysis also reveals that under pricing is
a substitute cost for lower fees, thus when all else being equal, increased under pricing
reduces the fee as a percentage of the aftermarket price. The method used for analysis in
Kenji’s and Smith’s study was regression analysis, with reliance on previously identified
variables.

When analyzing total issue cost and issue size, it was found that issuer age, sales
revenue, and equity to book value are not significantly related to the total cost of
auctioned IPOs. In the book built issues, the percentage cost is less for large issuers with
established track records.

In the study, the difference in equally-weighted average issue cost compares what
the issue cost would have been in both book building and auction scenarios for any given
company individually. Kenji and Smith found that auctioning reduces mean total issue
cost by an average of 6% of the first aftermarket price. Additionally, they predicted that
pricing through the auction method is projected to have resulted in lower total costs at
least in 82,5% of the subsample.

In conclusion, Kenji and Smith found that under the auction method, high quality
issuers had a limited ability to distinguish themselves from low quality issuers.
Furthermore, the research found that small and risky firms, as a group, incur higher costs
with book building, whereas larger and better-established issuers realize savings with this
particular method.

Overall in this sample of Japanese IPOs, the average total issue cost, measured as
a percentage of the initial aftermarket price, was significantly higher in the book building
regime than in the auction regime. However, it was found that aggregate under pricing
would have been lower under the book building, on the basis of either the full sample, or
the subsample.

2. Sherman and Jagannathan (2009)

In their study Sherman and Jagannathan identify the underlying reason for the
relative unpopularity of auctions as a means of going public. This study appears to be the
most comprehensive endeavor in terms of attempting to holistically identify the reasons
auctions have not been as attractive as other means of going public. Their research
studies international trends in auctions use. Here, the evidence overwhelmingly indicates
that auctions have been tried in over 20 countries but are rarely used today. “In other
words, out of more than 45 countries, we have not been able to find even one country in
which auctions are currently the dominant method.” (Sherman and Jagannathan 2005, 14)

Sherman and Jagannathan delve into commonly used stereotypical explanations

for why auctions are not used. The two most common notions are (1) auctions are not
used because they are still experimental and unproven, and (2) issuers are pressured into
book building due to higher fees. Nonetheless, through international research, it was
proven that even in markets where auctions have been used for a long time, there was a
decline in their use as soon as book building or some other method became available. For
the second issue, the authors found that competition in the market would drive down
prices of book building issues. Additionally, other research has shown that fixed price
offers lead to even lower spreads, compared to auctions.

In their study Sherman and Jagannathan find that on global scale initial returns is
not the most important aspect of the issue for the issuer. This was evident from data
collected on IPOs in Singapore, where both auctions and fixed price offers were
available. In this case, statistics revealed that the fixed price method was chosen as the
dominant means of going public, although auctions consistently provided lower under
pricing.
 Finally, the study also deemed whether any perceivable effect can be
distinguished from adding modern Internet technologies to enable bidding for the IPO
auction. The results illustrate that the median return for Open IPOs is 2%, which is
excellent. However, the research points out that there are significant outliers in the group.
In conclusion, Sherman and Jagannathan find that auctions have been tried and tested in
many markets, but have lost popularity due to poor control on the part of the issuer in
terms of the price and effort that are applied. They also identify that auctions provide
lower under pricing. This would imply that issuers are not only looking to optimize under
pricing, but are moreover interested in other attributes of the issue. “Without some way of
screening out free-riders and the unsure participation of serious investors, IPO auctions
are too risky for both issuers and investors.”

3. Kaneko and Pettway (2008)

Kaneko and Pettway attempt to provide an answer to the question “Does book
building provide a better mechanism for issuing firms than auctions?” Similar to Kenji
and Smith (2004), the Japanese market is used to test the assumption. The Japanese
auction process uses price discriminating auctions, instead of a fixed price or market-
clearing price as in the Open IPO process.

The empirical research in Kaneko and Pettway (2003) is broken up into three
parts. Firstly the descriptive statistics are analyzed, which demonstrate that book building
had significantly higher initial returns than auction priced IPOs. In the following part, the
auctioned priced and book built IPOs are analyzed separately through regression analysis.
In this section seven independent variables17 are tested to uncover which variables have
the most impact on under pricing. In the test of auctioned IPOs, it was found that market
volatility of daily index returns one month prior to the issue is the most significant factor
affecting under pricing. When the same regressions were run on the book built IPOs, it
was found that market change three months prior to the IPO was the most significant
factor affecting under pricing.

In the third part of Kaneko’s and Pettway’s research, regression analysis was run
on both sets of data, however controlling for the different firm specific characteristics.
There, it was also found that book built IPOs are underpriced significantly more than
auction priced IPOs. When the book built and auctioned priced IPOs were analyzed for
effects of hot and cold markets, it was found that book built IPOs are still much more
frequently underpriced. In conclusion, Kaneko and Pettway found that under all
conditions and while controlling firm specific characteristics, book built IPOs were much
more frequently underpriced in comparison to auctioned IPOs.

4. Biasis and Faugeron-Crouzet (2007)

In their research, Biasis and Faugeron-Crouzet analyze different types of IPO

auctions. They study uniform price auctions, fixed price offerings, internet-based Open
IPO mechanisms, and auctions such as Mise en Vente in France. These were analyzed
within a uniform theoretical model. (Biasis and Faugeron-Crouzet 2002, 13-17). In fixed
price offers, Biasis and Faugeron- Crouzet found high initial returns. High returns were
left both to institutional investors as well as small-uninformed investors, because of a
lack of adjustment for price and demand. For uniform price auctions, underpricing was
also evident, however with less underpricing than with fixed price offers.
The Mise en Vente auction is an auction type IPO procedure that is commonly
used in France. This auction has a fixed market clearing price and pro rata allocation. The
highest market clearing bids do not set the market-clearing price, instead it is set by a
Bourse official, based on the function of demand. It is noted that an explicit algorithm
that maps demand into price does not set the pricing in such cases.

The research found that for an optimal IPO auction, the IPO price must be set in a
manner, which reflects the information held by investors. If this is not done as in fixed
price auctions, under pricing is bound to be pervasive, whereas information gathering of
the value of the stock during the IPO process is bound to be insignificant. Biasis
Faugeron-Crouzet viewed the Open IPO process as a true Dutch auction when it in fact
was not.

An Open IPO process is a so-called ´Dirty Dutch´ auction as coined by Sherman

(1999). Much like the Mise en Vente, the fixed market-clearing price is not set at the
highest possible level, but instead it is marked down and set by the issuing company and
the underwriter based on their own perception of the function of demand.

Their study moreover identifies the problem of translating, i.e., mapping demand
into prices and into explicit computerized rules, which occur in Mise en Vente and in
Book building. The authors also highlight the importance of established relationships
between bidders and underwriters. Finally, according to Biasis and Faugeron-Crouzet an
established relationship can enhance the ability to extract information from investors.

5. Wilhelm (2007)

Wilhelm’s research dwells into the issue of how the Internet has affected
investment banking that has relied on relationship based production technology to date.
The methodology applied in this study is based on previous research relating to
investment banking. The author does not conduct his own empirical study; instead, he
identifies a list of anomalies that other studies have found indicative of the phenomenon
that investment banking, as we know it, could be changing.

Indications of the change in traditional investment banking according to the

author are that there has been a decline in the size of underwriter syndicates and there are
fewer or more dominant intermediaries in the securities underwriting business (Pichler
and Wilhelm 2001, 2256).

The second observation was made on the point of low-cost communication and
data processing, which might lead to a “direct marketing” business model. For example
Wit Capital, a subsidiary of Goldman Sachs, seeks to identify affinity groups through
data mining for a given firm’s offering.

In sum, the study forecasts that new technologies will complement traditional
technologies, rather than replace them, as has been witnessed with Wit Capital and W.R.
Hambrecht’s Open IPO.

6. Summary of previous research:

Below is a table summarizing the findings of the five key studies in the field:
Overview of Literature Review
IPO
 An initial public offering (IPO) will make the earlier private corporation a public
corporation and there will be several issues to deal with compared to the private market.
Most of them we will handle in the following sections. In this thesis we will only cover
the Stockholm Stock Exchange (OMXS), and we denote that all stock exchanges around
the world are different from each other.

At the Stockholm Stock Exchange there are two different listings possibilities;
first is the A-list that is for companies with higher turnover and it has higher demands on
firms that want to be listed. The other is the O-list that covers the rest of the publicly
listed companies, with fewer demands and companies with smaller turnover. (OMX,
2006) According to Petty, Bygrave and Shulman (1994), an IPO alternative is only for a
few entrepreneurial ventures. There are many listing requirements along with direct and
indirect costs, which in hand may be inconvenient or uneconomic for most entrepreneurs.
In the following chapters central themes such as motives, valuation, requirements and
performance will be covered, in order to explain the nature of an IPO.

TRENDS IN IPO

PRIMARY REASONS FOR A COMPANY GOING PUBLIC.

 Most people label a public offering as a marketing event, which it typically is. For
the majority of firms going public, they need additional capital to execute long-range
business models, increase brand name, to finance possible acquisitions or to take up new
projects. By converting to corporate status, a company can always dip back into the
market and offer additional shares through a rights issue.

PERFORMANCE IN 90s

Let us have a look at the general development of the Primary Markets in the nineties.
There have been many regulatory changes in the regulation of primary market in order to
save investors from fraudulent companies. The most path breaking development in the
primary market regulation has been the abolition of CCI (Controller of capital issues).
The aim was to give the freedom to the companies to decide on the pricing of the issue
and this was supposed to bring about a self-managing culture in the financial system. But
the move was hopelessly misused in the years of 1994-1995 and many companies came
up with issues at sky-high prices and the investors lost heavily. That phase took a heavy
toll on the investor’s sentiment and the result was the amount of money raised through
IPO route.

1993-96: SUNRISE, SUNSET.

With controls over pricing

gone, companies rushed to tap the
Primary Market and they did so, with remarkable ease thanks to overly optimistic
merchant bankers and gullible investors. Around Rs20000 crores were raised through
4053 issues during this period. Some of the prominent money mobilizes were the so
called ‘sunrise sectors’-polyester, textiles, finance, aquaculture. The euphoria spilled over
to the Secondary Market. But reality soon set in. Issuers soon failed to meet projections,
many disappeared or sank. Result: the small investor deserted both markets-till the next
boom!

1998-2000: ICE ON A HOT STREAK

As the great Indian software story played itself out, software stocks led a bull
charge on the bourses. The Primary Market caught up, and issues from the software
markets flooded the market. With big IPOs from companies in the ICE (Information
Technology, Communication and Entertainment) sectors, the average issue price shot up
from Rs.5 crore in 1994-96 to Rs.30 crore. But gradually, hype took over and valuations
reached absurd levels. Both markets tanked.

2001-2002-ALMOST CLOSED

There were hardly any IPOs and those who ventured, got a lukewarm response. A
depressed Secondary Market had ensured that the doors for the Primary Market remained
closed for the entire FY 2001- 2002.There were hardly any IPOs in FY 2001-2002.

2002: QUALITY ON OFFER.

