A STUDY ON POST ISSUE PERFORMANCE OF INITIAL PUBLIC OFFERING (IPO’S)

IN THE INDIAN CAPITAL MARKET

By

GOPINATH.A

Reg No. 41909631032

Of

SRI SAI RAM ENGINEERING COLLEGE

A PROJECT REPORT

Submitted to the faculty of management studies

In partial fulfillment of the requirements

For the award of the degree of

MASTER OF BUSINESS ADMINISTRATION

ANNA UNIVERSITY

JUNE-2011

ABSTRACT

The project work entitled “A Study on the Performance of Cement Industry in the Indian Capital Market”

is conducted in SHAREKHAN,Parry’s,Chennai to evaluate the performance of select cement industry in

Indian Capital Market.The cement industry which are listed are :

ACC LTD

AMBUJA CEMENTS

GRASIM

ULTRATECH

This study will give a basic idea about the financial performance of the cement industry in the

Indian Capital Market. This study finds out the volatility of each stock to identify the most consistent and

inconsistent stock.

For this study 5 years data is used. The data is taken from the balance sheet of the companies. Using

the data, ratio analysis was performed to find out the financial performance of the companies. Using

standard deviation and Beta value, the volatility of the stocks can be identified. Analyzing the price

movements, the price fluctuation and market movement of each stock is identified.

Major findings are reported at the end of the project .On the basis of findings suitable suggestions

have been made to the investors.

.

CHAPTER – I

INTRODUCTION

1.1 INTRODUCTION INDUSTRY PROFILE

INITIAL PUBLIC OFFERING (IPO)

The first public offering of equity shares or convertible securities by a company, which is

followed by the listing of a company’s shares on a stock exchange, is known as an ‘Initial

Public Offering’. In other words, it refers to the first sale of a company’s common shares to

investors on a public stock exchange, with an intention to raise new capital. The most important

objective of an IPO is to raise capital for the company. It helps a company to tap a wide range of

investors who would provide large volumes of capital to the company for future growth and

development. A company going for an IPO stands to make a lot of money from the sale of its

shares which it tries to anticipate how to use for further expansion and development. The

company is not required to repay the capital and the new shareholders get a right to future profits

distributed by the company.

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. When a privately held corporation needs additional

capital, it can borrow cash or sell stock to raise needed funds. Often "going public" is the best

choice for a growing business. Compared to the costs of borrowing large sums of money for ten

years or more, the costs of an initial public offering are small. 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.

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.

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.

THE RISK FACTORInvesting 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.

No past track record of the company.

Potential of stock market.

.

RISK ASSESSMENT:

The possibility of buying stock in a promising start-up company and finding the next success

story has intrigued many investors. 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.

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.

IPO INVESTMENT STRATEGIES:

Investing in IPOs is much different than investing in seasoned stocks. This is because there is

limited information and research on IPOs, prior to the offering. And immediately following the

offering, research opinions emanating from the underwriters are invariably positive.

There are some of the strategies that can be considered before investing in the IPO:

Understand the working of IPO:

The first and foremost step is to understand the working of an IPO and the basics of an

investment process. Other investment options could also be considered depending upon

the objective of the investor.

Gather knowledge:

It would be beneficial to gather as much knowledge as possible about the IPO market, the

company offering it, the demand for it and any offer being planned by a competitor.

Investigate before investing:

The prospectus of the company can serve as a good option for finding all the details of

the company. It gives out the objectives and principles of the management and will also

cover the risks.

Know your broker:

This is a crucial step as the broker would be the one who would majorly handle your

money. IPO allocations are controlled by underwriters. The first step to getting IPO

allocations is getting a broker who underwrites a lot of deals.

Measure the risk involved:

IPO investments have a high degree of risk involved. It is therefore, essential to measure

the risks and take the decision accordingly.

Invest at your own risk:

Finally, after the homework is done, and the big step needs to be taken. All that can be

suggested is to ‘invest at your own risk’. Do not take a risk greater than your capacity.

PRICING OF AN IPO:

The pricing of an IPO is a very critical aspect and has a direct impact on the success or failure of

the IPO issue. There are many factors that need to be considered while pricing an IPO and an

attempt should be made to reach an IPO price that is low enough to generate interest in the

market and at the same time, it should be high enough to raise sufficient capital for the company.

