A

RESEARCH PROJECT
REPORT ON

“Valuation of issue prices of Indian IPOs and the

impact of mis-valuation on its performance”
Is it beneficial to deal in primary market (IPO) or
Secondary market?

SUBMITTED TO: DR. RENU CHOUDHARY

SUBMITTED BY: BINDIYA SHARMA

A-10

4TH
SEMESTER

AMITY GLOBAL BUSINESS SCHOOL

Acknowledgement
Declaration
 TABLE OF CONTENT

SR.NO PARTICULAR PAGE NO

1 Preface
2 Executive summary
3 Introduction to report
3.1 Objective of the Report
3.2 Research Methodology
3.3 Limitations
4 Analysis of IPO
4.1 Introduction of IPO
4.2 Significances
4.3 Disadvantages
4.4 Pricing of IPO
4.5 Principal steps in IPO
4.6 Analyzing an IPOs investment
4.7 IPO investment Strategy

5 Short run and long run performance

6 Indian Scenario
6.1 IPO activity in Indian stock market
6.2 IPO Scams
6.3 Cases for IPO Scam
6.4 Salient Features of IPO Scams
6.5 Operational Deficiencies
6.6 Measures to Prevent Scams
7
Track Records for 2010
 7.1IPO Track Record and Performance in Financial year
2009-2010
7.2Case study on ARSS infrastructure
7.3 Case Study on India Bulls
7..4 Performance on Capital Market
7.4.1 IPOs: What's Beyond the Noise?
7.4.2 Ipo overpricing
8 Introduction to secondary market and Primary
market
8.1 Risk Factors in Market
8.1.1 Risk Factor IN IPO
8.1.2 Risk Factor in Secondary Market
8.2 Returns from Market
8.3 Observation of secondary market and primary market
8.3.1 Secondary market more rewarding than
IPOs
8.3.2 Investor vs. trading
9 Conclusion
10 Bibliography
11 Annexure

Preface
Executive summary
3. Introduction to Report

Change is the only constant in today’s capital markets. New products and services are created
everyday and they impact consumers, financial service provider’s delivery systems and
regulations. This change presents a constant challenge for a publication devoted to the capital
markets.

The equity trading is the buying and selling of equities i.e. good, product, raw material at the
prevailing price rate for immediate settlement. The exchange of equities will not be in physical.
It is a speculative market i.e. the increase of prices of the equities can be enjoyed in the way
of profit or loss. When there is the monetary flow in the transactions, the emotional feeling will
be impact on this activity. The equities are traded in the exchanges. The exchanges are the free
market where forces that influences price are brought together in open auction.

The Indian primary market has come a long way particularly in the last decade after
deregulation of the Indian economy in 1991-92. Both the primary and secondary markets have
had their fair share of reforms, structural cum policy changes time to time. The most
commendable being the dismantling of the Controller of Capital Issues (CCI) and introduction
of the free pricing mechanism. This changed the whole facet of Initial Public Offering (IPO)
market. But in last ten years or so, the scenario has changed for the better. Online trading is a
reality with much better transparency than the previous system. We have SEBI which
Has a better grip over the market nuisance that was there in the past.

3.1 Objective of the report:

To study in detail about –

• To know the process of Valuation of IPOs

• To understand the Impact of mis-valuation on its performance

• To know are there any changes in IPOs before and after recession?
 • To understand the Benefits to investor from IPOs or dealing in secondary market

• To know regulatory consideration with IPO

• Methods of IPO process

• To do detail study of IPO ratings, documents, performance tracker and basis of

allotment.

3.2 Research Methodology

The research is exploratory research. The data is collected from various sources like Internet, News
paper, Magazines, Personals

• Data Collection

Primary sources - Surveys to various broking firms and analysis on the same
Study through investors from questionnaire.
Secondary sources- Study from books
Analysis of IPOs of various sectors
Search from Various investor sites.

3.3 Limitations
• The study is not proposed to be an expert study as it was done by a student for the
purpose of a partial fulfillment of the course in the Finance training, which is an
integral part, in completion and reward of MBA. The study was conducted in short span
of eighteen weeks, so the findings cannot be generalized for all times. Some of the
information’s being confidential was not included in the study. During my project I
would not be able to track performance of IPO already listed of every sector.

The scope of the study, by and large is very vast. It is very difficult to satisfy all the
areas. Therefore an attempt is made to cover as much as possible included in the study.
4. Analysis of IPO
4.1 Introduction

Initial pubic Offering

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. Anybody can go out and incorporate a company: just put in some
money, file the right legal documents and follow the reporting rules of jurisdiction such as Indian
Companies Act 1956. It usually isn't possible to buy shares in a private company. One 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."
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.
4.2 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.
4.3 Disadvantages

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 regulation experts to do the same. All these aspects, if not handled with efficiency,
prove to be some major drawbacks related to the launch of IPO’s. 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.
4.4 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.

IPO PRICING DIFFERENCES:

It is generally noted, that there is a large difference between the price at the time of issue of an
Initial Public Offering (IPO) and the price when they start trading in the secondary market.

These pricing disparities occur mostly when an IPO is considered “hot”, or in other words,
when it appeals to a large number of investors. An IPO is “hot” when the demand for it far
exceeds the supply.

This imbalance between demand and supply causes a dramatic rise in the price of each share in
the first day itself, during the early hours of trading.

UNDERPRICING:

The pricing of an IPO at less than its market value is referred to as ‘Underpricing’. In other
words, it is the difference between the offer price and the price of the first trade.

Historically, IPO’s have always been ‘underpriced’. Underpriced IPO helps to generate
additional interest in the stock when it first becomes publicly traded. This might result in
significant gains for investors who have been allocated shares at the offering price. However,
under pricing also results in loss of significant amount of capital that could have been raised
had the shares been offered at the higher price

OVERPRICING:

The pricing of an IPO at more than its market value is referred to as ‘Overpricing’. Even
“overpricing” of shares is not as healthy option. If the stock is offered at a higher price than
what the market is willing to pay, then it is likely to become difficult for the underwriters to
fulfill their commitment to sell shares. Furthermore, even if the underwriters are successful in
selling all the issued shares and the stock falls in value on the first day itself of trading, then it
is likely to lose its marketability and hence, even more of its value.

Type of issues
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.
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 -

• Price Aggression

• Investor quality
 • 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) is 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, 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.

• 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 has 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 under pricing'. 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 under pricing
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.

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.
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

4.5 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 sending 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.

Book building is the process of price discovery (Basic concept)

• The company does not come out with a fixed price for its shares; instead, it indicates a
price band that mentions the lowest (referred to as the floor) and the highest (the cap) prices at
which a share can be sold.

• 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. As we continue with the series, we will explain the
process in detail.

• According to the book building process, three classes of investors can bid for the
shares:

1. Qualified Institutional Buyers: Mutual funds and Foreign Institutional Investors.

2. Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor.

3. High net worth individuals and employees of the company.

• Allotment is the process whereby those who apply are given (allotted) shares. 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.
Example 1:

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

Example 2:

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.
 4.6 ANALYSING AN IPO INVESTMENT

POTENTIAL INVESTORS AND THEIR OBJECTIVES:

Initial Public Offering is a cheap way of raising capital, but all the same it is not considered as
the best way of investing for the investor. Before investing, the investor must do a proper
analysis of the risks to be taken and the returns expected. He must be clear about the benefits
he hope to derive from the investment. The investor must be clear about the objective he has
for investing, whether it is long-term capital growth or short-term capital gains.

The potential investors and their objectives could be categorized as:

 INCOME INVESTOR:

An ‘income investor’ is the one who is looking for steadily rising profits that will be
distributed to shareholders regularly. For this, he needs to examine the company's potential for
profits and its dividend policy.

 GROWTH INVESTOR:

A ‘growth investor’ is the one who is looking for potential steady increase in profits
that are reinvested for further expansion. For this he needs to evaluate the company's
growth plan, earnings and potential for retained earnings.

 SPECULATOR:
 A ‘speculator’ looks for short-term capital gains. For this he needs to look for potential
of an early market breakthrough or discovery that will send the price up quickly with
little care about a rapid decline.

INVESTOR RESEARCH:

It is imperative to properly analyze the IPO the investor is planning to invest into. He needs to
do a thorough research at his end and try to figure out if the objective of the company match
his own personal objectives or not. The unpredictable nature of IPO’s and volatility of the
stock market adds greatly to the risk factor. So, it is advisable that the investor does his
homework, before investing.

The investor should know about the following:

 BUSINESS OPERATIONS:

• What are the objectives of the business?

• What are its management policies?

• What is the scope for growth?

• What is the turnover of the labor force?

• Would the company have long-term stability?

FINANCIAL OPERATIONS:

• What is the company’s credit history?

• What is the company’s liquidity position?

• Are there any defaults on debts?

• Company’s expenditure in comparison to competitors.

• Company’s ability to pay-off its debts.

• What are the projected earnings of the company

 MARKETING OPERATIONS:

• Who are the potential investors?

• What is the scope for success of the IPO?

• What is the appeal of the IPO for the other investors?

• What are the products and services offered by the company?

• Who are the strongest competitors of the company?