The Primary Market boom promises to be different. To start with, the cream of
corporate India is queuing up, which ensures quality. In this fragile market, issue pricing
remains to be conservative, this could potentially mean listing gains. This could rekindle
the interest of small investors in stocks and draw them back into the capital market. The
taste of gains from the primary issues is expected to have a spillover effect on the
secondary market, where valuations today are very attractive.
2003: IPO-IMPROVED PERFORMANCE OVERALL!

Even as the secondary market moved into top gear in 2003 the primary market too
scripted its own revival story, buoyed largely by the Maruti IPO which was
oversubscribed six and a half times. In 2003 almost all primary issues did well on
domestic bourses after listing, prompting retail investors to flock to IPO’s. All IPO’s,
including Indraprastha Gas and TV Today Network which was oversubscribed 51 times
showed the growing appetite for primary issues. Divi Labs hit the market in February
followed by Maruti. Initially, the Maruti share price was considered steep at Rs125 per
share for a Rs5 paidup share. By the end of the year, the stock had climbed to over
Rs355. Close on the heels of Maruti, came the Uco Bank IPO, which attracted about 1mn
applicants. The primary issue of Indian Overseas Bank attracted about 4.5mn applicants
and Vijaya Bank over Rs40bn in subscriptions. The last one to get a huge response was
Indraprastha Gas, which reportedly garnered about Rs30bn. TV Today’s public offer was
expected to draw in excess of Rs30bn. In overseas listings, the only notable IPOs were
Infosys Technology's secondary ADR offering and the dull debut of Sterlite Group
company Vedanta on the London Stock Exchange. It was really Maruti Udyog that took
the lead with its new issue in June. The issue was heavily over-subscribed and by the
middle of December the share value appreciated 186 per cent. The near trebling of the
investment in less than 6 months inspired the retail investor who is now back again in the
market scouting for good scrips. After the phenomenal success of Maruti issue, a number
of companies have approached the capital market and a lot more are waiting for SEBI
approval.

SEBI has taken enough care to force companies to make relevant disclosures for
the investor to judge the quality of new issues. Besides, the companies themselves have
been careful not to overprice the shares. On the contrary, some of the companies have
deliberately under-priced them to let the issue get over-subscribed and to let the investor
share some of the capital gain after listing. With the care taken by SEBI and the
companies it is unlikely that the experience of 1995 will be repeated.
2007: INITIAL PUBLIC OUTBURST

In 2007, the Indian equity market was in full swing with the index gaining ~53%
Y-o-Y and valuations edging beyond explanation. The total market capitalization of the
Indian stock market increased 8% (INR 5,230 bn) on the back of 96 new listings in 2007.
2007 stood out in the history of Indian capital markets with the highest funds raised
through IPOs in any calendar year with maximum companies from the construction (16)
and IT sectors (11).• Almost 61 of the 96 IPOs (63%) debuted in premium in CY 07 as
compared to 54 out of 75 IPOs (72% of total IPOs) in 2006.

2008: IPO IN DOWNTURN

 On January 15, 2008, Reliance Power attracted $27.5 billion of bids on the first
day of its IPO, equivalent to 10.5 times the stock on offer, thereby, creating
India's IPO record. Its upper cut off price was Rs. 450. The proposed IPO was to
fund the development of its six power projects across the country.

 Emaar MGF’s IPO, at $1.6 billion is estimated to be the second largest IPO in the
world so far this year, behind Reliance Power's $3 billion IPO.

 Thomson Financial data reveals that India accounts for 49.1% of global IPO
proceeds at the moment, compared to just 3.7% same time last year. Significant,
given that global IPOs declined 36.1% over the last one year.

2009: IPO IN RECOVERY PERIOD

The severe economic downturn in 2008 sent worldwide IPO markets plummeting
by over 60% in both deal numbers and funds raised since 2007. With assets being
revalued globally, no IPO market was insulated from the financial crisis. The spreading
financial contagion effectively shut down public markets worldwide, bringing to an
abrupt end the record-setting IPO boom years of 2006-07. Even so, some larger quality
companies with strong business plans still managed to access the public markets with
positive results. Despite faltering economies and sinking stock markets in 2008, the US
and China led in IPO fundraising and deal numbers, respectively, while Saudi Arabia
emerged as the third largest IPO market. Trends in IPO activity can be difficult to predict,
especially in times of market volatility. Global markets will require a period of
macroeconomic stability and confidence rebuilding for the window of IPO opportunity to
reopen.

2010 IPO pipeline

This contains many quality companies from both developed and emerging
markets, which continue to ready themselves to go public while waiting for market
conditions to improve. After extensive interviews with some of the world’s top
investment bank leaders and stock exchange leaders, Ernst & Young’s Global IPO trends
report 2009 reviews the major developments in the worldwide IPO markets of 2008 and
the first quarter of 2009. As the sixth global IPO report produced by Ernst & Young, this
review offers an in-depth examination of the key trends for companies planning an IPO
today, as well as perspectives on IPO readiness. As Jim Turley, Chairman and CEO,
Ernst & Young, emphasizes in the report’s opening interview, “A crisis is a terrible thing
to waste.” Indeed, many market-leading companies were formed during challenging
economic times. Companies that undergo an effective IPO readiness transformation
during these tough times will be the first to go public when markets reopen. Early signs
suggest a shift toward a new economic landscape favoring companies that offer
innovative and productive solutions for the changing environment.

Important Factors to be
kept in Mind

 Who are the Promoters?

 What is their credibility and
track record?
 What is the company
manufacturing or providing
services?
  What has been the past performance of the Company offering the IPO?
 What is the Project cost?
 What are the means of financing and profitability projections?
 What are the Risk factors involved?
 Who has appraised the Project? In India Projects apprised by IDBI and ICICI
have more credibility than small Merchant Bankers.

Motives for IPO

There are many different motives for making an IPO; we will cover some of the
most common to give the reader an understanding of the advantages with an IPO.
Grundvall, Melin-Jakobsson & Thorell (2004) describe a variation of general motives
that are to be presented below. The raising of capital: The stock exchange (e.g. OMXS in
Sweden) is a part of the capital market. They provide a market for risk capital, the so
called secondary market where “secondhand” shares are traded.

One of the most common reasons for going public is to gain access to this market,
hence expand a company’s capital due to issuing new shares. Further, many high-growth
firms are often constrained financially and need a new way to acquire capital. Along with
this, there is a time difference between the time of investment and the time it takes to
generate capital, therefore debt financing may not be suitable.

According to this an IPO may be a better alternative, since you evade debt
financing (Huyghebaert & Van Hulle 2005). Publicity: By going public, the company
will be analyzed by financial institutions, media, and several other entities, which will
make the company and its business operations more known. This can have positive
businesslike advantages, but if it is handled badly there is a chance for incorrect
interpretations and negative spreading of rumours about the company. Status: When a
company goes public it usually raises the status of the company, especially rewarding
towards international companies and media. It can somewhat be seen as a “sign of
quality”.

Recruitment possibilities: Many companies have seen an advantage when

recruiting staff after an IPO. The reason is surely somewhat psychological. The challenge
and stimulation with a continuous external interest, is to many people a positive factor.
This motive goes hand in hand with the motives of publicity and status.

Ownership for employees: One motive could be that possibility to make

employees owners of the company. The company can through different ownership-
programs offer the employees part-ownership. For a person who believes in the company
and in him-/herself, a positive personal dividend can be obtained.

Generation change: An IPO can help to solve problems with a potential change of
generations. The heirs of family, whose fortune lies primarily in a company, may have
completely different interests and plans for the future. An IPO facilitates the possibility to
divide the ‘fortune’ without having to break up the company or sell it in its entirety.
 According to Arnold (2002) there could also be other motives that may be
essential to the shareholders, and for future investments. For shareholders: Shareholders
benefit from the availability of a speedy, cheap secondary market if they want to sell. Not
only does the public market give the possibility for the shareholders to sell their shares, it
also gives them a value of their shares within a reasonable degree of certainty. By
contrast, unquoted companies’ shareholders often find it difficult to estimate the value of
their shares. Mergers and acquisitions through own shares: After an IPO, a company has
the possibility to acquire other companies through paying the whole sum, or a part of the
sum, with their own newly issued shares. After the company has gone public, every share
is set at a price. This price, multiplied with a number of shares can represent the sum or
part of the sum in a merger or acquisition. This kind of deal is directed to the acquired
company’s owner, and the owner has to agree to such deal before it is attainable. Also
needed in this kind of deal, is the approval of the shareholders of the buying company.
The own share will be diluted when investing with own shares. According to earlier
empirical researches there are a few additional motives for going public, or at least some
other aspects of above stated motives.

Dispersed share ownership: In a public firm, the required capital is created by

selling shares to a large number of investors. To compare this with a private firm where
external financing often is generated by one large investor (or small group of investor).
Two positive reasons of having a public firm with a large number of investors are;

(1) The presence of numerous shareholders, all with smaller holdings, imply a much
better diversified owners structure
 (2) The avoidance of a large investor, with considerable more bargaining power
towards the entrepreneur, to interfere with the entrepreneur’s business strategy.
(Chemmanur & Fulghieri, 1999)

Valuation of IPOs
According to Kiholm and Smith (2004), there are several methods of valuing a
firm. The different methods to use depend in what stage a company is situated in, what
risks that is involved in the IPO, and what legislation that is present in the country.
Different opinions of a firm’s worth can also play a big role when considering an IPO.
The company will b valued by analysts, who will look at balance sheet, income statement
and cash flow of the company, and then decide the value of the company. The issuing of
shares helps the company to raise capital through selling the shares. By supplying freely
tradable shares to investors, the IPO set off the public market for the shares and allows
the “market” to establish a value of the equity.

The procedure of going public starts with that a company selects an underwriter,
normally an investment bank, that advices, issues, distributes and underwrites the risk of
market price fluctuations during the offering.

This is the primary valuator of the company that also serves as a good ground
before an IPO, even though it is not always accurate in their valuation when compared to
the final offering prices. When an underwriter determines the value of a firm it looks to
value the enterprise on a pre-money basis, i.e. before the IPO proceeds but reflecting the
opportunities facing the venture. This will be a comparison of firms in the same industry
or recent pricings on similar companies. After that, the underwriter arrives at an estimate
of an equity market value. Having done this, the underwriter will determine the number
of shares to be offered, and the price per share based on estimate of existing value per
share. (Kiholm & Smith, 2004)

According to Lowry (2001), IPO volume is positively related to firms’ demand

for additional capital and the level of investor sentiment. The author also claims that
when temporary overvaluations of companies occur (a common occurrence when PE
companies are involved in pricing), the volume of IPOs also is increased.

According to Wiggenhorn and Madura (2005), miss-pricing of newly public firms

may be affected due to liquidity and/or information during the first year after the IPO.
This comes from the fact that they have not shed any information up until the IPO, and
their liquidity is limited because they have not yet secured financing at the early stage.
The miss-pricing phenomenon varies among the three different periods. In the first period
the owners or managers have inside information but are not allowed to sell. Investors’
overconfidence about private information causes an overreaction to the price, and for that
reason mispricing may be present.
 In the second period miss-pricing is present since private- and public information
increases, and analysts cover the firm more actively. In the third period, a miss-pricing
may be present due to the owners’ sell-out of shares. To sum up, a newly public firm
experiences both changes in liquidity as well as a change in both public and private
information. This is due to the underwriter’s efforts to stabilize the share price, and how
investors respond to the information.