The process for determining an optimal price for the IPO involves the underwriters arranging

share purchase commitments from leading institutional investors.

PROCESS:

Once the final prospectus is printed and distributed to investors, company management meets

with their investment bank to choose the final offering price and size. The investment bank tries

to fix an appropriate price for the IPO depending upon the demand expected and the capital

requirements of the company. The pricing of an IPO is a delicate balancing act as the investment

firms try to strike a balance between the company and the investors. The lead underwriter has the

responsibility to ensure smooth trading of the company’s stock. The underwriter is legally

allowed to support the price of a newly issued stock by either buying them in the market or by

selling them short.

PRINCIPAL STEPS IN AN IPO:

Approval of BOD : Approval of BOD is required for raising capital from the public.

Appointment of lead managers : the lead manager is the merchant banker who

orchestrates the issue in consultation of the company.

Appointment of other intermediaries :

Co-managers and advisors

Underwriters

Bankers

Brokers and principal brokers

Registrars

Filing the prospectus with SEBI : The prospectus or the offer document communicates

information about the company and the proposed security issue to the investing public.

All the companies seeking to make a public issue have to file their offer document with

SEBI. If SEBI or public does not communicate its observations within 21 days from the

filing of the offer document, the company can proceed with its public issue.

Filing of the prospectus with the registrar of the companies : once the prospectus have

been approved by the concerned stock exchanges and the consent obtained from the

bankers, auditors, registrar, underwriters and others, the prospectus signed by the

directors, must be filed with the registrar of companies, with the required documents as

per the companies act 1956.

Printing and dispatch of prospectus : After the prospectus is filed with the registrar of

companies, the company should print the prospectus. The quantity in which prospectus is

printed should be sufficient to meet requirements. They should be send to the stock

exchanges and brokers so they receive them at least 21 days before the first

announcement is made in the news papers.

Filing of initial listing application : Within 10 days of filing the prospectus, the initial

listing application must be made to the concerned stock exchanges with the listing fees.

Promotion of the issue : The promotional campaign typically commences with the filing

of the prospectus with the registrar of the companies and ends with the release of the

statutory announcement of the issue.

Statutory announcement : The issue must be made after seeking approval of the stock

exchange. This must be published at least 10 days before the opening of the subscription

list.

Collections of applications : The Statutory announcement specifies when the

subscription would open, when it would close, and the banks where the applications can

be made. During the period the subscription is kept open, the bankers will collect the

applications on behalf of the company.

Processing of applications : Scrutinizing of the applications is done.

Establishing the liability of the underwriters : If the issue is undersubscribed, the

liability of the underwriters has to be established.

Allotment of shares : Proportionate system of allotment is to be followed.

Listing of the issue : The detail listing application should be submitted to the concerned

stock exchange along with the listing agreement and the listing fee. The allotment

formalities should be completed within 30 days.

Major Advantages of IPOIPO has a number of advantages. IPO helps the company to create a public awareness

about the company as these public offerings generate publicity by inducing their products to

various investors.

The increase in the capital: An IPO allows a company to raise funds for utilizing in

various corporate operational purposes like acquisitions, mergers, working capital, research

and development, expanding plant and equipment and marketing.

Liquidity: The shares once traded have an assigned market value and can be resold.

This is extremely helpful as the company provides the employees with stock incentive

packages and the investors are provided with the option of trading their shares for a price.

Valuation: The public trading of the shares determines a value for the company and sets

a standard. This works in favor of the company as it is helpful in case the company is looking

for acquisition or merger. It also provides the share holders of the company with the present

value of the shares.

Increased wealth: The founders of the companies have an affinity towards

IPO as it can increase the wealth of the company, without dividing the

authority as in case of partnership.