4.7 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.
5. Short run and long run performance

Sample and Research Methodology

The sample in this study includes all the new equity issues offered through book building route
on the National Stock Exchange (NSE) from 1999 till May2007. The entire list of public offers
made through NSE are available on their web site (www.nseindia.com)however we have
excluded the entire offer for sale issues, follow on public offers, those exclusions we were left
with a sample of 156 IPOs (see Appendix) for the short run analysis. Over this period these
sample companies raised a sum of Rs 56,666.95 Cr. For the listing day and the next day
(second day) we collected the opening price and closing price of the IPO from the NSE's web
site. Thereafter the monthly adjusted closing prices (adjusted for dividends, stock splits and
bonus issues if any) were obtained for the same from Capitaline database.
In this study we examined the price performance of the IPOs both in the short-run as well as in
the long-run where short-run means the behavior of initial return sup on listing. As in other
studies on this theme we computed the return realized over the period from the offering of the
shares to the first trading day on NSE, called as offer-to-close return. Following Barry and
Jennings (1993) we extend the short-run analysis by examining offer-to-open returns which
will give a fair idea of how much the IPO gained or lost up on opening trades and an intra day
return on the listing day defined as the open-to-close returns on the listing day. We also analyze
the next day (second day) returns in a similar manner with reference to the first day's closing
price.
IPO long run performance is gauged by examining the returns beyond the second day of their
listing at monthly intervals till May 2007 subject to a maximum of 60months. Therefore for
those listed in January 2000monthly returns will be observed till December 2004encompassing
60 monthly returns however for a stock listed in May 2006 we could analyze its performance
for a maximum of one year.
We estimate simple returns as well as market adjusted returns to capture the market movements
during the period between offer closures to listing. Simple returns are computed as

Where P; is the opening/closing price of stock 'i' at time 't' and O;is the offer price of the
i`'stock. These returns measure whether an investor gained (or lost) by buying the shares
during the IPO at the offer price and selling at the prevailing price on the opening day. If R; is
positive one can infer that the issue is under-priced; if R, is negative it may be inferred that the
issue is over-priced and if R„ is zero it means the issue is aptly priced. As there is a lag
between the offer day and listing day (varying from) the price observed in the market on the
listing day may be different from the offer price as a result of the overall market movements,
we also computed market adjusted returns of the IPOs for the same period. This adjustment is
made first by computing the returns on the market index (Nifty) during the same period

Where It is the Nifty index closing/opening value on day 't' and lo is the closing level of Nifty
on the last day of the !PO offering. If Rm, is positive it means the market on the whole has
moved up; if it is negative it may be considered that there is a decline in the over all market
and if it is equal to zero it may be concluded that market remained unchanged during the
interval between IPO offering to its listing.
Now the market returns will be deducted from the IPO's returns and the resultant returns are
called as excess returns:
E R = R, - Rm,
If ER;, is positive one can infer that the issue is under-priced after adjusting for the market
movements in the intervening period and a negative value for ER,, indicates that the issue is
over-priced and it is equal to zero it may be concluded that the issue is fairly priced.

Long run performance

IPO performance in the long run is examined by using two measures buy and hold market
adjusted returns (BHAR) and monthly market adjusted returns (MMAR)

Computed as follows:

Where P; is the closing price’t’ months of the i’ IPO after its listing
P,, is the closing price of the of the i'hIPO on its listing day
P, o is the offer price of the i'h IPO
I is the closing Nifty index value’t’ months after listing
I, is the closing index value on the listing day
to is the closing index value on the last day of the IPO's offer

Average IPO returns upon listing and on the next day

Long run performance of IPO based on offer price
 After market performance of IPO

 IPOs have given higher returns compared to the negative returns reported from other
countries. From our analysis it may be observed that IPOs generated positive returns
even after two years of listing but subsequently they under-perform. However we again
caution that the present study suffers from a small sample limitation particularly in the
time frame after twenty four months.
 An important finding from this study is the amount of over performance in the short-
run and the quantum of underperformance in the long run have come down
significantly compared with that reported in earlier mentioned studies.
 One can also note that the decrease in under pricing in the short-run and over
performance in the long run has decreased probably due to the introduction of book
building process as that is an important change that the public issue process has
witnessed from the early nineties to the present study however the same may be
confirmed by empirical examination.
 Our inference is based on the logic that the earlier studies that documented under
pricing have examined a sample of IPOs that were issued following the fixed price
route while the present study's sample comprises IPOs that were issued only through
the book building route hence we attribute the reduction in under pricing to the process
of book building.
 We make this inference at the risk of sounding a little arbitrary but the same may be
confirmed or otherwise by an empirical examination by further studies with a sample
that pans both the regimes- fixed price regime as well as book building
6. Indian Scenario
6.1 IPO activity in Indian stock market
IPO market in India has seen many ups and down during the last decade. It has seen a steep
rise in the initial years of the post liberalization. The Growth observed during the first half of
the 90s is mostly attributed to the financial liberalization of the economy. Capital market
reforms like abolition of the office of controller of capital issues (CCI), constitution of SEBI
under the new security and regulation act and relaxation in pricing of capital issues played an
important role in such upsurge.

IPOs: Changing Trend

The Indian primary market has come a long way particularly in the last decade after
deregulation of the Indian economy in FY92. Both the primary and secondary markets have
had their fair share of reforms, structural cum policy changes time to time. The most
commendable being the dismantling of the Controller of Capital Issues (CCI) and introduction
of the free pricing mechanism (which permits the companies to price the issues). This changed
the whole facet of Initial Public Offering (IPO) market. Free pricing mechanism allowed good
corporate to raise money from the primary market at the right price, which was denied earlier.
However, the decontrol was, to some extent, misused by corporate to overprice issues.

The government realized the need for a regulated environment and started to promote its
necessity in capital markets. Spearheading this was the establishment of The Securities and
Exchange Board of India (SEBI) which became active in 1992. SEBI was assigned the role of
monitoring and regulating the working of stockbrokers, bankers to an issue, merchant bankers,
portfolio managers, and other intermediaries who are associated with stock markets. The
effects of these structural changes are apparent from the trends in the resources raised from
primary market, which includes public issues, rights issues, private placements and overseas
issues.
 The Primary market 'Cycle'
F
Y
(Rs bn) FY93 FY94 FY95 FY96 FY97 FY98 FY99
0
0
1
5
Public
134.6 188.9 249.1 182.6 157.8 122.1 144.5 9
Issues
.
0
1
0
(% y-o-y -
40.3% 31.9% -13.6% -22.6% 18.3% .
growth) 26.7%
0
%
1
Rights 6
121.6 129.1 115.7 61.3 26.6 20.0 36.1
Issues .
2
-
5
- - 5
6.2% -56.5% -24.7% 80.2%
10.4% 47.1% .
2
%
4
0
Private
18.7 79.8 115.4 65.3 104.8 347.9 251.9 3
Placement
.
2
6
0
-
326.0% 44.5% 60.4% 231.9% -27.6% .
43.4%
0
%
3
Overseas 9
7.5 79.9 78.8 25.7 56.8 11.0 181.0
Issues .
9
 -
7
- 8
959.2% -1.3% 120.7% -80.6% 1540.7%
67.4% .
0
%
6
1
Total 282.4 477.7 558.9 334.9 346.0 501.1 613.5 8
.
2
0
- .
69.1% 17.0% 3.3% 44.8% 22.4%
40.1% 8
%

It is evident that during 1992-94, the bourses started to show signs of recovery after the
securities scam in FY92. The Sensex also touched a new high during the same period due to
the improved economic environment. Though total funds mobilized during FY94 went up from
Rs 135 bn in FY93 to Rs 188 bn in FY94, a number of companies started to cash in on the
buoyant primary market, notably the finance companies. Besides, as the domestic companies
went on for overseas issues (GDR, FCCBs and ECBs), there was a sharp increase in funds
raised through overseas issues, which shot up by 959% from Rs 8 bn in FY93 to Rs 80 bn in
FY94. The trend continued in 1995 backed by robust industrial production and higher gross
domestic product growth. IPO market had another impressive year. Public issue proceeds
moved up to Rs 249 bn, a growth of a 32% compared to FY94.
Buoyed by the business scenario most of the manufacturing companies went for huge capacity
expansions and diversification. The impact of this was visible as excess capacity cramped
margins and many companies went into the red. Public issues started drying up. The total fund
mobilized during FY96 came down by 40% as the proceeds from public, rights and overseas
issues fell by 27%, 47% and 67% respectively. That is the reason why both proceeds from
private placement as well as overseas markets moved up sharply by 60% and 121%
respectively in FY97. But, then South East Asian crises came, which hit the trade and
economic growth. So, FIIs shifted their portfolio, which resulted in reduced exposure towards
developing economies like India. The market remained flat, as investors preferred to put
money in banks rather than investing in shares.
But during the latter half of FY98, markets witnessed the boom in software stocks. Software
stock valuations soared through the roof. This boom in the secondary market caught on to the
primary market as well. More than 50% of new issues were from software companies in FY99.
They received tremendous response from investors with over-subscription rates ranging
anywhere between 20 times-55 times the issue size. Subsequently, these companies got listed
at huge premiums to their offer price, which triggered interest among investors. The private
placement market witnessed a surge in mobilizations. This was largely due to promoter’s
shoring up their stakes in companies, in light of the takeover code taking a more concrete
shape. Also, as the primary markets for both equity and debt turned bearish, companies opted
for the low cost option of private placements.
Moreover, funds mobilized via overseas issues witnessed a 1,500% jump since Indian
companies went for American Depository Receipts (ADR) issues, the first one being, Infosys.
However, proceeds from private placements started to fall after SEBI announced new
regulations. The total receipts via private placement fell by 28% in FY99.
Since inception, the role that market regulator SEBI has played in reforming primary market is
commendable. Stringent norms have been imposed as and when required. Pre-issue
requirements of issuing company and Lead Managers, filing due-diligence report at the time of
filing of draft-prospectus and post-issue obligations of revealing the allotment basis are some
of the regulatory measures, which were enacted to safeguard investors and to bring
transparency in the system. Other notable norms include the lock-in period norms for
promoters as well as mutual funds in the issuing company. Besides, project appraisal route as
an alternative to the profit track record route was replaced by book-building route, where
qualified institutional investors (QIBs) where allowed to subscribe 60% of the issue.
Though these measures did prevent the investors from fraudulent practices, the quality of new
issues, however, seemed to be deteriorating. Companies with good track record, teams and
institutional backing were overtaken by companies, which zoomed in to cash in on this new
economy boom.
Though public issue receipts showed 10% YoY growth in FY00, funds mobilized from primary
market remained flat (1%). The primary market moved in tandem with secondary markets. For
instance, Television–18 got a tremendous response while public issue from Ajanta Pharma just
managed to sail through. Further, established software companies preferred the private
placement route for raising funds in FY00. As a result, proceeds from private placement
showed a sharp rise of 60% to Rs 403 bn. For the second consecutive year, non-financial
public sector undertakings and government companies remained absent from public issue
market. Though private placement receipts fell during FY00, some bond issues received good
responses which include bond issue from Indian Oil Corporation and Hindustan Petroleum
Corporation Limited.
The IPO market has come a long way since the boom of FY94. However lots have to be done
since the market seems to be heading the same direction as it way during the early nineties
when non-banking financial institutions tamed the primary market. Besides, recent statistics
also indicate that the average size of public issues have shrinked to Rs 100 m in FY01. Added
to the woe, only five issues in the first half of the current year managed to get more than 5
times over-subscription compared to 30 last year. This is expected to continue as long as
unscrupulous companies who do not have any infrastructure facilities, manpower, revenue
model, continue to raise money from the markets.
Nevertheless, the regulators role is commendable and it can be anticipated that the regulatory
environment will only improve in the coming years.
After 2002 till 2008
FINANCIAL YEAR AMOUNT RAISED THROUHG IPO