According to Hebb and MacKinnon (2004), there is also an increased risk of

under-pricing of a public company when a commercial bank acts as an underwriter
instead of an investment bank. This is due to the presence of a greater degree of
asymmetric information in the after-market. It has been discussed that the reason for this
comes from a potential conflict of interest faced by commercial banks, since they may
place their own interest before their customers’ interest.

Also noticeable is the fact that the issuing firm is rewarding the underwriter for
the services they achieve, e.g. they are paying fees. It is however important to recognize
that the investment bank is also selling the securities to their customers. Thus, it becomes
unclear as to what is driving the pricing decision by the investment banker. There are
empirical evidences that investment bankers tend to under-price new offerings to the
disadvantage of the existing shareholders. (Petty et al., 1994)

3.1 6 ways not to get duped by an IPO!

Everyone is talking about it even if they don't know what it means.

What is an IPO?
If a brand new company or a company already
in existence, but with no shares listed on the
stock exchange, decides to invite the public to buy its shares, it is called an Initial Public
Offering or an IPO.
Since it is the first time the company is approaching the public for money, it is also
referred to as 'going public'.
If a company that is already listed (its shares are available for buying and selling on the
stock exchange) is coming out with a fresh lot of shares, it is called the new issue. Here
are six terms commonly associated with an IPO that you, as an investor, must be aware
of.

How to invest in an IPO

i. Book building
Book building is the process of price discovery. That means there is no fixed price
for the shares.
Instead, the company issuing the shares comes up with a price band. The lowest
price is referred to as the floor and the highest, the cap.
Bids are then invited for the shares. Each investor states how many shares s/he
wants and what s/he is willing to pay for those shares (depending on the price band).
The actual price is then discovered based on these bids. To understand the entire
book building process, read Want to bid for shares?

ii. Allotment
This is the process whereby those who apply are given shares.
According to the book building process, three classes of investors can bid for the shares:

 Qualified Institutional Buyers: QIBs include mutual funds and Foreign

Institutional Investors. At least 50% of the shares are reserved for this category.
  Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor.
At least 25% is reserved for this category.
 The balance bids are offered to high net worth individuals and employees of the
company.
The bids are first allotted to the different categories and the over-subscription (more
shares applied for than shares available) in each category is determined.

Retail investors and high net worth individuals get allotments on a proportional basis.

Assuming you are a retail investor and have applied for 200 shares in the issue, and the
issue is over-subscribed five times in the retail category, you qualify to get 40 shares (200
shares/5).

Sometimes, the over-subscription is huge or the issue is priced so high that you can't
really bid for too many shares before the Rs 50,000 limit is reached.

In such cases, allotments are made on the basis of a lottery.

Say, a retail investor has applied for five shares in an issue, and the retail category has
been over-subscribed 10 times. The investor is entitled to half a share.
Since that isn't possible, it may then be decided that every 1 in 2 retail investors will get
allotment. The investors are then selected by lottery and the issue allotted on a
proportional basis.
That is why there is no way you can be sure of getting an allotment.
To understand the entire allotment process, read Want to bid for shares?

iii. Draft Offer Document

Any company making a public issue is required to file its prospectus with the
Securities and Exchange Board of India [ Images ], the market regulator.
A prospectus is the document that contains all the information you need about the
company. It will tell you why the company is coming is out with a public issue, its
financials and how the issue will be priced.
 This is called a Draft Offer Document.
This is first filed with SEBI which may specify changes, if any, to be made.
Once the changes are made, it is filed with the Registrar of Companies or the
Stock Exchange.
It must be filed with SEBI at least 21 days before the company files it with the
RoC/ Stock Exchange.
During this period, you can check it out on the SEBI web site.

Iv. Red Herring Prospectus

This is a prospectus that will have all the information as a draft offer document,
except details of the price or number of shares being offered or the amount of issue.
That is because it is used in book building issues only, where the details of the
final price are known only after bidding is concluded.
So a Red Herring prospectus is an offer document used only in book building
issues. All issues these days are through the book building route.

v. Underwriters
An underwriter to the issue could be a banker, broker, merchant banker (see
below) or a financial institution. They give a commitment to underwrite the issue.
Underwriting means they will subscribe to the balance shares if all the shares
offered at the IPO are not picked up.
 Suppose there is an issue is for Rs 100 crore (Rs 1 billion) and subscriptions are
received only for Rs 80 crore (Rs 800 million). It is then left to the underwriters to pick
up the balance Rs 20 crore (Rs 200 million).
If underwriters don't pay up, SEBI will cancel their licenses.

Vi. Lead Manager

Just because the prospectus has been filed with SEBI, it doesn't mean it recommends
the issue or guarantees its contents.
That responsibility rests with the lead managers to the issue, who are supposed to do
due diligence on the issue. In plain language that means certifying the issue is in
accordance with the regulations, proper disclosures have been made and the facts in the
prospectus are correct.
They are also called merchant bankers or investment bankers and are in charge of the
issue process. Their functions are:

 To act as intermediaries between the company seeking to raise money and the
investors. They must possess a valid registration from SEBI enabling them to do
this job.
 They are responsible for complying with the formalities of an issue, like drawing
up the prospectus and marketing the issue.
 If it is a book building process, the lead manager is also in charge of it. In such a
case, they are also called Book Running Lead Managers.
 Post issue activities, like intimation of allotments and refunds, are their
responsibility as well.
The actual work of drawing up the list of allottees, crediting the shares to their demat
accounts and ensuring refunds is done by the Registrars to the Issue. These are financial
institutions appointed to keep a record of the issue and ownership of company shares.
In the case of complaints like non-receipts of shares or refunds, investors must
complain to the lead managers, who take up the matter with the registrars.
 The names of all the lead managers and the registrar to the issue, with their
addresses, phone numbers and e-mail addresses, are displayed prominently on the cover
of every prospectus.

On a closing note
Don't forget there are no guarantees in subscribing to IPOs.
The lead manager may have certified the facts as disclosed in the prospectus are
right. Prominent financial institutions may agree to underwrite the issue. The issue may
end up being oversubscribed.
But the responsibility for investing in an issue rests fairly and squarely on you, the
investor. So make sure you have studied the company and the issue thoroughly before
you makes the decision to invest.

3.2 THE RISK FACTOR

 Investing in IPO is often seen as an easy way of investing, but it is highly risky
and many investment advisers advise against it unless you are particularly experienced
and knowledgeable. The risk factor can be attributed to the following reasons:

UNPREDICTABLE:

The Unpredictable nature of the IPO’s is one of the major reasons that investors
advise against investing in IPO’s. Shares are initially offered at a low price, but they see
significant changes in their prices during the day. It might rise significantly during the
day, but then it may fall steeply the next day.

NO PAST TRACK RECORD OF THE COMPANY:

 No past track record of the company adds further to the dilemma of the
shareholders as to whether to invest in the IPO or not. With no past track record, it
becomes a difficult choice for the investors to decide whether to invest in a particular IPO
or not, as there is basis to decide whether the investment will be profitable or not.

POTENTIAL OF STOCK MARKET:

Returns from investing in IPO are not guaranteed. The Stock Market is highly
volatile. Stock Market fluctuations widely affect not only the individuals and household,
but the economy as a whole. The volatility of the stock market makes it difficult to
predict how the shares will perform over a period of time as the profit and risk potential
of the IPO depends upon the state of the stock market at that particular time.

RISK ASSESSMENT:

The possibility of buying stock in a promising start-up company and finding the
next success story has intrigued many investors. But before taking the big step, it is
essential to understand some of the challenges, basic risks and potential rewards
associated with investing in an IPO. This has made Risk Assessment an important part of
Investment Analysis. Higher the desired returns, higher would be the risk involved.
Therefore, a thorough analysis of risk associated with the investment should be done
before any consideration.

For investing in an IPO, it is essential not only to know about the working of an
IPO, but we also need to know about the company in which we are planning to invest.
Hence, it is imperative to know:
  The fundamentals of the business
 The policies and the objectives of the business
 Their products and services
 Their competitors
 Their share in the current market
 The scope of their issue being successful
 It would be highly risky to invest without having this basic knowledge about the
company.
 There are 3 kinds of risks involved in investing in IPO:

BUSINESS RISK:

It is important to note whether the company has sound business and management
policies, which are consistent with the standard norms. Researching business risk
involves examining the business model of the company.

FINANCIAL RISK:

Is this company solvent with sufficient capital to suffer short-term business

setbacks? The liquidity position of the company also needs to be considered. Researching
financial risk involves examining the corporation's financial statements, capital structure,
and other financial data.

MARKET RISK:

It would beneficial to check out the demand for the IPO in the market, i.e., the
appeal of the IPO to other investors in the market. Hence, researching market risk
involves examining the appeal of the corporation to current and future market conditions.

3.3 Preparations and Requirements for IPO

 We will now cover the preparations and requirements before and after the IPO,
and we will start with the different aspects a company has to go through before making
an IPO.

 Before the IPO

The chronology of an IPO is relatively straightforward according to Petty et al. (1994):

1. The owners and management decide to go public
2. An investment banker is selected to serve as underwriter
3. A prospectus is prepared
4. The managers, along with the investment banker, goes on the road to tell the firm’s
story to the brokers who will be selling the stock
5. On the day before the IPO is released to the public, the decision is made as to the
actual offering price
6. The shares are offered to the public

This is not as easy as it sounds; it comes with numerous other complications. It is

also said that a shift in power arises during the process. As of the time of the prospectus
has been prepared, and the firm’s management are on the road show, the investment
banker gets more control of the decisions. After that the demands of the marketplace
starts to take over, and the market decides the final outcome. (Petty et al., 1994)

To be able to make a planned IPO, the company has to be well prepared to avoid
difficulties to make the IPO in due time. It takes approximately three months to complete
an IPO after an application for admission to the stock exchange.

Before the formal application is completed, issues have to be handled and

demands have to be met. This takes time, and a firm should count on roughly one to two
years of preparations before the formal application. (Grundvall et al., 2004) Kensinger,
Martin and Petty (2000) mean that to go public takes a lot of energy and time from the
management and is often experienced as a distraction to the ordinary business. It results
in a reduction of managerial focus and a decline in performance.

Further, the authors mean, it also implies uncertainty to the employees when
being set out to a new owner, which may result in lower morale due to the stress and
anxiety. Owners and employees with a lower morale will often result in decreased
earnings which is very bad to a company just about to go public.
 According to a research by Petty et al. (1994), the IPO process is considered one
of the most shattering and annoying, but still the most motivating and exciting
experiences the management have known. In a survey, the CEOs who had participated in
the IPO procedure had spent on average 33 hours per week on IPO-related work for over
four and a half months.

According to Grundvall et al. (2004), there are several requirements that have to
be fulfilled before going public. Legal due diligence: Before a company makes an IPO, it
has to be inspected by an external commercial lawyer. The reason for this is to show
whether it exists possible obstacles to the IPO and to verify that the whole picture is
given of the company and its business.

Education: A company has to send their Board of Directors, management team

and accountants to go through training in order to create an understanding of the demands
the stock exchange has on each listed company. Record (A-list only): If a company wants
to be listed at the A-list it has to show a historical record of operations conducted the last
three years and be able to show accounting documents.