Drawbacks of IPOMaking important business decisions. A major risk with shareholders is that, they can sell

off their stocks any time they want, in case they see the price band of the stakes It is true that

IPO raises huge capital for the issuing company. But, in order to launch an Initial Public

Offering (IPO), it is also necessary to make certain investments. Setting up an IPO does not

always lead to an improvement in the economic performance of the company. A continuing

expenditure has to be incurred after the setting up of an IPO by the parent company. A lot of

expenses have to be incurred in the form of legal fees, printing costs and accounting fees,

which are connected to the registering of an IPO. Such expenses might cost hundreds of US

dollars. Apart from such enormous costs, there are other factors as well that should be taken

into consideration by the company while introducing an IPO. Such factors include the rules

and regulations involved to set up public offerings and this entire process on the other hand

involve a number of complexities which sometime require the services of experts in relevant

fields. Some companies hire experts to do the needful to ensure a hassle-free execution of the

task. After the IPO is introduced, the expenses become a routine in every activity involved.

Besides, the CEO of the company would have to spend a lot of time in handling the SEC

regulations or sometimes he hires experts to do the same. All these aspects, if not handled

with efficiency, prove to be some major drawbacks related to the launch of IPOs. The launch

of IPO also brings about shareholders of the company. Shareholders have ownership in the

company. The primary owners of the company or the people holding maximum authority in

the company cannot take decisions all by themselves once an IPO has been launched and

shareholders have been formed. The shareholders have an active participation in every

decision that is being taken even if they do not hold 50 percent share of the company. They

have their individual demands to be met as they own a certain percentage of stakes in the

company. The SEC regulations require notifications from the shareholders of the company,

meetings, and also approvals from them while of that company is going down. This will lead

to a further drop of the value of shares in the market which in turn will decrease the overall

value of the company.

Part 1.4

COMPANY PROFILE :

Share khan is one of the leading retail brokerage of City Venture which is running successfully since 1922 in the country. Earlier it was the retail broking arm of the Mumbai-based SSKI Group, which has over eight decades of experience in the stock broking business. Share khan offers its customers a wide range of equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, investment advice etc.

Earlier with a legacy of more than 80 years in the stock markets, the SSKI group ventured into

institutional broking and corporate finance 18 years ago. SSKI is one of the leading players in

institutional broking and corporate finance activities. SSKI holds a sizeable portion of the market in each

of these segments. SSKI’s institutional broking arm accounts for 7% of the market for Foreign

Institutional portfolio investment and 5% of all Domestic Institutional portfolio investment in the country.

It has 60 institutional clients spread over India, Far East, UK and US. Foreign Institutional Investors

generate about 65% of the organization’s revenue, with a daily turnover of over US$ 2 million. The

content-rich and research oriented portal has stood out among its contemporaries because of its steadfast

dedication to offering customers best-of-breed technology and superior market information. The objective

has been to let customers make informed decisions and to simplify the process of investing in stocks

Mission :

“To educate and empower the individual investor to make better investment decisions through

QUALITY ADVICE

INNOVATIVE PRODUCTS and

SUPERIOR SERVICE”.

WORK STRUCUTRE OF SHAREKHAN

Share khan has always believed in investing in technology to build its business. The company has used

some of the best-known names in the IT industry, like Sun Microsystems, Oracle, Microsoft, Cambridge

Technologies, Nexgenix, VignetteVeriSigngn Financial Technologies India Ltd, Spider Software Pvt.

Ltd. to build its trading engine and content. The City Venture holds a majority stake in the company.

HSBC, Intel & Carlyle are the other investors.

On April 17, 2002 Share khan launched Speed Trade and Trade Tiger, are net-based executable

application that emulates the broker terminals along with host of other information relevant to the Day

Traders. This was for the first time that a net-based trading station of this caliber was offered to the

traders. In the last six months Speed Trade has become a de facto standard for the Day Trading

community over the net. Share khan’s ground network includes over 700+ Share shops in 130+ cities in

India.

The firm’s online trading and investment site www.sharekhan.com - was launched on Feb 8, 2000. The

site gives access to superior content and transaction facility to retail customers across the country. Known

for its jargon-free, investor friendly language and high quality research, the site has a registered base of

over 3 Laces customers. The number of trading members currently stands at over 7 Laces. While online

trading currently accounts for just over5 per cent of the daily trading in stocks in India, Share khan alone

accounts for 27 per cent of the volumes traded online.