2002-03 Rs 1039 crores

2003-04 Rs 17807 crores

2004-05 Rs 21432 crores

2005-06 Rs 23,676 crores

2006-07 Rs 24,994 crores

2007-08 Rs 52,253 crores

• India is being lauded as the savior of the ailing global IPO market with $3.3 billion worth of
proceeds from eight deals. This makes India the largest IPO market in the world so far this
year.

• According to Thomson Financial, the bulk of the volumes came from the biggest IPO deal so
far this year — Reliance Power's $3 billion IPO on January 21, 2008.

• 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 precedes 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.

• The Indian capital market has performed quite well in 2007. It raised US$8.3 billion through 95
Initial Public Offers (IPOs). According to the Ernst & Young report, "Globalization - Global IPO
Trend Report 2007" India was the fifth largest market in the world in terms of the number of
IPOs and the seventh largest in terms of the proceeds for the year

• It was the real estate sector which took the maximum advantage of the bullish stock market
trends in 2007. According to the industry body Assocham, real estate players raised the
maximum amount of funds from the capital market through IPOs last year. Realty firms picked
up around 42.7% of the total funds generated through IPOs. Of the Rs.34, 119 crores raised in
the primary market in the period starting from January 1, 2007 to mid-December, about
Rs.14,591 crores was raised by the realty firms.

Public issue calendar wise Summary

FINANCIAL YEAR WISE SUMMARY
As shown in the table during the economic boom there were much more IPOs. During
2007-2008 the share market witnessed its highest number of IPOs in past one decade.
6.2 IPO Scams

IPO Scams are well structured game played by the absolute opportunists consisting of
intermediaries, financiers and bank employees, who make a lot of money by controlling shares
Meant for retail investors in Initial Public Offer (IPO), as per the statement of the Securities
Exchange Board of India. In the last few years, the capital market in India went through a rapid
transformation. The increased use of information technology and the integration of financial
markets have stepped up the risk profile of the capital market. The two major IPO scams in the
Indian Capital market were the Harshad Mehta scam in the year 1992 and the Ketan Parekh
scam in loopholes in the Indian capital 2001. The IPO Scams opened up the latent market.

IPO SCAMS - CAUSES

· Two of the most common factors of the major IPO scams in India were the tacit consent of
the banks and the poor surveillance techniques.
· The Depository Participants must be provided the proof of identity and proof of address as a
routine check for the opening demat accounts. This was not followed.
· Numerous dematerialized accounts and bank accounts had been opened under false names
and the IPO applications were made in non existing names.
The Securities and Exchange Board of India (SEBI), the capital market watchdog, they cracked
down on some of the top brokerage firms and banks for their alleged involvement in an initial
public offering (IPO) scam.

SEBI conducted investigations in respect of all the IPOs from January 2003 to December 2005.

The findings of investigations, prima facie, revealed violations of serious nature by several key
operators, their financiers, concerned depository participants and the depositories.

In its order, SEBI has barred brokerage firms like Karvy Stockbroking and IndiaBulls from the
market. It has also directed HDFC Bank and IDBI Bank not to open new demat accounts for
share transactions. SEBI's Order fallout:
24 entities banned from primary and secondary market, including IndiaBulls, Karvy Securities

• 12 DPs can’t open fresh demat accounts, including HDFC Bank, IDBI Bank, Central Bank,
ING Vysya Bank, IL&FS and Motilal Oswal; 15 more under scrutiny, including ICICI Bank,
Citibank,Stanchart

• 85 Financiers barred from the market.

SEBI said certain entities had cornered shares reserved for retail applicants in the name of
fictitious entities in the initial public offerings of Yes Bank and Infrastructure Development
Finance Company (IDFC).

Each of the fictitious application was of small value so as to be eligible for allotment under the
retail category, it added.

After the allotment, these fictitious beneficiaries transferred these shares to their principals
who in turn transferred the shares to their financiers.
The financiers in turn sold most of these shares on the first day of listing, thereby realizing the
windfall gain of the price difference between IPO price and the listing price.

6.3 Cases for IPO Scam

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
allots tees. 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 allotted 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 Ahmedabad. There are
three more addresses of locations in Ahmedabad, 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 crores on the day of the listing of YES Bank shares
SEBI unearths another IPO scam in IDFC
SEBI on Thursday 12th Jan 06 unearthed yet another abuse of IPO norms in the
IDFC's initial public offering (IPO) where a few investors opened over 14,000 dematerialized
accounts to corner large number of shares of the company. This is the second such incident,
after a similar such violations were detected in the YES Bank's IPO.
SEBI said in IDFC's IPO too four investors opened as many as 14,807
dematerialized accounts with Karvy-DP and "strangely", all these account holders have their
bank accounts with Bharat Overseas Bank Ltd, Ahmedabad. SEBI order said: "further probe is
required for examining the systemic fault, if any, of the registrar Karvy-RTI i.e. Karvy
Computer Shares P Ltd, and the lead managers Kotak Mahindra Capital Company Ltd, DSP
Merrill Lynch Ltd and SBI Capital Markets Ltd in identifying and weeding out the benami
applications."
Reference is being made to the RBI to examine the role of BOB, HDFC Bank,
Indian Overseas Bank, ING Vysya Bank and Vijay Bank in opening the bank accounts of these
benami entities and apparently funding them.
 According to SEBI, Karvy-DP, which was also named in the YES Bank IPO
case, has not adhered to `Know-your-Client' norms, as per the reports of inspection submitted
by NSDL and CDSL on the DP. Also, some of the documents collected by CDSL during the
course of inspection show that Karvy-DP has obtained letters purportedly issued by the banks'
concerned such as BOB as proof of identity and proof of address of the person for the purpose
of opening dematerialized accounts.
"It is seen that one branch manager has on the same date signed as authorized
signatory of different branches of the bank. This raises a doubt as to the authenticity of the
bank documents obtained by Karvy-DP for opening dematerialized accounts," the SEBI order
by its Whole-time Director Mr. G. Anantharaman said. SEBI also banned four investors (in
whose names the multiple accounts were opened) viz., Ms Roopalben Nareshbhai Panchal
(who was also named in the YES Bank IPO scam), Sugandh Estates & Investments P Ltd, Mr.
Purshottam Ghanshyam Budhwani and Mr. Manojdev Seksaria from doing any kind of
transactions in the securities market, till further directions.
Another 35 firms were also barred from participating in the IPOs in the future, till further
orders, the SEBI order said.
MARUTI Case

Fictitious Demat A/c’s opened in 2003 itself

`First IPO in which key players took part was Maruti'

The Charges

DPs have been accused by SEBI of not fully implementing the `maker-checker'
concept, data entry errors, scanning of officials' signatures, and appointing themselves as the
second holder.

Description

Some of the demat accounts that were used to manipulate allotments in the
initial public offer of Yes Bank and IDFC were opened during 2003, and not in the last year as
was earlier believed. The first IPO in which the key operators have participated was that of
Maruti Udyog Ltd, in June 2003, though the numbers of fictitious demat accounts were not
very high then, the interim order from Securities and Exchange Board of India has said.

SEBI's investigations have now pegged that a "total of 24 key operators have
indulged in abusive practices in respect of 21 IPOs".

The evidence against Karvy DP has stemmed from the fact that almost all the
demat accounts which served as conduits for these master account holders were held with
Karvy DP, according to the order. These 24 operators have 34 demat accounts; of which 16
demat accounts are held with Karvy DP.

Due Diligence Not Taken

The market regulator's investigations have pointed out that, while opening
demat accounts the depository participants were not exercising due diligence. Persons involved
in the scam have collected proofs of identity and addresses from groups of persons and used
this to open bogus bank accounts.

Inter-linkages

The master account holders were found to have made off-market transfer of the
IPO shares to various common groups of entities who appear to be their principals. It is seen
that some of the master account holders have also made off-market transfers amongst
themselves. This shows that there are inter-linkages amongst the master account holders as
well as between groups of master account holders and their principals, the order said.