There are no specific demands if a company wants to enter the O-list. However
there exists a demand of non-financial information so that the investors can make an
appropriate valuation of the company. Documented earning capacity (A-list only): To
enter the A-list a company needs a record of profit earning. The profit has to be
comparative to other firms in the same industry. For both lists an inspection of key ratios
will be conducted. The purpose with the inspection is to examine if the company has a
stability and profitability according to the stock exchange. The company has to show
sufficient financial resources for the upcoming twelve months after the day of the IPO.

Market value (A-list only): If the company would like to be listed at the A-list they
need a market value of at least 300 Billion SEK. There is no such demand for listing at
the O list.
 After the IPO
 There are also continuous requirements after an IPO. These requirements concern
the Board of Directors and the management team of the company and consist of the
assembly of the Board of Directors, control of economy and capacity to deliver
information, as swell as spreading of shares and owner-concentration. (Grundvall et al.,
2004)

To begin with there are extensive accounting and information demands that every
company is obliged to follow, such as the delivery of an annual report, interim report and
preferably an interim financial statement. Further, companies are required to disclose a
far greater range and depth of information than is otherwise required, which may come as
demanding sometimes.

The motives behind these regulations are to protect investors and for the stock
exchange to be able to supervise trade, price formation and that regulations not are
abused. Also important is the guarantee of fair pricing and contemporaneous knowledge
of information over the market to avoid insider trading and suchlike. (Arnold, 2002)
Some decision-making changes may also be experienced after an IPO.
 An increased Boardof Directors’ size may enhance corporate governance since
the CEO may have a less dominating role, which can be better for the whole of the
company, as well as the shareholders. However, a larger Board of Directors may imply
costs to a company in a way of poorer communication and decision-making that is
associated with larger groups. Larger group may experience a lower participation and are
often less cohesive. Also, if a public Board of Directors not is as knowledgeable about
the company, as the former owners were, this can result in less effective leadership for
the company. (Pacini, Hillison, Marlett & Burgess, 2005)

Performance of IPOs

According to Jain and Kini (1999), there is a difference in performance due to in

what stage of the growth cycle the company is in. A firm that goes public in an early
stage of their growth cycle tends to be less profitable at the time of the IPO. Firms that
are already profitable, and further into their growth cycle, tend to demonstrate a higher
operating performance after the IPO.
Also, a firm that goes public in an early stage is more likely to fail or get acquired
by another company. Leleux and Muzyka (1999, cited in Wright, Wilson & Robbie,
2002) discuss three empirical anomalies when seeing to pricing and performance of IPO
shares; abnormal initial returns, hot issue phenomenon and long-term underperformance.
Abnormal initial returns: This phenomenon implies an under-priced stock with a higher
first market price than offering price. This was particular notable from the mid-sixties to
the late eighties in both the U.S. and Europe, and was usually around 10 to 25 percent.
The phenomenon has been widely studied and is seen to be a robust measurement across
many countries still today. (Leleux & Muzyka, 1999, cited in Wright, Wilson & Robbie,
2002) Hot issue phenomenon: There are studies that show patterns in the way IPOs are
made, for example firms seem to go public in about the same time.

This depends on economic times, and the fact that good economic times affect
cash flow in a positive way. With strong positive cash flows many firms have incitements
for going public. Therefore it is common that the IPOs come in waves in good economic
times. (Benninga, Helmantel & Sarig, 2003) Long-run underperformance: A stock seems
to under-perform compared to benchmarks at a three to six year period after an IPO.

Leleux and Muzyka (1999) made a research during a time period of three years
and with five European countries as a sample, in order to analyse the long-term
performance of IPOs. During the test, four out of five countries underperformed and had
a negative market-adjusted return of approximately 20 percent. According to Howton,
Howton and Olson (2001), long-run underperformance may be present due to managerial
mismanagement of new funds due to agency conflicts that leads to results not optimal to
shareholders, and hence the value of the company.
Another important phenomenon is the short-term strategy view that comes with
many public companies. Since many investors possess less information about a company,
compared to the management of a company, they tend to focus on quarterly reports to
attain performance of a firm. This in hand affects the stock price of a company and
corporate executives tend to be concerned by reputations and the company’s stock price
so they start to focus on short-term performance as well.

3.4 Getting In On an IPO

The Underwriting Process

 Getting a piece of a hot IPO is very difficult, if not
impossible. To understand why, we need to know how an
IPO is done, a process known as underwriting.

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 Wall Street
works. Underwriting is the process of raising money by either
debt or equity (in this case we are referring to equity). You 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. 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.

As you can see, the road to an IPO is a long and complicated one. You may have
noticed that individual investors aren't involved until the very end. This is because small
investors aren't the target market. They don't have the cash and, therefore, hold little
interest for the underwriters. If underwriters think an IPO will be successful, they'll
usually pad the pockets of their favorite institutional client with shares at the IPO price.
The only way for you to get shares (known as an IPO allocation) is to have an account
with one of the investment banks that is part of the underwriting syndicate. But don't
expect to open an account with $1,000 and be showered with an allocation. You need to
be a frequently trading client with a large account to get in on a hot IPO.

Bottom line, your chances of getting early shares in an IPO are slim to none
unless you're on the inside. If you do get shares, it's probably because nobody else wants
them. Granted, there are exceptions to every rule and it would be incorrect for us to say
that it's impossible. Just keep in mind that the probability isn't high if you are a small
investor.

Parameters to judge an IPO

Good investing principles demand that you study the minutes of details prior to
investing in an IPO. Here are some parameters you should evaluate:-

 Promoters
Is the company a family run business or is it professionally owned?

Even with a family run business what are the credibility and professional qualifications of
those managing the company?

Do the top level managers have enough experience (of at least 5 years) in the specific
type of business?

 Industry Outlook

The products or services of the company should have a good demand and scope for
profit.

 Business Plans

Check the progress made in terms of land acquisition, clearances from various
departments, purchase of machinery, letter of credits etc. A higher initial investment from
the promoters will lead to a higher faith in the organization.

 Financials

Why does the company require the money? Is the company floating more equity
than required? What is the debt component? Keep a track on the profits, growth and
margins of the previous years. A steady growth rate is the quality of a fundamentally
sound company. Check the assumptions the promoters are making and whether these
assumptions or expectations sound feasible.

 Risk Factors

The offer documents will list our specific risk factors such as the company’s
liabilities, court cases or other litigations. Examine how these factors will affect the
operations of the company.
 Key Names

Every IPO will have lead managers and merchant bankers. You can figure out the
track record of the merchant banker through the SEBI website.

 Pricing

Compare the company’s PER with that of similar companies. With this you can
find out the P/E Growth ratio and examine whether its earnings projections seem viable.

 Listing

You should have access to the brokers of the stock exchanges where the company
will be listing itself.

Parties Involved in the IPO:

• Issuer
• Lead Manager
• Lawyer / Solicitor
• Auditors
• Reporting Accountants
• SEBI

Understanding the role of intermediaries:

 Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead Managers (BRLM),

syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the
company, Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The
issuer discloses the addresses, telephone/fax numbers and email addresses of these
intermediaries. In addition to this, the issuer also discloses the details of the compliance
officer appointed by the company for the purpose of the issue.

 Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with the

SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead
Manager to an issue.

 What is the role of a Lead Manager? (pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up the due diligence of
company’s operations/ management/ business plans/ legal etc. Other activities of the LM
include drafting and design of Offer documents, Prospectus, statutory advertisements and
memorandum containing salient features of the Prospectus. The BRLMs shall ensure
compliance with stipulated requirements and completion of prescribed formalities with
the Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing.
Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and
Bankers to the Offer is also included in the pre-issue processes. The LM also draws up
the various marketing strategies for the issue. The post issue activities including
management of escrow accounts, co-ordinate non-institutional allocation, intimation of
allocation and dispatch of refunds to bidders etc are performed by the LM. The post Offer
activities for the Offer will involve essential follow up steps, which include the
finalization of trading and dealing of instruments and dispatch of certificates and demat
of delivery of shares, with the various agencies connected with the work such as the
Registrar(s) to the Offer and Bankers to the Offer and the bank handling refund business.
The merchant banker shall be responsible for ensuring that these agencies fulfill their
functions and enable it to discharge this responsibility through suitable agreements with
the Company.

 What is the role of a registrar?

The Registrar finalizes the list of eligible allottees after deleting the invalid
applications and ensures that the corporate action for crediting of shares to the demat
accounts of the applicants is done and the dispatch of refund orders to those applicable
are sent. The Lead manager co-ordinates with the Registrar to ensure follow up so that
that the flow of applications from collecting bank branches, processing of the
applications and other matters till the basis of allotment is finalized, dispatch security
certificates and refund orders completed and securities listed.

 What is the role of bankers to the issue?

Bankers to the issue, as the name suggests, carries out all the activities of ensuring
that the funds are collected and transferred to the Escrow accounts. The Lead Merchant
Banker shall ensure that Bankers to the Issue are appointed in all the mandatory
collection centers as specified in DIP Guidelines. The LM also ensures follow-up with
bankers to the issue to get quick estimates of collection and advising the issuer about
closure of the issue, based on the correct figures.

 Question on Due diligence

The Lead Managers state that they have examined various documents including
those relating to litigation like commercial disputes, patent disputes, disputes with
collaborators etc. and other materials in connection with the finalization of the offer
document pertaining to the said issue; and on the basis of such examination and the
discussions with the Company, its Directors and other officers, other agencies,
independent verification of the statements concerning the objects of the issue, projected
profitability, price justification, etc., they state that they have ensured that they are in
compliance with SEBI, the Government and any other competent authority in this behalf.

What is the Registration Process?

Going public requires a Registration Statement which is a carefully crafted

document that is prepared by your attorneys and accountants. It requires detailed
discussions on information pertaining to:
 Business product/service/markets
 Company Information
 Risk Factors
 Proceeds Use (How are you going to use the money)
 Officers and Directors
 Related party transactions
 Identification of your principal shareholders
 Audited financials

After your registration statement is prepared, it is submitted to the Securities and

Exchange Commission and various other regulatory bodies for their detailed review.
When this process is completed, you and your management team will do a "road show" to
present your company to the stock brokers who will then sell your stock to the public
investors. Assuming they can successfully sell your issue, you’ll receive your money.
Then it's simple, all you have to do is make a lot more money with the proceeds so as to
increase the value of your, your teams and the public investors stock.
3.5 IPO SCAMS

YES BANK Ltd. CASE

The modus operandi adopted in manipulating the YES Bank Ltd (YBL)'s initial
public offering (IPO) allotment involved opening of over 7,500 benami dematerialized
accounts.
 These accounts were with the National Securities Depository Ltd (NSDL) through
Karvy Stockbroking Ltd (Karvy-DP). Of the 13 erring entities, the chief culprits
identified by SEBI were Ms Roopalben Panchal and Sugandh Estates and Investments
Pvt Ltd.