The Corporate Finance section has a list of very prestigious clients and has many ‘firsts’ to its credit, in

terms of the size of deal, sector tapped etc. The group has placed over US$ 5 billion in private equity

deals. Some of the clients include BPL Cellular Holding, Gujarat Papaya, Essar, Hutchison, Planetasia,

and Shopper’s Stop. Finally, Share khan shifted hands and City venture get holds on it.

PRODUCT AND SERVICES OFFERD BY SHAREKHAN

1- Equity Trading Platform (Online/Offline).

2- Commodities Trading Platform (Online/Offline).

3- Portfolio Management Service.

4- Mutual Fund Advisory and Distribution.

5- Insurance Distribution.

6-Forex

Share khan offers the following products:-

CLASSIC ACCOUNT

This is a User Friendly Product which allows the client to trade through website www.sharekhan.com and

is suitable for the retail investors who is risk-averse and hence prefers to invest in stocks or who does not

trade too frequently.

Features

Online trading account for investing in Equity and Derivatives via www.sharekhan.com

Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE.

Integration of On-line trading, Saving Bank and Demat Account.

Instant cash transfer facility against purchase & sale of shares.

Competitive transaction charges.

Instant order and trade confirmation by E-mail.

Streaming Quotes (Cash & Derivatives).

Personalized market watch.

Single screen interface for Cash and derivatives and more.

Provision to enter price trigger and view the same online in market watch.

TRADE TIGER

TRADE TIGER is an internet-based software application that enables you to buy and sell in an instant. It

is ideal for active traders and jobbers who transact frequently during day’s session to capitalize on intra-

day price movement.

Features

Instant order Execution and Confirmation.

Single screen trading terminal for NSE Cash, NSE F&O & BSE.

Technical Studies.

Multiple Charting.

Real-time streaming quotes, tic-by-tic charts.

Market summary (Cost traded scrip, highest clue etc.)

Hot keys similar to broker’s terminal.

Alerts and reminders.

Back-up facility to place trades on Direct Phone lines.

Live market debts.

DIAL-N-TRADE

Along with enabling access for trade online, the CLASSIC and SPEEDTRADE ACCOUNT also gives

Dial-n-trade services. With this service, one can dial Share khan’s dedicated phone lines 1800-22-7500,

3970-7500. Beside this, Relationship Managers are always available on Office Phone and Mobile to

resolve customer queries.

SHARE MOBILE

Share khan had introduced Share Mobile, mobile based software where one can watch Stock Prices, Intra

Day Charts, Research & Advice and Trading Calls live on the Mobile. (As per SEBI regulations, buying-

selling shares through a mobile phone are not yet permitted.)

PREPAID ACCOUNT

Customers pay Advance Brokerage on trading Account and enjoy uninterrupted trading in their Account.

Beside this, great discount are also available (up to 50%) on brokerage.

Prepaid Classic Account: - Rs. 2000

Prepaid Speed trade Account: - Rs. 6000

IPO ON-LINE

Customers can apply to all the forthcoming IPOs online. This is quite hassle-free, paperless and time

saving. Simply allocate fund to IPO Account, Apply for the IPO and Sit Back & Relax.

Mutual Fund Online

Investors can apply to Mutual Funds of Reliance, Franklin Templeton Investments, ICICI Prudential, SBI,

Birla, Sundaram, HDFC, DSP Merrill Lynch, PRINCIPAL and TATA with Share khan.

Zero Balance ICICI Saving Account

Share khan had tied-up with ICICI bank for Zero Balance Account for Share khan’s Clients. Now their

customers can have a Zero Balance Saving Account with ICICI Bank after your demat account creation

with Share khan.

REASON TO CHOOSE SAHREKHAN LIMITED

Experience

SSKI has more than eight decades of trust and credibility in the Indian stock market. In the Asia Money

broker's poll held recently, SSKI won the 'India's best broking house for 2004' award. Ever since it

launched Share khan as its retail broking division in February 2000, it has been providing institutional-

level research and broking services to individual investors.

Technology

With their online trading account one can buy and sell shares in an instant from any PC with an internet

connection. Customers get access to the powerful online trading tools that will help them to take complete

control over their investment in shares.