Depository participants have been accused by SEBI of not fully implementing

the `maker-checker' concept, data entry errors, scanning of officials' signatures and appointing
themselves as the second holder.

With some of the DPs also acting as brokers, stock exchanges have been advised
to examine the role and involvement of brokers and sub-brokers by way of participation in
IPOs either directly or indirectly and their dealings in the shares subsequent to listing.
Exchanges are to submit a report on this within a month.

SEBI bars Karvy, 23 other entities

Alleged involvement in IPO allotment scam

In the dock

Ban on several entities including HDFC Bank, IDBI Bank, ING Vysya Bank
and Motilal Oswal Securities from opening fresh demat accounts.
The regulator also pulled up NSDL and CDSL for `grave management lapses'.

Description
 SEBI on Thursday 27th April 2006 came down heavily on stock market
intermediaries by banning several entities including Karvy group of companies, Pratik DP and
IndiaBulls Securities, for their alleged involvement in the IPO allotment scam. SEBI has also
barred several entities including HDFC Bank, IDBI Bank, ING Vysya Bank and Motilal Oswal
Securities from opening fresh demat accounts.
In an interim order issued today after the second round of investigations, the
capital market regulator has banned 24 entities from buying and selling securities till further
orders.
Common address
SEBI also said 15 Depository Participants at National Securities Depository Ltd
(NSDL) including Kotak Securities, Citibank, ICICI Bank, Bank Paribas and IndusInd Bank
had more than 500 demat account holders sharing the common address.
It asked NSDL to conduct inspection on whether all the demat account holders
are genuine. NSDL has also been asked to check whether the Know Your Customer norms of
SEBI have been duly complied with and take action against suspect accounts on verification.
Analysts felt the SEBI order was akin to capital punishment for the entities
involved in the securities market scam.
"In view of the detailed findings, Karvy DP and Pratik DP prima facie do not
appear to be fit to deal in securities market as SEBI-registered intermediaries. Appropriate
quasi-judicial proceedings are being initiated against the two DPs," the 252-page order issued
late in the evening said.
SEBI said the other business groups of Karvy appear to have acted in concert in
the gamut of IPO manipulations. "I further direct Karvy Stock Broking Ltd, Karvy Computer
Share PVT Ltd, Karvy Investor Services and Karvy Consultants not to undertake fresh
business as registrar to the issue and share transfer agent," Mr. G Anantharaman, Whole-Time
Member, SEBI, said.
NSDL, CDSL pulled up
The regulator also pulled up NSDL and CDSL for `grave management lapses'.
The findings revealed "contributory negligence" on the part of the depositories and their
managements.
"The promoters of NSDL and CDSL are directed to take all appropriate actions
including revamping of management which clearly has allowed matters to come to such a sorry
pass," the order said.
The order, to be treated as a `show-cause notice', has given 15 days time to the
parties named for filing objections.

IPO scam: HDFC Bank, 2 others fined

 The Reserve Bank of India on Monday 27th Feb 2006 fined HDFC Bank, IDBI
and ING Vysya Bank for violation of Know Your Customer norms and other irregularities in
relation to the recent IPO scam.
HDFC Bank has been slapped with the highest penalty of Rs 25 lakh; ING
Vysya Bank - Rs 10 lakh and IDBI Ltd Rs 5 lakh.
This is the second time HDFC Bank has been fined for violation of KYC norms.
In January, the bank was imposed a penalty of Rs 5 lakh.
According to an RBI release, these banks have been fined, "for violation of
regulations on KYC norms, for breach of prudent banking practices and for not adhering to its
directives/guidelines relating to loans against shares/ IPO."

6.4 Salient Features of IPO scam

Modus operandi

 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

 Margin money provided by brokers through single cheque

 Nexus between merchant banker, brokers and banks suspected

6.5 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

6.6 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

 An 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

7. Track Records for 2010
7.1 Recent IPO’s

7.2 IPO Track Record and Performance in Financial year 2009-2010

IPO Track Record and Performance in Financial year 2009-2010
During the financial year 2009-2010 a total of 35 IPO’s listed. Their performance is
enumerated in the table below. Of the 35 issues as many as 24 or 68.57% ended in positive
territory. Closing in the negative were 11 or 31.4% of the issues. The top gainer was Jubilant
Food works Limited which gained 116.31%. The issue was priced at Rs 145 and closed at Rs
313.65, an absolute gain of Rs 168.65. The second top performer was yet another century
maker ARSS Infrastructure Limited which issued shares at Rs 450, and gained Rs 478.50 or
106.33% to close at Rs 928.50.
The biggest loser was Euro Multivision which lost 67.81% of its issue price of Rs 75. The
stock closed at Rs 24.14 down Rs 50.86. The second biggest loser was Rishabdev Techno
cables which lost 66.76%. The issue was priced at Rs 33, lost Rs 22.03 and is currently quoting
at Rs 10.97.
Name of Listing Issue High Low Close Gain/Los %
Company date Price s Change
1 Jubilant Food 8th Feb 145.00 361.80 161.60 313.65 168.65 116.31
works
2 ARSS 3rd Mar 450.00 998.00 640.00 928.50 478.50 106.33
Infrastructure
3 Mahindra 16th 300.00 574.00 0.00 543.85 243.85 81.28
Holiday July
4 Syncom 15th 75.00 162.40 70.65 119.95 44.95 59.93
Healthcare Feb
5 Think soft Global 26th Oct 125.00 544.00 100.00 187.80 62.80 50.24
6 Cox and Kings 11th 330.00 504.90 304.10 481.65 151.65 45.95
Dec
7 Man 11th 252.00 408.45 322.50 360.10 108.10 42.90
Infraconstruction Mar
8 DQ 29th 80.00 140.00 103.00 112.25 32.25 40.31
Entertainment Mar
(Int)
9 Globus Spirits 23rd 100.00 142.00 74.05 135.55 35.55 35.55
Sept
1 MBL 8th Jan 180.00 247.60 182.20 225.65 45.65 25.36
0 Infrastructure
11 Aqua Logistics 23rd 220.00 286.40 219.40 271.15 51.15 23.25
Feb
1 Pipavav Shipyard 9th Oct 58.00 72.60 47.65 70.40 12.40 21.38
2
1 Adani Power 20th 100.00 117.80 90.25 115.95 15.95 15.95
3 Aug
1 Infinite 3rd Feb 165.00 222.90 178.35 190.85 25.85 15.67
4 Computer
1 DB Corp 6th Jan 212.00 274.60 207.40 239.15 27.15 12.81
5
1 JSW Energy 4th Jan 100.00 123.90 99.90 111.80 11.80 11.80
6
1 Oil India 30th 1050.0 1374.8 1019.0 1150.55 100.55 9.58
7 Sept 0 0 0
1 Thangamayil 19th 75.00 82.40 62.00 81.35 6.35 8.47
8 Jewellery Feb
1 Jindal Cotex 22nd 75.00 120.50 75.00 81.15 6.15 8.20
9 Sept
2 IL&FS 30th 258.00 295.00 270.10 278.45 20.45 7.93
0 Transportation Mar
2 Godrej Properties 5th Jan 490.00 586.70 446.90 513.10 23.10 4.71
1
2 United Bank of 18th 66.00 77.00 66.10 68.60 2.60 3.94
2 India Mar
2 Texmo Pipes 10th 90.00 162.80 90.20 92.35 2.35 2.61
3 Mar
2 Den Networks 24th 195.00 208.00 151.00 195.30 0.30 0.15
4 Nov
2 DB Realty 24th 468.00 540.10 407.00 458.50 -9.50 -2.03
5 Feb
2 Vascon 15th 165.00 173.45 119.00 155.30 -9.70 -5.88
6 Engineers Feb
2 Hathway Cable 25th 240.00 246.00 189.10 207.20 -32.80 -13.67
7 Feb
2 NHPC 1st Sept 36.00 39.75 29.85 30.50 -5.50 -15.28
8
2 India Bulls 30th Oct 45.00 45.50 28.65 30.75 -14.25 -31.67
9 Power
3 Astec 25th 82.00 96.10 44.00 49.00 -33.00 -40.24
0 Lifesciences Nov
3 Raj Oil Mills 12th 120.00 133.70 56.10 59.70 -60.30 -50.25
1 Aug
3 Emmbi Polyarns 24th 45.00 48.35 20.10 20.75 -24.25 -53.89
2 Feb
3 Excel Infoways 3rd Aug 85.00 128.40 37.15 39.10 -45.90 -54.00
3
3 Rishabdev 29th 33.00 47.00 10.01 10.97 -22.03 -66.76
4 Techno cables June
3 Euro Multivision 15th Oct 75.00 80.90 23.55 24.14 -50.86 -67.81
5

FPO
1 NTPC 19th 201 241.7 196.1 207 6.00 2.99
Feb
2010
2 REC Ltd 8th Mar 203 274.5 205.15 249.9 46.90 23.10
2010
3 NMDC 29th 300 571.8 283.5 294.15 -5.85 -1.95
Mar
2010

The performance of the 35 IPO’s is as follows.