While Ms Panchal opened 6,315 benami DP accounts, another entity Sugandh

opened 1,315 benami accounts. Each of these accounts applications were made for 1,050
shares, paying application money of Rs 47,250 each. By applying for small lots (1,050
shares through each accounts), they misused the retail allotment quota stipulated for
IPOs. The shares allotted in IPO to the benamis of Ms Panchal and Sugandh would have
otherwise gone to genuine retail applicants.
The IPO of YBL opened on June 15, 2005 and its shares were listed on the BSE
and the NSE on July 12, 2005.
It was observed that Ms Panchal had transferred 9,31,600 shares to various
entities in seven off-market transactions on July 11 - a day prior to the listing and
commencement of trading on the stock exchanges. In order to get an allotment of
9,31,600 shares, Ms Panchal would have had to apply for crores of shares involving
many crores of rupees in application money.

However, Ms Panchal's name did not appear in the list of top 100 public issue
allottees. Thus, it was suspected that Ms Panchal must have made multiple applications
or that other applicants were acting as a front for her. Ms Panchal had applied for only
1,050 shares in the YES Bank IPO, paying the application money of Rs 47,250. And she
did not receive any allotment in the IPO. On July 6, Ms Panchal received 150 shares each
from 6,315 allottees through off-market transactions aggregating 9,47,250 YBL shares.

Curiously, as per the dematerialized account data furnished by NSDL, of the

above 6,315 entities as many as 6,221 entities have a same address in Ahmadabad. There
are three more addresses of locations in Ahmadabad, which have been linked to Ms
Panchal. All the 6,315 entities have their bank accounts with Bharat Overseas Bank and
demat accounts with Karvy-DP.
 By applying for the maximum possible number of shares per applicant while
being categorized as retail applicant and by putting in large number of applications in the
lot of 1,050 shares, Ms Panchal and her associates (real or fictitious) have attempted to
corner the maximum possible number of shares in the IPO allotment.

This tantamount to an abuse of IPO allotment process, the SEBI order said.

A similar modus operandi was adopted by Sugandh, which received 150 shares
each from 1,315 dematerialized accounts aggregating 1,97,250 shares in off market
transactions.

According to SEBI findings, Ms Panchal and others booked profits to the tune of
about Rs 1.70 crore on the day of the listing of YES Bank shares.

Salient Features of IPO scam

 Current account opened in the name of multiple companies on the same date in
the same branch of a bank

 Sole person authorized to operate all these accounts who was

also a Director in all the companies

 Identity disguised by using different spelling for the same name in different
companies

 Multiple accounts opened in different banks by the same group of joint account
holders

 Huge funds transferred from companies accounts to the individual’s account

which was invested in IPO’s

 Loans/ overdrafts got sanctioned in multiple names to bypass limit imposed by

RBI

 Loans sanctioned to brokers violating guidelines

 Multiple DP accounts opened to facilitate investment in IPO

 Large number of cheques for the same value issued from a single account on the
same day

 Multiple large value credits received by way of transfer from other banks

 Several accounts opened for funding the IPO on the request of brokers, some were
in fictitious names

 Refunds received got credited in brokers a/cs

Operational deficiencies:
Factors that facilitated the scam

 Photographs not obtained

 Proper introductions not

obtained

 Signatures not taken in the

presence of bank official

 Failure to independently

verify the identity and address

of all joint account holders

 Directors identity/ address not verified

 Customer Due Diligence done by a subsidiary

 Objective of large number of jt. account holders opening account not ascertained

 Purpose of relationship not clearly established

 Customer profiling based on risk classification not done

 Poor monitoring and reporting system due to inadequate appreciation of ML

issues

 Absence of investigation about use and sources of funds

 Unsatisfactory training of personnel

 No system of fixing accountability of bank officials responsible for opening of

accounts and complying with KYC procedures

 Ineffective monitoring and control

Measures to prevent scams:

 An analysis of IPO scam clearly brings

out the laxity on the part of banks to
scrupulously implement the KYC/AML
guidelines issued from time to time. It
also raises serious concerns about the
integrity of the systems & systemic risks.

 While scams may still happen despite

best of preventive measures, it should not undermine the efforts being made to
insulate the financial sector from money laundering. It is going to be a long fight
with constant need to improve and innovate new strategies.

 It is important to understand that the risks banks run as a result of non-compliance

with regulatory and statutory guidelines can cause severe reputational and
financial damage to individual banks and the Indian banking system as a whole

 Need for comprehensive operational framework implementing important aspects

of KYC instructions e.g.

 Documentation procedure for opening of all types of customer accounts;

 Clarity in understanding of risk classification of accounts and proper customer

profiling

 Ongoing monitoring of medium and high risk accounts

 Enhanced due diligence in respect of accounts with beneficial ownership, non-
face to face transactions, group companies, high risk businesses and wire transfers
etc.

 Prompt reporting of cash and suspicious transactions to Principal Officer by

branches

 Effective audit machinery Good understanding of regulatory and statutory

prescriptions in letter and spirit

 Clear demarcation of duties and responsibilities

 Violations to be dealt with sternly

PRICING OF ISSUE:

CONTROLLER OF CAPITAL ISSUE

During the Controller of Capital Issue (CCI)

regime the issues were priced by the company and
approved by CCI. Generally the CCI was very
conservative and hardly allowed premium issues.

ARRIVAL OF SEBI

After the Arrival of SEBI free market policy

is followed for pricing of issue. Merchant Bankers are responsible for justifying the
premium. The company was allowed to give future profit projections. A company can
issue shares to applicants in the firm allotment category at higher price than the price at
which securities are offered to public. Further, an eligible company is free to make
public/rights issue in any denomination determined by it in accordance with the
Companies Act, 1956 and SEBI norms.

DECIDING PREMIUM BY BID SYSTEM

Since year 2000 SEBI has changed pricing formula. The promoters cannot give
future projections and merchant banker alone cannot decide the pricing of IPO. At
present, 50%of the IPO is reserved for the wholesale investors and 50% is for the small
investor. The Lead Manager starts road show in consultation with Institutional Investors.
Then they call for bid at recommended prices. Once, bids are received pricing is open for
discussion. The mean bid price is accepted and allocation is done.
3.6 BOOK BUILDING:

THE LATEST AVTAAR OF PRICE DISOVERY

WHAT IS BOOK BUILDING?

Book Building is basically a capital issuance process used in Initial Public

Offering (IPO), which aids price and demand discovery. IT is a process used for
marketing a public offer of equity shares of a company and is a common practice in most
developed countries.

Book Building is so-called because the collection of bids from investors is entered
in a "book". These bids are based on an indicative price range. The issue price is fixed
after the bid closing date.

PERSONS INVOLVED IN THE BOOK-BUILDING PROCESS

The principal intermediaries involved in the Book Building process are the
company; Book Running Lead Managers (BRLM) and syndicate members who are
intermediaries registered with SEBI and are eligible to act as underwriters. Syndicate
members are appointed by the BRLM.

HOW IS THE BOOK BUILT?

A company that is planning an initial public offer appoints a category-I Merchant

Banker as a book runner. Initially, the company issues a draft prospectus which does not
mention the price, but gives other details about the company with regards to issue size,
past history and future plans among other mandatory disclosures. After the draft
prospectus is filed with the SEBI, a particular period is fixed as the bid period and the
details of the issue are advertised. The book runner builds an order book, that is, collates
the bids from various investors, which shows the demand for the shares of the company
at various prices.
 For instance, a bidder may quote that he wants 50,000 shares at Rs.500 while
another may bid for 25,000 shares at Rs.600. Prospective investors can revise their bids at
anytime during the bid period that is, the quantity of shares or the bid price or any of the
bid options.

BASIS OF DECIDING THE FINAL PRICE

On closure of the book, the quantum of shares ordered and the respective prices
offered are known. The price discovery is a function of demand at various prices, and
involves negotiations between those involved in the issue. The book runner and the
company conclude the pricing and decide the allocation to each syndicate member.

PAYMENT FOR THE SHARES

The bidder has to pay the maximum bid price at the time of bidding based on the
highest bidding option of the bidder. The bidder has the option to make different bids like
quoting a lower price for higher number of shares or a higher price for lower number of
shares. The syndicate member may waive the payment of bid price at the time of bidding.
In such cases, the issue price may be paid later to the syndicate member within four days
of confirmation of allocation. Where a bidder has been allocated lesser number of shares
than he or she had bid for, the excess amount paid on bidding, if any will be refunded to
such bidder. Advantage of the Book Building process versus the Normal IPO marketing
process Unlike in Book Building, IPO’s are usually marketed at a fixed price. Here the
demand cannot be anticipated by the merchant banker and only after the issue is over the
response is known. In book building, the demand for the share is known before the issue
closes. The issue may be deferred if the demand is less. This process allows for price and
demand discovery. Also, the cost of the public issue is reduced and so is the time taken to
complete the entire process.
DIFFERENCE IN FIXED PRICE PROCESS AND BOOK BUILDING
PROCESS
 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.
 Company plans an IPO via Book Building route

Appoints a Merchant Banker

As Book Runner

Issue a Draft Prospectus

(Containing all mandatory Company disclosures other than Price)

Draft prospectus filed simultaneously with concerned

authority (SEBI)

Book runner appoints syndicates members and

Registered intermediaries to garner subscription

Price discovery begins through the bidding process

A close of bidding, Book runner and company decide

Upon the allocation and allotment
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 the company concludes the final price at which it is willing to
issue the stock and allocation of securities.

 Generally, the numbers of shares are 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.

Book-building is all about letting the company know the price at which you are
willing to buy the stock and getting an allotment at a price that a majority of the investors
are willing to pay. The price discovery is made depending on the demand for the stock.

The price that you can suggest is subject to a certain minimum price level, called
the floor price. For instance, the floor price fixed for the Maruti's initial public offering
was Rs 115, which means that the price you are willing to pay should be at or above Rs
115.

In some cases, as in Biocon, the price band (minimum and maximum price) at
which you can apply is specified. A price band of Rs 270 to Rs 315 means that you can
apply at a floor price of Rs 270 and a ceiling of Rs 315.

If you are not still very comfortable fixing a price, do not worry. You, as a retail
investor, have the option of applying at the cut-off price. That is, you can just agree to
pick up the shares at the final price fixed. This way, you do not run the risk of not getting
an allotment because you have bid at a lower price. If you bid at the cut-off price and the
price is revised upwards, then the managers to the offer may reduce the number of shares
allotted to keep it within the payment already made. You can get the application forms
from the nearest offices of the lead managers to the offer or from the corporate or the
registered office of the company.

How is the price fixed?

All the applications received till the last date is analyzed and a final offer price,
known as the cut-off price is arrived at. The final price is the equilibrium price or the
highest price at which all the shares on offer can be sold smoothly. If your price is less
than the final price, you will not get allotment.

If your price is higher than the final price, the amount in excess of the final price
is refunded if you get allotment. If you do not get allotment, you should get your full
refund of your money in 15 days after the final allotment is made. If you do not get your
money or allotment in a month's time, you can demand interest at 15 per cent per annum
on the money due.

How are shares allocated?

 As per regulations, at least 25 per cent of the shares on offer should be set aside
for retail investors. Fifty per cent of the offer is for qualified institutional
investors. Qualified Institutional Bidders (QIB) are specified under the regulation
and allotment to this class is made at the discretion of the company based on
certain criteria.