Accessibility

Share khan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for investors. These

services are accessible through many centers across the country (Over 650 locations in 150 cities), over

the Internet (through the website www.sharekhan.com) as well as over the Voice Tool.

Knowledge

In a business where the right information at the right time can translate into direct profits, investors get

access to a wide range of information on the content-rich portal, www.sharekhan.com. Investors will also

get a useful set of knowledge-based tools that will empower them to take informed decisions.

Convenience

One can call Share khan’s Dial-N-Trade number to get investment advice and execute his/her

transactions. They have a dedicated call-center to provide this service via a Toll Free Number 1800 22-

7500 & 39707500 from anywhere in India.

Customer Service

Its customer service team assist their customer for any help that they need relating to transactions, billing,

demat and other queries. Their customer service can be contacted via a toll-free number, email or live

chat on www.sharekhan.com.

Investment Advice

Share khan has dedicated research teams of more than 30 people for fundamental and technical research.

Their analysts constantly track the pulse of the market and provide timely investment advice to customer

in the form of daily research emails, online chat, printed reports etc.

Benefits

Free Depository A/c

Instant Cash Transfer

Multiple Bank Option.

Secure Order by Voice Tool Dial-n-Trade.

Automated Portfolio to keep track of the value of your actual purchases.

24x7 Voice Tool access to your trading account.

Personalized Price and Account Alerts delivered instantly to your Mobile Phone & E-mail

address.

Live Chat facility with Relationship Manager on Yahoo Messenger

Special Personal Inbox for order and trade confirmations.

On-line Customer Service via Web Chat.

Enjoy Automated Portfolio.

Buy or sell even single share

Anytime Ordering.

NEED FOR THE STUDY:

A script performing in the primary market is essentially monitored, the factor that are to

be monitored offer price. The analysis of this helps the investors in making a better

investment decision .As the firm SHARE KHAN ,plays the role of leading financial

services providing company, there is a need for them in analyzing the performance of

scripts in the primary market.

SCOPE OF THE STUDY.

The scope lies in determine the future prospectus for the investor in making investment

decision.

The study provides a comprehensive overview of performance of script in the primary

market.

The study aims to find out the profitable issues among the total issues passes out during

the period.

OBJECTIVES .

To determine the future prospectus for the investor in making investment decision.

To find out the profitable issues among the total issues passed out during the period.

To analyze the performance of IPO over certain period(3 YEARS).

To know the market rate of return for the same period.

To understand the Benefits to investor from IPOs

LIMITATIONS.

Only companies previous track record is being considered in case investing decision,

window dressing can be made in balance sheet in order to attract.

The study has been limited to a period of 4 years.

The study has been focused only on performance of script in primary market.

Only past performance are considered for the study, they do not guarantee future

performance and growth.

Investor may not get the preferred number of units as the allocation is based on random

draw.

REVIEW OF LITERATURE.

THE IMPACT OF TMT BOARD MEMBER CONTROL ANDENVIRONMENT

ON POST-IPO PERFORMANCE

BRUCE A. WALTERS ,MARK KROLL Louisiana Tech University

PETER WRIGHT University of Memphis

Academy of Management Journal 2010, Vol. 53, No. 3, 572–595.

We draw on theories of entrepreneurial firms to explore the impact of top management team

(TMT) board control on holding period returns (HPRs). We posit a complex relation between a

firm’s performance after initial public offering (IPO) and the proportion of TMT members on its

board. HPRs increased modestly as TMT board membership rose to 50 percent, increased

dramatically as it rose from 50 to 75 percent (the “optimal” range), and decreased materially as it

rose beyond 75 percent. Further, environmental conditions influenced the focal relationship, in

some cases in unpredictable ways, even when TMT board control was optimal.

The post-offering performance of IPOs in the Indian banking industry

Saurabh Ghosh , Monetary Modelling Unit, Monetary Policy Department,

Reserve Bank of India, NCOB, Mumbai-400001, India, Applied Economics Letters, 2005,

12, 89–94.

In the literature, the underperformance of IPOs is a well-documented empirical anomaly.