2 stocks gained 100% or more
1 stock gained 80% or more but less than 100%
2 stocks gained more than 50% but less than 60%
3 stocks gained more than 40% but less than 50%
2 stocks gained more than 25% but less than 40%
6 stocks gained more than 10% but less than 25%
4 stocks gained more than 5% but less than 10%
4 stocks gained less than 5%
On the negative side 4 stocks lost less than 25%
2 stocks lost more than 25% but less than 50%
5 stocks lost more than 50% but less than 67%
FPO
There was three follow on offers and all were from the government. They were from NTPC,
REC and NMDC. The success story was REC which returned excellent returns to investors.
The share gave returns of almost 15% on day one of the share being available for trading and
has given returns of 23% till date.
NTPC has given very small returns of a mere 3% but the disappointment has been NMDC
which is down 2% but the stock has fallen from a high of Rs 572 to below Rs 300, a fall of
more than 47%.
It has been interesting during the year that pricing has been the key factor throughout the year.
Wherever promoters have priced the issue reasonably and left money on the table for investors,
there has been excellent response. However where pricing has been expensive, they have
received poor response. I believe this should be a key factor to watch in future issues.
In conclusion let me repeat a statement which I had made about the full form of IPO – It’s
Probably Overpriced.
7.3Case study on ARSS infrastructure

In the above performance we have seen that ARSS infrastructure IPO had
performed well while India bull performance was very bad. Let’s see the case of
ARSS infrastructure understand why it performed in the market well and reason
for the same.
Analysis of the case

Promoted by Subhash Agarwal of Bhubaneswar and his three brothers, ARSS Infrastructure
Projects (AIPL) provides construction services for railway infrastructure, roads &
highways and irrigation projects.
Strengths
• Strong unexecuted order book of Rs 2877.53 crores as on 10 January 2010 and
significantly diversified order book comprising 41% railway projects, 41% road
projects, 3% irrigation projects, and balance others. Moreover, orders from government
and government entities amounted to 87.5% of the order book as on 10 January 2010.
• Given the strong investment lined up in the country, both in the road sector as well as
by the Railways including the dedicated rail freight corridor project is well positioned
to capitalize on it.
Weaknesses
• There are a number of pending litigations against the company and/or the promoters
and group companies, including a criminal case.
• Has expanded its presence and pursued orders outside Orissa like Chhattisgarh,
Rajasthan, Jharkhand, Haryana and Tamil Nadu. Still, contracts outside Orissa are
limited.
Had negative cash flow from operating activities in the fiscal ended March 2008 (FY 2008) as
also nine months ended December 2009

An analysis of the company’s business and a comparison with its peers seems to indicate that
the issue is very attractively priced. Investors are advised to subscribe to the issue.

BUSINESS:
As of January 10, 2010, the company has an order book of Rs 2,877 crores, equivalent to 4.6x
its FY09 contract income. This indicates strong future revenue stream. The company has
acquired the necessary equipment to execute these orders spanning over 18-24 months. ARSS
has established itself as an infrastructure player through joint ventures with established
partners and has developed an extensive experience in rail projects. Its revenue mix includes
46% from railways, 33% from roadwork and the balance from irrigation projects and others.
However, this skews the revenue mix towards one segment. Going ahead, the share of roads is
expected to increase slightly, according to the current order book. SBI is a major investor with
a 7.97% holding in the company. Some of the major projects executed so far aggregate to Rs
1,284 crores.

Stock Financials

Over the past two years, orders from railways grew 89% while the company has been in this
business for the past nine years. In FY09, the total income stood at Rs 628 crores with a net
profit of Rs 51.2 crores. Its revenues grew at a CAGR of 116.7 % for the period FY07- FY09
and profit after tax grew at a CAGR of 120 % over the same period. The company is expected
to complete projects worth Rs 994 crores by FY10. Going ahead, the company would look at
diversifying its revenue stream and also increase the share of irrigation projects apart from
roads. It has managed to improve its ratio of net working capital to sales from 0.53 in FY08 to
0.43 in FY09. This shows faster cash generation by the business. The company has a debt of
Rs 370 crores on its books.

Valuation and IPO analysis

Post the issue; valuation of the company comes to 6.61 xs to 7.14 xs of its annualized earnings
of FY10. The fact that almost half of its annual profit is generated in the last quarter would
further lower its pricing. The company has a significant presence in railway contracts and there
are not many players, other than L&T, in this segment. On a TTM basis, L&T is trading at
10.69 xs. Thus ARSS leaves enough scope of upside for the investors. The fact that the
company’s net worth will increase after the issue, growth in revenue will be good. Moreover,
as government spending on infrastructure is bound to increase and with an established track
record of executing government orders, the future for ARSS looks bright.

AIPL’s revenue grew 99% to Rs 624.38 crores in FY 2009 and net profit was up by 90% to Rs
51.04 crores. The EPS for FY 2009 works out to Rs 33.9 and Rs 34.4 on post-IPO equity at
the lower and upper price band, respectively. The P/E works out to 12.1 times and 12.9 times
on the lower and upper price band, respectively. This is comparatively higher than players such
as PBA Infrastructure and MSK Projects, which quote at PIE of 6.8 times and 10.8 times their
FY 2009 earning. However, the offer is at a discount to J Kumar Infrastructure and Tantia
Construction which quotes at 13.7 times and 12.3 times their FY 2009 earning.
Conclusion: Breaking from the recent trends of poor listing day performances, the initial
public offer (IPO) of ARSS Infrastructure Projects on Wednesday made a strong debut on the
domestic equity bourses gaining nearly 67%. The shares of ARSS Infrastructure Projects which
was issued at Rs 450 per equity shares got listed on the National Stock Exchange (NSE) at a
premium of 40% at Rs 630 and further soared to hit an intra-day high of Rs 751.80 before
ending the trading session at Rs 750. The stock gained Rs 300, or 66.67%, on NSE. Around
1.57 crores shares changed hands on NSE generating a turnover of Rs 1,111 crores.
7.4 Case Study on India Bulls
Company Details :
Open Date :Oct 12, 2009 Close Date : Oct 15, 2009 Issue Type :Book
Building
Issue Size : 33.98 crores Minimum App Lot : 10 Issue Price : Rs40-45
shares

Issue details
Issue opens: 12-Oct-09
Issue closes: 15-Oct-09
Issue size: 33.98 crores shares
Green shoe option: 5.1 crores shares
Face value: Rs10 each
Break-up of fresh issue to public
QIB's portion: 20.4 crores shares
Retail portion: 10.2 crores shares
Non-institutional portion: 3.4 crores shares
Price band: Rs40-45

IndiaBulls Power Ltd (IPL), a part of IndiaBulls Group, is coming with a public issue of
339,800,000 equity shares of Rs10 each. There will also be a green shoe option of up to
50,900,000 equity shares. The company will be raising Rs1, 359 crores at the lower price band
of Rs40 and Rs1, 529 crores at the higher price band of Rs45. The issue and the green shoe
option if exercised in full will aggregate to 390,700,000 equity shares. The issue will constitute
16.98% of the fully diluted post issue paid-up capital of the company assuming that the green
shoe option is not exercised and 19.06% of the fully diluted post issued paid-up capital
assuming that the green shoe option is exercised in full.
Shareholding pattern
Particular Pre-issue Post-issue Post-issue
s Number of % of Number of % of Number of % of
Shares Share shares share shares share
capital (assuming capital (assuming capital
GSO not (assumin GSO (assuming
exercised) g GSO exercised in GSO
not full) exercised
exercised) in full)
IndiaBulls 1,185,000,00 71.43 1,185,000,00 59.18 1,185,000,00 57.81
Real 0 0 0
Estate Ltd
Total 1,185,000,00 71.43 1,185,000,00 59.18 1,185,000,00 57.81
promoter 0 0 0
holding
Promoter Nil Nil Nil Nil Nil Nil
group
Total 1,185,000,00 71.43 1,185,000,00 59.18 1,185,000,00 57.81
promoter 0 0 0
and
promoter
group
holding
LNM India 177,750,000 10.71 177,750,000 8.87 177,750,000 8.67
Internet
Centuries
FIM 296,250,000 17.86 296,250,000 14.79 296,250,000 14.45
Public - - 339,800,000 16.97 390,700,000 19.06
(pursuant
to the
issue)

Object of the issue

The net proceeds of the issue are proposed to be utilized to

• Part finance the construction and development of the 1,320 mega watt (MW) Amravati
Power Project (Phase–I);
• Fund equity contribution in the company’s wholly-owned subsidiary, IRL, to part
finance the construction and development of the 1,335MW Nasik Power Project; and
• General corporate purposes.
Company Background
IPL is a part of IndiaBulls Group, one of the leading Indian business houses with business
interests in real estate, infrastructure, financial services, retail, multiplex and power sectors.
Incorporated on October 08, 2007, IPL is in the business of developing, constructing and
operating thermal and hydro-power projects. The company currently has five thermal power
projects under development, which will have a combined installed capacity of 6,615MW by
September 2013 and entails a total capital outlay of over Rs31, 000 crores. All the power
generation capacity planned is coal based with 5,280MW being supercritical. The company is
presently also in the process of evaluating the establishment of a 1,320MW coal-fired thermal
power project in Jharkhand and a 2,640MW coal-fired thermal power project in Chhindwara,
Madhya Pradesh.
Analysis

 Key positives

IPL will have a combined installed capacity of 6,615MW in Maharashtra and Chhattisgarh post
the completion of these projects with lot more projects in the evaluation stage.
The company has also signed memorandum of understanding (MoU) for developing coal-fired
thermal power projects aggregating to 3,960MW with the state governments of Jharkhand and
Madhya Pradesh.
The company has also signed a MoU with the government of Arunachal Pradesh for
developing four hydro-power projects with an aggregate capacity of 167MW. These
hydroelectric projects are proposed to be run-of-the-river projects.
The company plans to sell its power to state-owned and private distribution companies, and
industrial consumers. It intends to maintain an appropriate mix of off-take arrangements,
including long-term power purchase agreements (PPAs), to provide a level of committed
revenues and short-term PPAs to realize higher tariff rates.
 Investment Negatives

 No operating history, so it is difficult to estimate its future performance.