 QIBs can be mutual funds, foreign institutional investors, banks or insurance

companies. If any of these categories is under-subscribed, say, the retail portion is
not adequately subscribed, then that portion can be allocated among the other two
categories at the discretion of the management. For instance, in an offer for two
lakh shares, around 50,000 shares (or generally 25 per cent of the offer) are
reserved for retail investors. But if the bids from this category are received are
 only for 40,000 shares, then 10,000 shares can be allocated either to the QIBs or
non-institutional investors.

 The allotment of shares is made on a pro-rata basis. Consider this illustration: An

offer is made for two lakh shares and is oversubscribed by times times, that is,
bids are received for six lakh shares. The minimum allotment is 100 shares. 1,500
applicants have applied for 100 shares each; and 200 applicants have bid for 500
shares each. The shares would be allotted in the following manner:

 Shares are segregated into various categories depending on the number of shares
applied for. In the above illustration, all investors who applied for 100 shares will
fall in category A and those for 500 shares in category B and so on.

 The total number of shares to be allotted in category A will be 50,000

(100*1500*1/3). That is, the number of shares applied for (100)* number of
applications received (1500)* oversubscription ratio (1/3). Category B will be
allotted 33,300 shares in a similar manner.

 Shares allotted to each applicant in category A should be 33 shares (100*1/3).

That is, shares applied by each applicant in the category multiplied by the
oversubscription ratio. As, the minimum allotment lot is 100 shares, it is rounded
off to the nearest minimum lot. Therefore, 500 applicants will get 100 shares each
in category A — total shares allotted to the category (50,000) divided by the
minimum lot size (100).

 In category B, each applicant should be allotted 167 shares (500/3). But it is

rounded off to 200 shares each. Therefore, 167 applicants out of 200 (33300/200)
would get an allotment of 200 shares each in category B.

 Recently, in India, there had been issue from Hughes Software Solutions which
was a milestone in our growth from fixed price offerings to true price discovery
 IPOs. While the HSS issue has many positive and fascinating features, the design
adopted was still riddled with flaws, and we can do much better.

 The final allotment is made by drawing a lot from each category. If you are lucky
you may get allotment in the final draw.
 The shares are listed and trading commences within seven working days of
finalization of the basis of allotment. You can check the daily status of the bids
received, the price bid for and the response form various categories in the Web
sites of stock exchanges. This will give you an idea of the demand for the stock
and a chance to change your mind. After seeing the response, if you feel you have
bid at a higher or a lower price, you can always change the bid price and submit a
revision form.

 The traditional method of doing IPOs is the fixed price offering. Here, the issuer
and the merchant banker agree on an "issue price" - e.g. Rs.100. Then one have
the choice of filling in an application form at this price and subscribing to the
issue. Extensive research has revealed that the fixed price offering is a poor way
of doing IPOs. Fixed price offerings, all over the world, suffer from `IPO
underpricing'. In India, on average, the fixed-price seems to be around 50% below
the price at first listing; i.e. the issuer obtains 50% lower issue proceeds as
compared to what might have been the case. This average masks a steady stream
of dubious IPOs who get an issue price which is much higher than the price at
first listing. Hence fixed price offerings are weak in two directions: dubious issues
get overpriced and good issues get underpriced, with a prevalence of underpricing
on average.

 What is needed is a way to engage in serious price discovery in setting the price at
the IPO. No issuer knows the true price of his shares; no merchant banker knows
the true price of the shares; it is only the market that knows this price. In that case,
can we just ask the market to pick the price at the IPO?
  Imagine a process where an issuer only releases a prospectus, announces the
number of shares that are up for sale, with no price indicated. People from all over
India would bid to buy shares in prices and quantities that they think fit. This
would yield a price. Such a procedure should innately obtain an issue price which
is very close to the price at first listing -- the hallmark of a healthy IPO market.

Documents Required:
A company coming out with a public issue has to come out with an Offer
Document/ Prospectus.

An offer document is the document that contains all the information you need
about the company. It will tell you why the company is coming is out with a public issue,
its financials and how the issue will be priced.

The Draft Offer Document is the offer document in the draft stage. Any
company making a public issue is required to file the draft offer document with the
Securities and Exchange Board of India, the market regulator.

If SEBI demands any changes, they have to be made. Once the changes are made,
it is filed with the Registrar of Companies or the Stock Exchange. It must be filed with
SEBI at least 21 days before the company files it with the RoC/ Stock Exchange. During
this period, you can check it out on the SEBI Web site.

Red Herring Prospectus is just like the above, except that it will have all the
information as a draft offer document; it will, however, not have the details of the price or
the number of shares being offered or the amount of issue. That is because the Red
Herring Prospectus is used in book building issues only, where the details of the final
price are known only after bidding is concluded.

Players:
 Co-managers and advisors
 Underwriters
 Lead managers
 Bankers
 Brokers and principal brokers
 Registrars
 Stock exchanges.
4.1 Research Methodology
Methodology means science of method or the body of methods used for a study.
Methodology is indispensable because of its scientific free through. Unless, a proper
method is following, any project work or study would not be a success. Therefore at
notable results, methodology should form a significant part of it.

The aim is to present a clear idea of the procedure followed in this study. Since the
value of any systematic and scientific research line in its methodology which gives a clear
idea of the form of procedure adopted in conducting it and stating the purpose becomes
the essential part of every study. In this project work, methodology includes objectives of
the study, significance of the study and limitation of the study.

4.2 Sources of data

There are two sources of collecting data (of both financial and non financial
in nature)

Primary data

The primary data is collected through interview method among various

department heads pertaining to Equity Research, Commodity, Derivatives,
etc.

Secondary data:

Secondary financial data was collected from the website of the company.
Major secondary source for the data collection is websites and magazines.
 IPO(2005) Performance
Equity Sensex
n
Sensex on 10 io
o. ic
e Issue Monthly e e
ris
.N Scrip Pr Issue Dates ng as on as -20 ng pa
Result
Sl Code
Company e Amount Listing date Average as ha Listing ex 12 ha m
su C C
Is
on 20-12-10 % ens 20- % Co
Date S
Start End (Rs. Cr.)
3I INFOTECH Under
1 532628 100 30-Mar-05 04-Apr-05 200 22-Apr-05 58.225 -42% 6346.57 19881.75 213% -255%
LTD. Performed

ABG SHIPYARD Under

2 532682 185 18-Nov-05 26-Nov-05 157.25 13-Dec-05 392.55 112% 9263.9 19881.75 115% -2%
LTD. Performed

AIA
Under
3 532683 ENGINEERING 250 17-Nov-05 22-Nov-05 117.5 14-Dec-05 430.5 72% 9241.76 19881.75 115% -43%
Performed
LTD.

ALLAHABAD Under
4 532480 82 06-Apr-05 12-Apr-05 820 22-Apr-05 230.475 181% 6284.2 19881.75 216% -35%
BANK Performed

ALLSEC
Under
5 532633 TECHNOLOGIES 135 13-Apr-05 20-Apr-05 42.41 9-May-05 34.275 -75% 6481.35 19881.75 207% -281%
Performed
LTD.

AMAR Over
6 532664 28 25-Aug-05 31-Aug-05 42 16-Sep-05 122.2 336% 8380.96 19881.75 137% 199%
REMEDIES LTD. Performed

AURIONPRO
Over
7 532668 SOLUTIONS 90 27-Sep-05 04-Oct-05 27 25-Oct-05 248.55 176% 7921.44 19881.75 151% 25%
Performed
LTD.

BANNARI
AMMAN Under
8 532674 135 19-Oct-05 25-Oct-05 94.5 14-Nov-05 142.05 5% 8494.29 19881.75 134% -129%
SPINNING MILLS Performed
LTD.

BARTRONICS Under
9 532694 75 20-Dec-05 24-Dec-05 45 1-Dec-06 88.05 17% 9303.71 19881.75 114% -96%
INDIA LTD. Performed

BOMBAY
Under
10 532678 RAYON 70 11-Nov-05 17-Nov-05 94.33 5-Dec-05 200.775 187% 6432.17 19881.75 209% -22%
Performed
FASHIONS LTD.
 IPO(2005) Performance
Equity Sensex
n
Sensex on 10 io
o. ic
e Issue Monthly e e
ris
.N Scrip Pr Issue Dates ng as on as -20 ng pa
Result
Sl Code
Company e Amount Listing date Average as ha Listing ex 12 ha m
su C C
Is
on 20-12-10 % ens 20- % Co
Date S
Start End (Rs. Cr.)
CELEBRITY Under
11 532695 180 19-Dec-05 22-Dec-05 81.9 12-Jan-06 22.775 -87% 9303.71 19881.75 114% -201%
FASHIONS LTD. Performed

EDUCOMP
Over
12 532696 SOLUTIONS 115 19-Dec-05 22-Dec-05 46 13-Jan-06 566.925 393% 9374.19 19881.75 112% 281%
Performed
LTD.

Over
13 531162 EMAMI LTD. 70 04-Mar-05 10-Mar-05 35 24-Mar-05 401.25 473% 6442.87 19881.75 209% 265%
Performed

EVEREST
Under
14 532684 KANTO 160 22-Nov-05 25-Nov-05 102.86 15-Dec-05 100.825 -37% 9170.4 19881.75 117% -154%
Performed
CYLINDER LTD.

GATEWAY
Under
15 532622 DISTRIPARKS 72 09-Mar-05 14-Mar-05 151.2 31-Mar-05 106.875 48% 6492.82 19881.75 206% -158%
Performed
LTD.

Ginni Filaments
16 590025 19-Dec-05 23-Dec-05 -- 15.275 #DIV/0! 19881.75 #DIV/0! #DIV/0! #DIV/0!
Ltd

GOKALDAS Under
17 532630 425 30-Mar-05 06-Apr-05 132.81 27-Apr-05 121 -72% 6278.5 19881.75 217% -288%
EXPORTS LTD. Performed

GUJARAT
Under
18 517300 INDUSTRIES 68 13-Oct-05 19-Oct-05 -- 8-Nov-05 102.675 51% 8317.8 19881.75 139% -88%
Performed
POWER CO.LTD.

Under
19 532662 HT MEDIA LTD. 530 04-Aug-05 10-Aug-05 370.74 9-Jan-05 141.375 -73% 7876.15 19881.75 152% -226%
Performed

20 532174 ICICI Bank Ltd. 01-Dec-05 06-Dec-05 -- 1123.225 #DIV/0! 19881.75 #DIV/0! #DIV/0! #DIV/0!
 IPO(2005) Performance
Equity Sense
Sensex
o. ic
e Issue Monthly e o
. N Scrip Pr Issue Dates ng as on as
Sl Code
Company e Amount Listing date Average as ha Listing ex 1
su C
Is
on 20-12-10 % ns 0-
Start End (Rs. Cr.)
Date Se 2

SHRI RAMRUPAI
41 532655 BALAJI STEELS 22 08-Jul-05 14-Jul-05 44 2-Aug-05 -100% 7756.04 19881.7
LTD.

FAME INDIA
42 532631 05-Apr-05 11-Apr-05 -- 77 #DIV/0! 19881.7
LTD.

SPL
43 532651 INDUSTRIES 70 29-Jun-05 05-Jul-05 63 26-Jul-05 7.045 -90% 7552.77 19881.7
LTD.