This study concentrates on IPOs from the banking sector of an emerging economy, India. In a

developing country, the role of the banking sector for economic development is undisputed. In

view of its importance in economic resource allocation and its distinction from other industries in

general, this paper analyses the post offering performance of banking sector IPOs in detail. The

performance evaluation on the basis of stock returns did not find significant evidences of

underperformance for the IPOs from the banking sector. Moreover, the study, based on key

accounting parameters, found improvement in the performance of the banks in the post-listing

period. There were no significant differences across ownership groups (public sector banks vis-

a`-vis their private counterpart) in the IPO performance.

Underpricing of Initial Public Offerings

The Indian Experience SAURABH GHOSH

Emerging Markets Finance and Trade, vol. 41, no. 6,

November–December 2005, pp. 45–57.

© 2006 M.E. Sharpe, Inc. All rights reserved.

ISSN 1540–496X/2006 $9.50 + 0.00.

This paper attempts to identify the factors explaining under pricing of initial public

offerings (IPOs) in an emerging economy, India, using 1,842 companies that got listed on the

Bombay Stock Exchange from 1993 to 2001. It is found that uncertainty played a role in

perverse under pricing in the Indian primary market. IPOs with a large issue size and those that

went for seasoned offerings had less under pricing. Contrary to the international evidence, under

pricing was less during the high volume (hot) period compared to the slump period in the Indian

IPO market. During the hot period, new issues belonging to business groups underpriced more

than their stand-alone counterparts did. Small issues belonging to private stand-alone firms had

less under pricing during the hot period and did not come to the market subsequently to raise

funds. Large issues belonging to the business groups, on the other hand, underpriced more and

subsequently raised funds from the market. These results support the predictions of signaling

theory for the IPOs listed in the Indian stock markets over the last decade.

IPO Valuation, Investor Protection and Deregulation:

Evidence from Bursa Malaysia

WAN NORDIN WAN HUSSIN, Universiti Utara Malaysia

The International Journal of Accounting, Governance & Society 1, 1-24 (2006)

The paper examines (1) the valuation impact of IPO profit guarantee as an investor

protection tool, and (2) the structural changes in IPO pricing before and after deregulation in

1996. Based on a sample of 251 IPOs during 1994-2000, the evidence points to the paradoxical

role of the IPO profit guarantees.

Prior to the Asian financial crisis in the third quarter of 1997, investors are willing to pay

more for the IPO shares the more the controlling shareholders guaranteed the forecasted profits.

However, in the aftermath of the crisis, IPO profit guarantees no longer affect IPO valuation.

Comparing IPO pricing before and after liberalisation, the evidence also lends support to Habib

and Ljungqvist (2001) entrepreneurial wealth losses minimisation hypothesis. When IPO

entrepreneurs are given the freedom to set the IPO price without interference from the regulator,

they factor in their IPO participation ratio in the pricing decision.

CORRECTING THE EMPIRICAL FOUNDATIONS OF IPO-PRICING

REGULATION

ROYCE DE ROHAN BARONDES*

FLORIDA STATE UNIVERSI TY LAW REVIEW [Vol. 33:437]

Recent events are replete with stories of fraudulent or opportunistic behavior in the initial

public offering (IPO) process—behavior that extended to the highest-reputation investment

banks. Curiously, notwithstanding this evidence, recent financial economics literature asserts

investment bank conflicts of interest “certify” IPO issuers. This Article develops new empirical

evidence that casts doubt on this “certification” hypothesis by examining the pre-IPO price

adjustment of IPOs involving qualified independent underwriters (QIUs),particularly IPOs in

which more than ten percent of the net proceeds are being directed to participating investment

banks (for example, to repay a prior extension of credit). These offerings have similar preIPO-

pricing patterns to those others interpret as involving certification. Investment bank exit,

however, cannot comfortably be categorized as certification. These results, together with other

recent results in the legal literature, support the view that factors other than “certification”

account for IPO-pricing phenomena in IPOs involving investment bank conflicts of interest.

The SEC is finally considering important proposals put forward by the NASD and the NYSE to

reform IPO marketing, albeit five years after the internet bubble in IPOs and other securities

transactions burst. These results support increased disclosure-focused regulation of the IPO

process.