The Company currently has no power projects in operation or other revenue generating
operations, and it has no significant operating history from which its business, future prospects
and viability can be evaluated. The development of power projects involves various risks,
including among others, execution risk, regulatory risk, construction risk, financing risk and
the risk that these projects may prove to be unprofitable. Any inability of the Company to
effectively develop and operate its power projects could adversely affect its business prospects,
financial condition and results of operation.
 Inability to commence operations as expected is a key risk

The first power project of IndiaBulls Power – Amravati Phase 1 is scheduled to

commence in September 2012. This is still nearly three years away. Power projects
have long gestation periods (time take to generate positive cash flow). It will take the
company a long time before it generates free cash flows.

 High Capital Outlay funded primarily by debt – thus interest rate risk
Building a Greenfield power project requires huge capital outlay. The company
estimates that it would require Rs.31, 052.4 crores for the projects under development.
Delay in procuring financing or licensing will impact the project closure and ultimately
profitability. Approximately 25% of the project is estimated to be financed from equity
and the rest from debt. So, the company will have a high gearing ratio. This makes the
company susceptible to losses in profitability in a tight fiscal policy environment on
account of higher debt servicing

Conclusion: IndiaBulls Power Limited the third mega power issue in the current season was
expected to be different from the other two IPO’s of Adani Power and NHPC. The difference
was there but on the unexpected side. It turned out to be a DISASTER. This failure of this
issue to be anywhere near the issue price forget returns points out to the gross over valuation
by merchant bankers and the greed of the promoters in pricing issues.
The stock opened at Rs 44.95 on the BSE and Rs 45.05 on the NSE respectively. The high on
the BSE was Rs 45.50 and the open of Rs 45.05 on the NSE.
Exchang Open High Low Close Net % gain Volume Wt Avg
e Change
BSE 44.95 45.50 35.00 38.30 -6.70 -14.89 4450366 37.97
7
NSE 45.05 45.05 35.35 38.35 -6.65 -14.78 2937015 37.82
4
Total 7387382
1

The company had issued 33.90 cr shares at Rs 45 and the issue was oversubscribed almost 40
times by QIB’s. Having received an allotment of just 2.5% of their appetite one wonders where
they have disappeared and why they are not buying from the market when the share is
available 14% cheaper. It may also be mentioned that there is a green shoe option of 15% of
the issue size which can be used for price stabilization.
In the interest of investors and the future of IPO’s I believe it is time promoters and merchant
bankers did their bit to protect the long term interest of investors and the capital markets.
7.5 Conclusion

7.5.1 IPOs: What's Beyond the Noise?

The Borrowing Trap

Although IPOs have the potential of giving windfall gains, the opposite could also be true. And
in such cases, borrowing to buy IPOs could aggravate your losses. Here’s an example to show
that. We assume you apply for Rs 1 lakh (the maximum limit for retail investors) in an IPO
issue and borrow Rs 90,000. In this case, even a 5 per cent fall in the share prices on the listing
day will erode your investment by 57.74 per cent
Step I Applying For the IPO
• Application Money Rs 1,00,000
• Own Money Rs 10,000
• Borrowed Cash Rs 90,000
Step II Interest Of 15 Per cent Per Annum on Borrowed Money
• Interest Charged (21/365*15) or 0.86 % for 21 days (from the time you borrow the
money to apply for the IPO till the IPO is listed when you sell your portfolio to return
broker’s or bank’s money)
• Interest Amount Rs 774 (Rs 90,000*0.86 %)
Step III IPO is listed At a Discount
• Issue Price Rs 100 per share
• Shares Allotted 1,000
• Listing Price Rs 95 (fall of 5%)
• Cash In Hand After Selling The Portfolio At Listing Rs 95,000
Step IV Negative Returns
• Money Returned to Broker/Bank Rs 90,774 (borrowed cash + int. amount.)
• Amount Left Rs 4,226
• Your Loss Rs 5,774 (fall by 57.74 %)
Measured Steps
The first step in IPO investing is to decide whether you want to invest in the company or just
the offering. Investing merely in the offering is similar to trading. But, if you want to invest in
the company, you need to take a long-term view
Do's
• Understand the business. Different companies have different risk-return tradeoff. For
example, a power company’s IPO has potential for higher returns, but it also entails
higher risk compared to, say, a Pharma firm.
• Specific risks. Other than common risks involved in all businesses, consider specific
risks attached with IPO investing. An example is lack of complete information on the
company bringing its IPO.
• Evaluate the management. If there is lack of information on the company, doing this
would help. For example, a management having a successful track record of
implementing projects is positive for an IPO.
• Why is the company raising money? Try to find out whether the company really
needs money or is it only trying to capitalize on a bullish market sentiment. The latter is
true when companies already flush with cash or with little investment opportunities in
future raise money from the market.
• Is the price reasonable? One way to find this out is by comparing it with other
companies in the same sector. It may not be wise to pay a higher price even for a good
company. High initial cost reduces the return.
Don’ts
• Never follow the crowd. Initial oversubscription could be because of herd mentality.
• Don’t go by the investment banker. An investment banker fixes prices based on
demand-supply mechanics rather than the actual value of the company.
• Oversubscription is not an indicator of listing price. Many investors could come at
the same time to sell in the market, which triggers a fall.
• Avoid loans to apply for IPOs. Margin funding of IPOs increases your gain in case
listing is good, but the losses are also amplified in case the listing price fails (see The
Borrowing Trap).
The initial public offer (IPO) of Adani Power in July 2009 raised Rs 3,016 crores for the
company and was oversubscribed 21.64 times. Two other IPOs in the same month raised
another Rs 162 crores. The next month was even better. NHPC’s IPO rose over Rs 6,000 crores
and was fully subscribed within an hour of opening. The Adani IPO was the first one that rose
more than Rs 1,000 crores after the Rs 1,614-crores IPO by Rural Electrification Corporation
that closely followed the Rs 10,000-crores Reliance Power issue back in January 2008.
Investors seemed to be regaining some of the confidence they had lost more than a year ago.
Big brand IPOs, such as those of Wockhardt Hospital and Emaar MGF withdrew after opening,
and 33 others shelved their plans after getting regulatory approval when the market tanked in
2008. Not a single IPO hit the market during six of the 17 months between the Reliance Power
and the Adani Power issues. Four months saw a single smallish issue each. The average
amount of money raised in the remaining months through 26 IPOs, eight of them in June 2008
alone, was Rs 167.54 crores. Not exactly, what you would call a thriving IPO market.
Some market participants would have us believe that the Adani issue is the inflexion point, that
the revival is well and truly on, and that things will continue to improve here on in the IPO
market, and, hence, one should invest in them. The proposition is a tempting one. There are a
handful of IPOs lined up. But should you go for it? Are these upcoming IPOs the passport to
riches?
Why Now?
The IPO drought of over a year was primarily due to bad market conditions. When markets are
falling, or are volatile, the investors’ appetite for new stocks is low. Also, when markets are not
in good shape, pricing suffers. Promoters have to sell equity at lower prices. Now, as markets
have made significant gains from the lows, promoters are looking to tap the opportunity.
However, the continued volatility in the market is deterring them from entering in larger
numbers.
Popular Myth
It is widely held that allotment in an IPO guarantees a positive return. However, that’s a
misconception. In fact, investors are still carrying the baggage of the pre-liberalization era,
when the Controller of Capital Issues used to decide how much capital a company can raise
and at what price shares should be issued. Typically, this price used to be much lower than
what the company could otherwise have got. So, the opportunity to make money at listing was
much higher. But the dynamics have changed completely. Now, it’s for the company to decide
at what price it wants to sell its shares, and investors should always keep in mind that
promoters will try to make the most of the issue. So, an issue can be slightly mispriced, but it
certainly can’t be cheap.
Some Facts
In order to understand how IPO investments work, we considered all the IPOs that got listed
since 2005 and the returns they gave on the day of listing—the difference between the issue
price and listing price. We found that, in 2005, of the total IPOs that hit the market, only 11.54
per cent gave negative listing returns, while the rest managed to remain in green. So, the
chances of success were fairly good at around 90 per cent. But, the trend did not last very long.
In 2006, 30 per cent of the total issues posted negative listing returns. The percentage rose
through 2007 and, by 2008, about half of the IPOs gave negative returns on listing.
What's New?
Although the jump in value of Sensex indicates that the secondary market is on its way to
recovery, the IPO markets seem to be lying low--the number and volume of IPOs that hit the
market in the last few months has not picked up

Period No. of issues Sensex

Mar-06 30 11,279.96
Jun-06 10 10,609.25
 Sep-06 18 12,454.42
Dec-06 15 13,786.91
Mar-07 33 13,072.10
Jun-07 21 14,650.51
Sep-07 27 17,291.10
Dec-07 19 20,286.99
Mar-08 17 15,644.44
Jun-08 13 13,461.60
Sep-08 6 12,860.43
Dec-08 1 9,647.31
Mar-09 1 9,708.50
Jun-09 1 14,493.84
Aug-09 6 15,800.00