SUZLON
44 532667 510 23-Sep-05 29-Sep-05 1,496.34 19-Oct-05 48.725 -90% 7971.06 19881.7
ENERGY LTD.

SYNDICATE
45 532276 07-Jul-05 13-Jul-05 -- 135.625 #DIV/0! 19881.7
BANK

Talbros
46 -- Automotive 01-Sep-05 09-Sep-05 -- #DIV/0! 19881.7
Compo. Ltd.

TRIVENI
ENGINEERING &
47 532356 48 18-Nov-05 25-Nov-05 240 13-Dec-05 103.9 116% 9263.9 19881.7
INDUSTRIES
LTD.

TULIP TELECOM
48 532691 120 09-Dec-05 15-Dec-05 108 5-Jan-06 173.3 44% 9617.74 19881.7
LTD.

UTV SOFTWARE
49 532619 COMMUNICATIO 130 21-Feb-05 25-Feb-05 91 17-Apr-05 539.5 315% 6669.52 19881.7
NS LTD.

50 532648 YES BANK LTD. 45 15-Jun-05 21-Jun-05 315 12-Jul-05 310.575 590% 7303.95 19881.7

Interpretation
From the above table we can interpret that out of 50 IPO issued and got listed in the year
2005 only 9 IPO has performed above the Stock market performance. Out of over
performed IPO Yes Bank Ltd. Has performed well because, It opened 15 branches in
FY06, the year it hit the market with its IPO. Thereafter the branches grew in number on
year-on-year basis. It opened 133 new branches in the next 4 years and the total number
rose from 17 in FY06 to 150 in FY10.

This may be one of the reasons which decide the performance of IPO.
The brand image and future prospectus of the company also decides the performance of
the company. If the company is having bad brand image and there no chance for more
growth then there is less chance of being fully subscription of that IPO.

If the IPO is not price to perfection, not allowing capital appreciation for the IPO
investors.

Ethical value followed by company also affects the subscription of IPO.

 Paired Samples Test

Paired Differences t df Sig. (2-tailed)

95% Confidence Interval
of the Difference
Std.
  Mean Deviation Std. Error Mean Upper Lower
Grade - Stock 3,232.9485 Paired Samples Statistics
3,166.3966 9,632.2936 1.00
28,756.04861 3,215.02397 79 0.318
  Returns 0
Mean N 4
Std. Deviation 4 6 Error Mean
Std.
T- Test at 5% Level Of
Grade 2.85Significance80 0.915 0.102
Stock Returns -3,230.0985039583500% 80 28,756.02992540490000% 3,215.02188381118000%

-Paired Samples Correlations

  N Correlation Sig.
Grade & Stock Returns 80 -0.020 0.857
As calculated ‘t’ value is less than the table value (1.645) we accept the null hypothesis, that is there is no relationship between IPO
grade and Stock returns at 5% level of significance.

T- Test at 10% Level Of Significance

Paired Samples Statistics

  Mean N Std. Deviation Std. Error Mean
Grade 2.85 80 0.915 0.102
Stock Returns -
80 28,756.02992540490000% 3,215.02188381118000%
3,230.0985039583500%

Paired Samples Correlations

  N Correlation Sig.
Grade & Stock Returns
80 -0.020 0.857

Paired Samples Test

Paired Differences
90% Confidence Interval of the
Std. Error Difference
  Mean Std. Deviation Mean Upper Lower t df Sig. (2-tailed)
Grade - Stock 3,232.9485 7
Returns 28,756.04861 3,215.02397 2,118.04547 8,583.94248 1.006 0.318
0 9
As calculated‘t’ value is less than the table value (1.282) we accept the null hypothesis, that is there is no relationship between IPO
grade and Stock returns at 10% level of significance.
IPO’S IN PAST RECENT YEAR’S:

RECENT IPO DATA WITH BREAK-UP:

THE 8 BEST IPOS OF 2010:

2010 has had a very mixed fanfare when it comes to the IPO market.  Investors
have followed IPOs with a passion on and off since the 1900′s when technology, biotech
and internet wonders reached the edge of imagination. Many of the 2010 IPOs have gone
from hot to snot, and there are over 20 busted IPOs trading under their offering price. 
This year’s class of IPOs does actually have many winners with double-digit percentage
gains even after the choppiness seen this week.

We are tracking gains so far in MakeMyTrip Ltd. (NASDAQ: MMYT), Fabrinet

(NYSE: FN), Qlik Technologies, Inc. (NASDAQ: QLIK), Green Dot Corporation
(NYSE: GDOT), AutoNavi Holdings Ltd. (NASDAQ: AMAP), RealD Inc. (NYSE:
RLD), Oasis Petroleum Inc. (NYSE: OAS), and RealPage, Inc. (NYSE: RP).

We have outlined the performance and added color in on the operations so that there
is some extra outlook possibility into the future.

1) MakeMyTrip Ltd. (NASDAQ: MMYT) just became the best IPO of 2010.  It actually
may have been the best IPO debut since 2007.  The online travel agency based in
India sold 5 million shares at $14.00 per share versus a $12.00 to $14.00 expected
price range.  That comes to $70 million raised, or $80.5 million raised in gross
proceeds if you consider the shares that will have been sold in the overallotment
option.  Shares closed at $26.45 on the debut for an 88.9% gain.  With shares down
around $25.50, MakeMyTrip is now ‘only’ up 82%.  Keep in mind that this one
opened up at $22.00 on Thursday, so that should really be considered the real
benchmark for everyone else that did not get IPO shares.
2) Fabrinet (NYSE: FN) came public at the end of June, in the middle of the selling fury,
which may account for some of the ‘value’ despite the issue that it ran solidly over
the last week and a half.  The company is based in the Cayman Islands but has its
facilities in the U.S., China, and Thailand.  It provides foundry services to optical
component, module, and subsystem original equipment manufacturers.  Of the 8.5
million shares offered, 2,830,000 shares were sold by the company and the pricing
was at $10.00.  The interesting aspect here is that Fabrinet actually turned into a
busted-IPO in late July and early August before a big swing upward in recent days. 
AT $14.40, Fabrinet is now up 44% from the IPO and up about 50% from the real
post-IPO lows.  Both Deutsche Bank and Stifel Nicolaus initiated the stock with Buy
ratings early this month.

3) Qlik Technologies, Inc. (NASDAQ: QLIK) remains unheard of by most, but it

remains one of the top IPOs of 2010 and was up about 50%.  The company develops
and sells software solutions for data analysis and reporting solutions.  The price range
was $8.50 to $9.50, yet its priced at $10.00 in mid-July.  The 11.2 million shares did
get its over-allotment option exercised, so underwriters sold some 12,880,000 shares
after it was all said and done.  At $14.98, we have a post-IPO trading range of $12.00
up to $16.04.  At $14.35 today, Qlik is trading up 43.5% from its IPO price.
4) Green Dot Corporation (NYSE: GDOT) just had its first earnings report Thursday.
The pre-paid credit company is proof that millions of Americans are no longer
eligible on-the-grid in the credit economy.  Shares have backed off a bit from highs,
but at $46.40, the 4.6 million share IPO is up 29% from the $36.00IPO price versus a
range set at $32.00 to $35.00.  The lowest this ever saw on the IPO data was $41.13,
so anything under $41.00 means any new buyers are thinking deal-parity has been
breached.  Trading volume in Green Dot has been very muted.

5) AutoNavi Holdings Ltd. (NASDAQ: AMAP) does personal navigation via digital
map content and navigation and location-based solutions in China.  This came public
right before July 4 at $12.50, which was at the top of a $10.50 to $12.50 trading
range.  The IPO sale came to 9,918,750 ADRs after the overallotment was exercised
by underwriters.  At $15.85, shares are up about 27% and the post-IPO range is
$12.62 to $16.96.  Trading volume has been muted in this issue as wel

6) RealD Inc. (NYSE: RLD) owes much of its fame to “Avatar” for its 3D graphics
systems.  The mid-July IPO priced at $16.00, above the $13.00 to $15.00 range.  The
stock opened above $19 and sold off down to about $17.00 before a recent resurgence
came back into the stock took it as high as $20.00.  Even after a 3% drop today to
$18.95 represents almost 20% gains from the IPO price.
7) Oasis Petroleum Inc. (NYSE: OAS) came public in mid-June.  The one engages in the
acquisition and development of oil and natural gas resources primarily in the
Williston Basin.  After a $13.00 to $14.00 range, the deal priced at $14.00. Shares
rose initially and pulled back some, but the trend on Oasis treated it as one of the few
watering holes in a desert as shares went as high as $18.74.  At $17.95 today, the
stock is up about 28% since mid-June and a post-IPO trading range of $13.88 to
$18.74 exists.

8) RealPage, Inc. (NYSE: RP) may be too soon to judge considering that it just came
public this week and there has not been enough to evaluate the company.  It provides
on-demand property management solutions to owners and managers of single-family
and multi-family rental properties to manage marketing, pricing, screening, leasing,
accounting, purchasing and other property operations.  Of the 12.3 million shares sold
at $11.00, 6 million shares were sold by the company.  Shares opened at $13.00 and
traded as high as $16.41 before a $14.52 close on its debut for a 32% gain. At $14.45
Friday, RealPage is still up over 30%.
 IPO Issues (2010) As on 21-Dec-2010
Current Current
Equity Issue Price %Gain/Loss Equity Issue Price %Gain/Loss
Price Price
  December-2010   May-2010
Claris Life 228 218 -4% Jaypee Infra 102 66 -35%
MOIL 375 443.6 18% SJVN 26 22.55 -13%
RPP Infra Proj 75 60.25 -20% Mandhana Ind 130 253.8 95%
  November-2010 Tarapur Trans 75 29 -61%
Gravita India 125 252.75 102% Nitesh Estates 54 32.2 -40%
Coal India 245 312.6 28% Talwalkars Fitn 128 261.3 104%
  October-2010   April-2010
Gyscoal Alloys 71 32.05 -55% Goenka Diamond 135 75 -44%
Prestige Estate 183 169.95 -7% Intrasoft Tech 145 85.7 -41%
BS TransComm 248 137.9 -44% Shree Gan Jewel 260 190.65 -27%
Oberoi Realty 260 267 3% Persistent 310 415.25 34%
Commercial Eng 127 45.55 -64% Pradip Oversea 110 80.45 -27%
Bedmutha Ind 102 80 -22%   March-2010
Sea TV Network 100 52.1 -48% ILandFS Trans 258 303.5 18%
Ashoka Buildcon 324 289.5 -11% DQ Entertain 80 92 15%
Va Tech Wabag 1310 1408.4 8% United Bank 66 100.8 53%
Cantabil Retail 135 59.75 -56% Man Infra 252 207 -18%
Tecpro Systems 355 367.05 3% Texmo Pipes 90 44.55 -51%
Electrosteel St 11 9.44 -14% ARSS Infra 450 822.4 83%
Orient Green 47 25.75 -45%   February-2010
Ramky Infra 450 306 -32% Hathway Cable 240 173.95 -28%
Career Point 310 359.9 16% Emmbi Polyarns 45 16.95 -62%
Eros Intern 175 156.25 -11% DB Realty 468 188 -60%
Microsec Fin 118 54.25 -54% Aqua Logistics 220 40.25 -82%
Tirupati Inks 43 13.35 -69% Thangamayil 75 154.25 106%
  September-2010 Syncom Health 75 44 -41%
Indosolar 29 24.35 -16% VasconEngg 165 123 -25%
Gujarat Pipavav 46 59.4 29% Jubilant Food 145 575.4 297%
  August-2010 Infinite Comp 165 175 6%
Prakash Steelag 110 130 18%   January-2010
Bajaj Corp 660 532.95 -19% MBL Infra 180 173.3 -4%
Midfield Ind 133 136.5 3% DB Corp 212 262.75 24%
  July-2010 Godrej Proper 490 605.2 24%
Aster Silicates 118 32.9 -72% JSW Energy 100 98.35 -2%
Hindustan Media 166 169.9 2%
Technofab Engg 240 180.5 -25%
Parabolic Drugs 75 55.8 -26%
Conclusion

The Indian initial public offer (IPO) market has always had more than its fair
share of doomsayers Right from the Maruti issue, which pundits decried as being
overpriced, to the ONGC and TCS issues, where the huge sizes of the offerings drew
predictions of calamitous effects on the secondary markets, the opinions of the “experts”
have proved to be wide off the mark.