An Investment Strategy Based on the Long-Run Performance of IPOs: Venture-

Backed and Non-Venture-Backed Firms

Junming Hsu, Chia-Yu Chang.The Journal of Investing Winter 2008, Vol. 17, No. 4: pp. 95-

105  DOI: 10.3905/JOI.2008.17.4.095

This study investigates the evolution and long-run performance of venture-backed and non-

venture-backed firms after the initial public offerings (IPOs). We hypothesize that the

entrepreneurial ability enables venture-backed firms to keep a good performance in the long run.

The results show that firms underperform the market over the five years following the IPOs, with

venture-backed firms outperforming non-venture-backed firms. About six years after the IPOs,

however, firms still alive outperform the market, with venture-backed firms showing superior

performance. We also find that venture-backed firms with glamour performance from year 2 to

year 5 after the IPOs tend to maintain good performance from year 6 to year 9. This result

supports our hypothesis that the entrepreneurial ability of venture-backed firms lasts for a long

period. Putting these results together, we suggest that holding a portfolio consisting of glamour

venture-backed stocks listing for about six years is a profitable strategy.

Investment Banking Conflicts: Research Analysts and IPO Allocations

PHILLIPKENNEDY(PP199-238).DOC

As investors sobered up from the “irrational exuberance” of the tech stock bubble, a

critical eye turned to securities industry practices.1 In hindsight, few people could understand

what pushed the markets so high when the tech stocks that lead the charge had nothing to show

in the way of profits.2 The answer seemed to be that research analysts consistently were bullish

on many stocks and remained so even as the bubble burst and the market price of many of those

same stocks plunged.3 What explains the analysts’ behavior? Some charge that research analysts

of the major investment banking firms created the stock boom by hyping the stock of companies

for which their investment banks had provided or were seeking to provide investment banking

services.The companies benefited because their stock price rose. In exchange, the banksn

benefited when they received large investment banking fees for services provided to those

companies.6 The alleged effect was that small investors were misled by these optimistic

recommendations, which investors assumed were objective, and then lost out when the stocks

eventually tumbled.7 In addition, banks doled out initial public offering (IPO) shares to

company executives purportedly in exchange for prior or continued investment banking

business, a transaction known as spinning.8 Overly optimistic stock analysis created artificial

demand, allowing executives to reap huge profits during the tech stock boom days of the late

1990s when they sold those IPO stocks almost immediately. After an investigation by New

York’s Attorney General, Eliot Spitzer, Merrill Lynch entered into a $100 million settlement in

May of 2002 that restricted interactions between its research analysts and bankers.10 Following

New York’s lead, the Securities and Exchange Commission (SEC) approved proposed rule

changes for two self-regulatory organizations (SROs), the National Association of Securities

Dealers (NASD) and the New York Stock Exchange (NYSE).

FINDINGS.

Pharma sector provides an average listing return of 13.5%

Mining sector provides an average listing return of 32.25%

Power sector provides an average listing return of 4.38%

Media sector provides an average listing return of 8.91%

Accesories sector provides an average listing return of 4.62%

Realty sector provides an average listing return of 15.51%

Bank sector provides an average listing return of 24.12%

Engg & metal sector provides an average listing return of 26.59%

IT sector provides an average listing return of 26.97%

Retail sector provides an average listing return of 1.09%

Most number of IPO’s came from realty sector (21).

Mining &IT sector provides better listing day return i.e.32.25%,27% resp.

Worst listing day return is been provided by Retail & power (1.09%,4.38% resp)

One year holding perspective Media provides a good return when compared to other

sector.

Two year holding perspective IT provides a good return.

Three year holding perspective IT provides a good return.

Best listing day return by individual stock is by Lotus health care ,it provided 177.5%

return.

Worst listing day return by individual stock is by Chemcel biotech ,it provided -34.75%

return.

IT is the most attractive sector for investment from the analysis made.

Engineering & Realty are the unattractive sectors for investment.

SUGGESTION.

IPO provides a better short term return when compared to other investments.

The aggregate listing day return provided by all sectors are positive therefore it is

better advised to exit on listing day and reenter at lower levels

IT & Bank proves to be a good investment strategy for long term perspective.

Investors are suggested not to invest in Realty,Engg&metal sector for long term.