Contrary to popular belief, it is riskier to buy in an IPO than from the secondary market. There
is normally a lag of 21 days between issue closing and listing, and during this time, market
sentiments can change dramatically. Further, an analysis in Value Investing and Behavioral
Finance by investment expert Parag Parikh shows that if the allotment is held for a month, the
percentage of IPOs that give positive returns falls. In other words, your chances of gain from
IPOs further reduce if you hold it for a month. If the holding period is increased to a few years
in place of a month, studies show, a larger number of IPOs give positive returns, but most of
them underperform the market index. This clearly diminishes the incentive to take risk by
investing in an IPO.
The Current Situation
Market participants have different opinions on the IPO market, though the evidence that the
conclusions are based on is the same. One section is looking at the investors’ response towards
the IPOs of Adani Power and NHPC, which got oversubscribed around 21 and 24 times,
respectively. Says Srinivasan Subramanian, head (investment banking), Enam Securities, “The
two issues are indicating that there is revival in IPO market.”
However, a section of experts don’t consider oversubscription as an indication of market
revival. Says Prithvi Haldea, founder and managing director, Prime Database, a company that
tracks the primary market, “There is a revival in the primary market, but there is no revival in
the IPO market as such.” Haldea believes that a one-off case is not substantial-enough
evidence to conclusively say that it’s the beginning of an uptrend. To say that the frequency of
IPOs need to increase
IPOs on the Avail
A comparison with the past vindicates Haldea’s stand. At the start of the previous IPO boom in
2006, on an average, 18 IPOs came in one quarter. Now, if you put this figure against the
recent numbers, you will conclude that a healthy pick up in the IPO market is still some
distance away.
Low retail confidence. Another reason for not considering the current IPO market as the start
of an uptrend is the relatively lower enthusiasm among retail participants. In the recent IPOs,
the institutional and retail investors subscribed over 30 times and 2-3 times their allocated
portion, respectively. Says Vinod Wadhwani, director, Ambit Corporate Finance, “The gap
indicates that retail investors are still cautious.”
Promoters still skeptical. An IPO is an once-in-a-lifetime event for a company, and promoters
want to be absolutely sure about the market conditions before they enter. Although the market
has risen almost 70 per cent from last year’s lows, in recent months, the current volatility and
skepticism on the direction of the market in the near term is not giving the promoter enough
confidence to take the plunge. For example, in 2008, when markets were volatile, more than 30
companies put off their plans of entering the market even after getting Securities and Exchange
Board of India’s (Sebi) approval. The situation hasn’t changed much. Says Haldea: “Though
nearly 700 companies want to float IPOs, just nine filed their offer documents with Sebi
between April and mid-August this year. So where is the rush?”
What Lies Ahead
The institutional bidders and high net worth individuals (HNIs) were dominant factors behind
the excitement around the recent IPOs—and they could well be the reason for the fizz to die
down. The oversubscription numbers for institutional bidders does not reflect the exact amount
of money chasing the IPO. Institutional bidders have to pay only an upfront margin of 10 per
cent of the total application amount. Therefore, the actual amount put in the application is just
one-tenth of the total subscription amount. Any move by Sebi to increase the upfront margin
could bring down the over-subscription in the institutional segment.
No Guarantees
IPOs do not guarantee positive returns on listing. Although many IPOs give positive returns on
listing, a lot more also give negative returns. Here, listing return is the percentage change from
the issue price to the closing price on the day of listing
Year Listing Returns (%)
Negative 0-25 25-50- > 50
% Of IPOs

2005 11.54 25.00 29.00 34.60

2006 30.55 29.00 19.44 21.00
2007 35.00 20.45 16.00 28.41
2008 48.65 27.00 13.51 10.81
2009* 20.00 60.00 0.00 20.00

The story behind HNI subscriptions goes like this. A large portion of money from HNIs that
flows into an IPO application comes through financing—a loan is taken during the application
process and is returned on the day the IPO is listed. The only way to cover the cost of this loan
is the listing gain—the difference between the issue price and the listing price. So, the listing
gains should be high enough to cover the interest cost as well as leave some profits in hand.
Also, HNIs face a unique situation that adds to the pressure to earn even higher listing gains
per share. The portion of shares allotted to them is generally oversubscribed. So, each HNI
applicant is allotted fewer shares that could earn gains, if any, at the time of listing.
In case of Adani Power, the listing gain per share was not high enough to cover the interest
cost. The listing of NHPC, from which investors had high hopes, also failed to cheer the
leverage investors. Cautions Jagannadham Thunuguntla, director (merchant banking), SMC
Global Securities, “If listing gains from another 2-3 IPOs is not high, it may dampen investors’
sentiments.”
What Should You Do?
There is a difference between investing in an IPO and investing in a company. Investing in an
IPO would mean that you are there in the market for the listing gains, while investing in a
company would mean that you would like to hold the shares allotted in the medium- to long-
term. If you are an IPO investor, you should sell on the listing day at whatever price. If you
don’t, then getting out could become even more difficult, depending on the price, as your
intention was never to hold the stock in the first place. If you are a long-term investor, then the
basics for investment remain the same. However, you need to be a little more careful with the
track record and the price at which shares are being offered.
Cut the noise. A company coming to the market to raise money will typically be preceded by
road shows, brand building and a lot of buzz in the press. At times, a lot of noise and excess
availability of information influences the decision of investors. For example, in the case of
Reliance Power last year, there was so much noise about grey market premium that investors
started believing that the stock has a lot of upside. No one even asked once whether the shares
were worth the price they were being sold at. The stock is still trading at a discount to the issue
price. Also, a major problem for the retail investor is to read and understand the offer
document, which runs into hundreds of pages. In such a case, if you wish to apply for an IPO,
you should go by the advice of an expert, who could be your broker or investment advisor.
Reading the grades. There is a high chance that, in the absence of time and expertise, the
retail investor will follow the grade given by rating agencies. We would strongly recommend
that you should not read too much into the IPO grades. The biggest flaw of grading is that it
does not take pricing into account. Other things remaining equal, a stock at 10 times earnings
can be a good investment, while the same company at 40 times may not be a good investment
at all. Buying the right stock at the right prices is the key to investing. Even evidence from the
recent past does not support the argument that a higher grade would translate into higher gains.
Finally, as far as the individual investor is concerned, there is no particular reason for euphoria.
To begin with, the hype around the market is giving a sense that much more is happening than
the real action on the ground can justify. There is no IPO flood, yet. Even if there were,
evidence would suggest steering clear of it unless good, old-fashioned analysis can justify the
price.

7.5.2 Ipo overpricing

The bogey of IPO Overpricing

All IPOs offered profitable exit windows at some point. If some are now below their offer
prices, it’s not because they were overpriced, but because the market has fallen sizeable

Rather than fret over new issue pricing, the focus should be on improving disclosures to help
investors make informed decisions

Prithvi Haldea
The media has, over the past several months, been flooding us with report on, and analysis of,
the deluge of initial public offers (IPOs) and the losses to investors arising from the
overpricing of new issues. In fact, the reportage has become so exaggerated that it has lad to
the proposal of rating IPOs – an untried and questionable idea. The recent meltdown has seen
such “loss” analyses in sharper focus.

What the media seems to forget is that IPOs do not operate independent of the secondary
market -- once made, they list on it and are influenced by it to a large extent. The market has
now fallen by over 25 per cent, and even the prices of the bluest among blue chips have taken a
beating. For instance, the Reliance Industries share crashed 20 per cent to Rs 953 on 31 May
from Rs 1,195 on 10 May 2006. ONGC, quoting at Rs 1,514 before the crash, fell to Rs 1112 –
a fall of 27 per cent fall in less than a month! Even most equity-oriented mutual funds, on
which many small investors depend, have seen erosions in Their NAVS.

If that’s the case, why do we expect IPOs to quote above their offer prices at all times and
against all odds?

The true Picture

In reality, however, the IPO scenario is not bad at all. On the contrary, it is quite encouraging.
Of the 124 IPOs floated between April 2003 and April 2006 – the period of the bull run -- as
many as 85 were still quoting above their offer prices as on 31 May. And the collective loss on
the remaining 39 issues, at Rs 1,324 crores, was a fraction of the Rs 25,511 crores gain on the
85 winners. (Since then, the market has crashed further, and all stocks, including IPOs, have
fallen).

What’s more, all 124 IPOs gave investors an opportunity --- some for a few days, others for
several months --- to exit at a profit. Let’s take the case of Jet Airways. Its issue, listed on 14
March 2005, was priced at Rs 1,100 and was heavily oversubscribed though most analysts felt
the pricing was aggressive. The share touched Rs 1,383 on 26 April and continued to quote
above its offer price for several months thereafter. It was only on 21 September -- more than
six months after listing -- that the quoted price dipped below the offer price for the first time,
only to surpass it again a few days later. After the crash, the share price falls to Rs 738 (on 31
May). If investors were bullish on the market or the company, or were plain greedy and did not
use the exit opportunity, should overpricing be blamed?

The lessons
Companies usually float issues in a buoyant secondary market. In the first phase of an IPO
cycle, most issues are under-priced, as companies are generally testing the waters. When the
Bull Run continues, the post-listing prices of issues already made also rise, keeping pace with
market trends and with the share prices of peer companies. The resulting bumper returns lead
to heavy over-subscriptions in newer offers, which in turn lead to more buying of such scrip on
listing, thereby pushing up their price. This takes the IPO cycle to the second phase in which
issuers start pricing reasonably. If the Bull Run persists and returns on earlier IPOs become
larger still, the third phase of mild overpricing comes in. Just before the crash, we had, at best,
reached the initial stages of this third phase.

Issue pricing is complex as there is no single perfect method of valuation. Although some
companies do price their offers based on historical earnings, most try and sell their future
(forward) earnings. Issuers do look for benchmarks, like the share prices of its peers, but it is
difficult to pin IPO pricing down to a single factor, as each company is unique. That explains
why the issue price PEs (based on historical earnings) of the 2004-05 IPOs ranged from 1 to
382! Until recently, when the whole market was working on forward multiples, IPOs got
priced similarly.