Not only did the mega issues sail through, but the secondary markets proved to be
far more resilient than anybody had anticipated. The data show that as much as Rs.
2033.99 Crores has been raised from the primary market in the current calendar year,
making it obvious that the Indian investor has far more appetite for equities than most
people realize.

Most of the money has been raised by big companies with a long term track
record. A substantial number of issues—barring that of TCS—also happened during the
early part of the year, before the markets got the shivers. The heavy oversubscriptions in
many cases can also be traced to the availability of bank finance for IPO investment.

Nevertheless, there is no denying the enormous interest retail and other investors
have shown in the primary market, perhaps even more so than in the secondary one. This
interest has been sustained despite the lack of bounce in the secondary market and is not
confined to the big issues; even smaller issues have sailed through with large
oversubscriptions.
The factors which determine the IPO performance

 Price
 Market condition
 Business Performance
 Timing of IPO that is whether IPO is done in Bullish market or Bearish market.
Recommendation

After making the project, I would like to say SEBI is playing very important role
in regulating the risk and financial aspects of the investors. Also the DIP guideline is
framed in such a manner, which can be understood by any individual. Overall the process
and the various intermediaries, which are involved in IPOs or initial public offering, are
doing very important task.

I found the following points very important from the investor point of view while
doing this project:

 The IPOs should be consumer friendly: Any investor should be able to analyze
the IPO in its simplest form and should be able to understand of whether to apply
for it or not.

 IPOs should be graded which is already started. But I think such kind of grading
is not enough because it doesn’t give enough information about the company; it
only says what the level of grade that a company deserves is.

 I would suggest shortening the time between application and allocation or

listing. We know SEBI and other intermediaries has done great job in doing so in
the past, but looking at the current scenario we think it’s very important to do so.
This would help investor in investing the same money in other IPOs if he is not
allotted shares in that particular company.
IPO GLOSSARY
A

Allocation

This is the amount of stock in an initial public offering (IPO) granted by the underwriter
to an investor.

Aftermarket

Trading in the IPO subsequent to its offering is called the aftermarket.

Board of Directors

The composition of the Board of Directors is particularly critical for an IPO. Typically, a
board is composed of inside and outside directors.

Broken IPOs

If an IPO trades below its IPO price in the aftermarket, it is said to be a broken IPO.

Calendar

This refers to upcoming IPOs and secondary offerings. Brokerage houses have equity
calendars, bond calendars and municipal calendars.

Clearing Price

The price at which all shares of an IPO can be sold to investors in a Dutch Auction.
Sometimes it referred to as the “market clearing price”.
 F

First Day Close

The closing price at the end of the first day of trading reflects not only how well the lead
manager priced and placed the deal, but what the near-term trading is likely to be.

Float

When a company is publicly traded, a distinction is made between the total number of
shares outstanding and the number of shares in circulation, referred to as the float. The
float consists of the company's shares held by the general public.

Green Shoe

A typical underwriting agreement allows the underwriters to buy up to an additional 15%

of shares at the offering price for a period of several weeks after the offering. This option
is also called the overallotment and is exercised when the IPO is oversubscribed and
trading above its offer price. The term comes from the Green Shoe Company, which was
the first to have this option.

Hot Issue

When there is significantly more demand than supply for an IPO it is said to be a hot
issue.
 I

Initial Public Offering

This is the event of a company first selling its shares to the public.

Insiders

Management, directors and significant stockholders are regarded as insiders because they
are privy to information about the operations of a company not known to the general
public.

IPO Price

Individual investors often ask why the price at which an IPO starts trading is different
from its offer price. This occurs because the offer price is set by the underwriters before
the stock starts trading. Once the stock starts trading, the price is determined by actual
supply and demand and can be higher or lower.

IPO Research

Prior to the offering, the underwriters involved in the IPO are prohibited from issuing
research or recommendations for forty days. Following the IPO, the underwriter is
allowed to issue a research report

M-N

Market Capitalization

It means the total market value of a firm. It is defined as the product of the company's
stock price per share and the total number of shares outstanding

Market Value

The market value of a company is determined by multiplying the number of shares

outstanding by the current price of the stock.
 O

Offering Price

This is the price at which the IPO is first sold to the public. It is set by the lead manager,
usually after the close of stock market trading the night before the shares are distributed
to IPO buyers. In the case of some foreign IPOs, the pricing occurs over the weekend.

Oversubscribed

When a deal has more orders than there are shares available it is said to be
oversubscribed.

Preliminary Prospectus

This is the offering document printed by the company containing a description of the
business, discussion of strategy, presentation of historical financial statements,
explanation of recent financial results, management and their backgrounds and
ownership.

Proceeds
Companies go public to raise money. The money raised is referred to as proceeds.

Red Herring
This is the term of art for the preliminary prospectus. It gets its name from the printed red
disclaimer on the left side of the prospectus.
 U-V

Underwriter
This is a brokerage firm that raises money for companies using public equity and debt
markets. Underwriters are financial intermediaries that buy stock or bonds from an issuer
and then sell these securities to the public.

Venture Capital
Funding acquired during the pre-IPO process of raising money for companies. It is done
only by accredited investors.
Bibliography

Web Based
 www.investopedia.com
 www.sebi.com
 www.vivro.net
 www.intimespectrum.com
 www.ffsil.com
 www.moneycontrol.com
 www.nseindia.com
 www.bseindia.com

Book Based
 Share Market Book  By Tarun Shah
 IPO Decision  By Jason Draho

Software Based
 SPSS

Appendix

 SIGNIFICANCE LEVEL FOR ONE-DIRECTION TEST

Df .10 .05 .025 .01 .005 .000
1 3.078 6.314 12.706 31.821 63.657 636.619
2 1.886 2.920 4.303 6.965 9.925 31.598
 3 1.638 2.353 3.182 4.541 5.841 12.941
4 1.533 2.132 2.776 3.747 4.604 8.610
5 1.476 2.015 2.571 3.365 4.032 6.859
6 1.440 1.943 2.447 3.143 3.707 5.959
7 1.415 1.895 2.365 2.998 3.499 5.405
8 1.397 1.860 2.306 2.896 3.355 5.041
9 1.383 1.833 2.262 2.821 3.250 4.781
10 1.372 1.812 2.228 2.764 3.169 4.587
11 1.363 1.796 2.201 2.718 3.106 4.437
12 1.356 1.782 2.179 2.681 3.055 4.318
13 1.350 1.771 2.160 2.650 3.012 4.221
14 1.345 1.761 2.145 2.624 2.977 4.140
15 1.341 1.753 2.131 2.602 2.947 4.073
16 1.337 1.746 2.120 2.583 2.921 4.015
17 1.333 1.740 2.110 2.567 2.898 3.965
18 1.330 1.734 2.101 2.552 2.878 3.922
19 1.328 1.729 2.093 2.539 2.861 3.883
20 1.325 1.725 2.086 2.528 2.845 3.850
21 1.323 1.721 2.080 2.518 2.831 3.819
22 1.321 1.717 2.074 2.508 2.819 3.792
23 1.319 1.714 2.069 2.500 2.807 3.767
24 1.318 1.711 2.064 2.492 2.797 3.745
25 1.316 1.708 2.060 2.485 2.787 3.725
26 1.315 1.706 2.056 2.479 2.779 3.707
27 1.314 1.703 2.052 2.473 2.771 3.690
28 1.313 1.701 2.048 2.467 2.763 3.674
29 1.311 1.699 2.045 2.462 2.756 3.659
30 1.310 1.697 2.042 2.457 2.750 3.646
40 1.303 1.684 2.021 2.423 2.704 3.551
60 1.296 1.671 2.000 2.390 2.660 3.460
120 1.289 1.658 1.980 2.358 2.617 3.373
X 1.282 1.645 1.960 2.326 2.576 3.291

 SIGNIFICANCE LEVEL FOR ONE-DIRECTION TEST

Df .20 .10 .05 .02 .01 .001
1 3.078 6.314 12.706 31.821 63.657 636.619
2 1.886 2.920 4.303 6.965 9.925 31.598
3 1.638 2.353 3.182 4.541 5.841 12.941
4 1.533 2.132 2.776 3.747 4.604 8.610
 5 1.476 2.015 2.571 3.365 4.032 6.859
6 1.440 1.943 2.447 3.143 3.707 5.959
7 1.415 1.895 2.365 2.998 3.499 5.405
8 1.397 1.860 2.306 2.896 3.355 5.041
9 1.383 1.833 2.262 2.821 3.250 4.781
10 1.372 1.812 2.228 2.764 3.169 4.587
11 1.363 1.796 2.201 2.718 3.106 4.437
12 1.356 1.782 2.179 2.681 3.055 4.318
13 1.350 1.771 2.160 2.650 3.012 4.221
14 1.345 1.761 2.145 2.624 2.977 4.140
15 1.341 1.753 2.131 2.602 2.947 4.073
16 1.337 1.746 2.120 2.583 2.921 4.015
17 1.333 1.740 2.110 2.567 2.898 3.965
18 1.330 1.734 2.101 2.552 2.878 3.922
19 1.328 1.729 2.093 2.539 2.861 3.883
20 1.325 1.725 2.086 2.528 2.845 3.850
21 1.323 1.721 2.080 2.518 2.831 3.819
22 1.321 1.717 2.074 2.508 2.819 3.792
23 1.319 1.714 2.069 2.500 2.807 3.767
24 1.318 1.711 2.064 2.492 2.797 3.745
25 1.316 1.708 2.060 2.485 2.787 3.725
26 1.315 1.706 2.056 2.479 2.779 3.707
27 1.314 1.703 2.052 2.473 2.771 3.690
28 1.313 1.701 2.048 2.467 2.763 3.674
29 1.311 1.699 2.045 2.462 2.756 3.659
30 1.310 1.697 2.042 2.457 2.750 3.646
40 1.303 1.684 2.021 2.423 2.704 3.551
60 1.296 1.671 2.000 2.390 2.660 3.460
120 1.289 1.658 1.980 2.358 2.617 3.373
X 1.282 1.645 1.960 2.326 2.576 3.291