Any analysis of IPO returns should be done only at the time of listing and for a few months
thereafter provided the secondary market has not crashed in the interim. After that, the stock
becomes a regular secondary market instrument, influenced by the state of the market,
macroeconomic factor and company specific factor.

Let the market decide

Aggressive pricing is no longer possible in the new market structure. Prices are now
determined through an elaborate pre-issue marketing exercise. More than half the issue has to
be bought by institutional buyers, who are more discerning and will not take just any price.
Moreover, the quality of issuers has improved due to tighter entry norms, better vetting and
new market dynamics. In this IPO boom, most offers were from established companies. Very
few were for Greenfield projects from new promoters. Companies too are cautious in pricing –
they have to ensure the issue sells and merchant bankers do not want issues to devolve. The
bottom-line: IPOs have to be bought they can’t be sold.

What needs to be ensured is that there are no malpractices. So, the focus has to continue on
better disclosures to help investors make more informed decisions, checking companies from
committing irregularities and monitoring the end-use of issue proceeds. Grading of IPOs is not
the solution.
The good news for the investors is that given the size of the secondary market crash, we might
go back to phase one of the IPO cycle-under pricing. Provided, of course, some stability
returns to the market.

8. Introduction to Primary market and Secondary market:

Primary and Secondary markets

In the primary market securities are issued to the public and the proceeds go to the
issuing company. Secondary market is term used for stock exchanges, where stocks are bought
and sold after they are issued to the public.

PRIMARY MARKET

The first time that a company’s shares are issued to the public, it is by a process
called the initial public offering (IPO). In an IPO the company offloads a certain percentage of
its total shares to the public at a certain price.

Most IPO’S these days do not have a fixed offer price. Instead they follow a
method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a
range with the highest and the lowest value (refer to the newspaper clipping on the page). The
public can bid for the shares at any price in the band specified. Once the bids come in, the
company evaluates all the bids and decides on an offer price in that range. After the offer price
is fixed, the company allots its shares to the people who had applied for its shares or returns
them their money.
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.
8.1 Risk factor in Market

8.1.1 Risk Factor in Primary Market

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.

8.1.2 Risk Factor in Secondary Market

 Speculation vs. Investment: In investment the investor has long and medium term
objectives, taken the delivery of security and book profit as and when the returns are
higher than his target expectations. But generally investor want short term returns and
 they indulge into speculation because of which investor had to bear losses.80%
speculation is done in Indian stock exchange.

 Market risk: This market is depending on industrial growth, inflation, currency

fluctuation and RBI policy which are not at all stable. As soon as any rumors in the
market come market falls down .It is unexpected market so this is main risk lies in this
market.

 Asymmetric information: Generally investors do not have complete information and

also equal information. They do trading depending on their friends and relatives
advice .They are with lack of information and even they don’t do research for the
company.

 Unpredictable market: Our Indian market directly or indirectly depends on the

international market, FIIs and FDI .Something happens in the global market affects our
Indian market which is quiet unpredictable. Example subprime crisis in year 2008.

 Loopholes in government policies: Generally our stock exchange has been regulated
by SEBI but than also we can see loopholes in the market. Indirectly we had problem in
corporate governance. .Example Satyam Auditor of the company had shown worn
figures in the balance sheet

RISK ASSESSMENT: Now if investor really wants to o make money out of secondary
market than risk assessment is foremost step needs to be taken.

Some of the basics steps would be same as mentioned above in primary market. Apart from
this

Following steps should be taken.

 Before buying any for long term or short term, complete technical analysis and
fundamental analysis of company should be done.
 Investor should update herself or himself with lot of information. Taking advices from
analyst or broker who had experience of stock market.

 If you are going for short term than stop loss policy should be adopted.

 Enough surplus funds should be having with the investor so that they can cover their
losses or can hold securities for long time when market is bearish.

 Credit or loan should not be taken for trading.

 Scrips are underpriced than buy it.

 Scrips are overpriced than sell it.

 Scrips are getting sick, sell immediately.

 Scrip had fluctuation than hold it.

8.2 Returns from the market

Return depends on the following:

 Longer the maturity, larger the risk hence higher the return.

 More the creditworthiness of the borrowers or agency issuing the securities lesser the
risk.

 Risk of loss of money is less in the case of debt investment than equity market.

 The tax provision would influence the returns.

 Returns would be definitely positive if investment is done with complete analysis.

In case of IPOs

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.

8.3 Observation for secondary market and primary market

8.3.1 Secondary market more rewarding than IPOs

Four out of every five IPOs floated over the past two years have failed to keep pace with the
broad market. The few that have delivered owe it to reasonable pricing that left money on the
table for investors.
With IPOs staging a comeback, retail investors may be pondering a key question: Should I
jostle for allotments in the fancied IPOs or stick to investing in the secondary market? Well, the
latter is the best course, if the experience of IPO investors over the past two years is anything
to go by.
Four out of five IPO stocks floated in 2007 and 2008 have failed to keep pace with the broad
market from their offer dates. Even after the almost 90 per cent rally in the broad market; five
out of every six IPOs have registered losses for their investors.
Not keeping up
 The two years between January 2007 and December 2008 saw about 120 IPOs tapping
investors for funds. But economic conditions sent the stock market on a downhill
journey which halted only recently. With the market now upward-bound, have the IPOs
improved their performance? We compared the performance of each to the market
index (BSE-500) from the respective offer date to August 10.
 More often than not, IPO stocks trailed the index by a wide margin. In fact, 95 of the
120 IPOs got investors lower returns than they would have garnered from an
investment in the broader market. Based on the returns between the closing day of the
IPO and current prices, only 25 stocks notched up better returns than the index.
 For example, realty player IVR Prime is currently down 88 per cent from when it hit
the market in mid-2007, while the market returned 10 per cent in that time. Similarly,
Jyothy Labs lost 83 per cent from its issue date in late 2007; in comparison, the market
lost 27 per cent.
 The figures above show that investing in initial public offers would not have delivered
on a par with the secondary market; thus, between investments in the primary or
secondary market, the latter would have been a better option.
On a listing high
 The second lesson that the analysis offers is this: If the IPO delivers hefty returns on
listing, do cash in. Despite the market rally repairing valuations, IPOs of 2007 and 2008
have a long way to go, with 104 of the 120 debutants trading below their listing price,
today.
 The last two years (straddling contrasting market conditions) have seen IPO investors
rake in healthy gains on listing. Regardless of the issue quality or its pricing, 70 of the
120 stocks had gained on close of listing day, with a handful even doubling on their
market debut.
 But holding on to stocks in the hope of better gains would have been a futile effort, as
most stocks slid far below their listing day prices in the subsequent months. One such
example is Zylog Systems, which gained 23 per cent on listing day but since crashed 41
per cent.
 A few stocks (16 of 120) do trade higher than their listing price; but these are among
the top 20 that recorded positive returns over their issue prices. For instance, Orbit
Corporation is up 44 per cent from price on close of listing day, and up further at 70 per
cent from issue price.
 On a related note, some stocks still held above issue prices during the market lows
experienced last October, such as Ackruti, Koutons Retail, Bang Overseas and Maytas
Infra. These have, however, fallen steeply since, and are now trading at discounts of
more than 15 per cent to their issue price.
 However, not all IPOs turned out to be duds. If you were fortunate or prescient enough
to pick a handful (23 in number) of outperformers, they generously rewarded investors,
both in absolute terms as well as relative to the market. In fact, seven of the 23
delivered returns of over 100 per cent.
Trailing IPO prices

What distinguished these offers from the rest? One factor could be low pricing, which left
plenty of money on the table for investors, despite the ups and downs of the market cycle.
Relative to listed peers, those IPOs priced at conservative valuations appear to have done much
better than others.
For instance, top IPO performer ICRA floated its offer in March 2007, at a valuation of about
18 times diluted per share earnings, which was at a substantial discount to the 40-plus price
multiple commanded by closest listed competitor Crisil. Similarly, the IPO of financial services
firm Religare Enterprises was priced at a valuation of 23 time’s post-issue equity, while
competitors were trading at a multiple of 30-40 times their earnings.
Being in a unique business also helped. Three of the top performing IPO

8.3.2 Investor vs. trading

Many people confuse trading with investing. They are not the same.
The biggest difference between them is the length of time you hold onto the assets. An investor
is more interested in the long-term appreciation of his assets, counting on that historical rise
in market equity.
He’s not generally concerned about short-term fluctuations in prices, because he’ll ride them
out over the long haul.
An investor relies mostly on Fundamental Analysis, which is the analytical method of
predicting long-term prospects of a particular asset. Most investors adopt a “buy and hold”
approach to assets, which simply means they buy shares of some company and hold onto them
for a long time. This approach can be dangerous, even devastating, in an extremely volatile
market such as today’s BSE or NSE Indexes Show.
Let’s consider someone who bought shares of XYZ Company at their peak value of around
Rs.650 per share at the beginning of the year 2000. Two years later, those shares are worth
Rs.100 each. If that investor had spent Rs. 65,000/-, his net loss would be Rs.55000/- ! I don’t
know about you, but losing Fifty Five Thousand Rupees would be a relatively big loss for me.
Many investors suffer such losses regularly, hoping that in five or ten or fifteen years the
market will rebound, and they’ll recoup their losses and achieve an overall gain.
What most investors need to remember is this: investing is not about weathering storms with
your “beloved” company – it’s about making money.
Traders, on the other hand, are attempting to profit on just those short-term price
fluctuations. The amount of time an active trader holds onto an asset is very short: in many
cases minutes, or sometimes seconds. If you can catch just two index points on an average day,
you can make a comfortable living as a Trader.
To help make their decisions, Traders rely on Technical Analysis, a form of marketing analysis
that attempts to predict short term price fluctuations.