LOVELY INSTITUTE OF MANAGEMENT (LIM) ACKNOWLEDGEMENT In order to make my project 1 acknowledge a special thanks to all those people without whose supports it would not be possible for me to complete for me to complete my report. First of all T really thankful to my Lovely Professional University because of them I could achieve the target. I express my sincere thanks to my project guide Mrs. Deepika Dhall who had guide to me throughout my project: Also I would like to express my inner feeling for all the people for co-operating and helping me throughout the project. Last but not the least Lam thankfid to my parents and friends who have provided me with their constant support throughout this project. Arun Guleria ARUN GULERIA [email protected]INDEX mm ACKNOWLEDGEMENT. = EXECUTIVE SUMMARY LITERATURE REVIEW: ‘Kenji and Smith (2009) Sherman and Jagannathan (2009) Kaneko and Pettway (2008) Biasis and Faugeron-Crouzet (2007) Wilhelm (2007) ‘Summary of previous research IPO ~ AN INTRODUCTION SIGNIFICANCE OF IPO KINDS OF PUBLIC OFFERINGS ANALYZING AN IPO INVESTMENT IPO INVESTMENT STRATEGIES. UNDERPRICING AND OVERPRICING OF IP PRINCIPAL STEPS IN AN IPO. BOOK-BUILDING PROCESS PLAYERS IN IPO HDIL’s IPO VALUATION FINDING SUGGESTIONS IPO GLOSSARY BIBLIOGRAPHY = ssa a i] 52 PRICING OF AN IPO ml Bea fe) Be) El co a Ee ARUN GULERIA [email protected]EXECUTIVE SUMMARY As we all know IPO ~ INITIAL PUBLIC OFFERING is the hottest topic in the current industry, mainly because of India being a developing country and lot of growth in various sectors whieh leads a country to ultimate suecess. And when we talk about country’s growth which is dependent on the kind of work and how much importance to which sector is given. And when we say or talk about industries growth which leads the economy of country has to be balanced and given proper finance so as to reach the levels to fulfill the needs of the society. And industries which have massive outflow of work and a big portfolio then its very difficult for any yy to work with limited and this is where IPO plays an important role. This report talks about how IPO helps in raising fund for the companies going public, what are its pros and cons, and also it gives us detailed idea why companies go public. How and what are the steps taken by the companies before going for any IPO and also the role of (SEBI) Securities and Exchange Board of India the BSE and NSE , what are primary and secondary markets and also the important terms related to IPO. It gives us idea of how IPO is driven in the market and what are various factors taken into consideration before going for an TPO. And it also tells us how we can more or less judge a good IPO. Then we all know that scams have always been a part of any sector you go in for which are covered in it and also few recommendations are given for the same. It also gives us some idea about what are the expenses that a company undertakes during an 1PO. IPO has been one of the most important generators of funds for the small companies making them big and given a new vision in past and it is still continuing its work and also for many coming years. ARUN GULERIA [email protected]LITERATURE REVIEW This section describes five key studies that have researched different forms of going public. This chapter also provides a brief account of a study which analyzed spreads, in addition to outlining a study which analyzed the impact of Internet technology on investment banking. 1. Kenji and Smith (2009) Kenji and Smith (2004) study the benefits and drawbacks of auctions versus book building as a method of IPO issuance in Japan. Their reason for choosing Japan as a test environment was due to the fact that book building has been a legal way of going public in Japan since 1997 Previously, auctioning was the only way that a company could go public in Japan. In their research, Kenji and Smith use the total issue cost as percentage of the value of the issue to measure the benefits and drawbacks of the different methods of going public The data that is used in this paper is a sample of 484 IPOs by companies that are listed on the JASDAQ or JASDAQ-OTC markets during a five-year period from 1995 to 1999. This included 321 auction IPOs and 163 book built IPOs. However, duc to varying market conditions during the years spanning from 1995 to 1999, the research has been divided into two different sections. The first uses all the data from the whole sample period, whereas the second section uses data only from the years 1996 through 1998, when the market was characterized by very stable market conditions. This provides a fairly similar setting for both auctions (January 1996 - September 1997) and book built (October 1997 - December 1998) IPO data sets. Firm data that is used include: sales revenue, equity to book value, shares outstanding, firm age, as well as number of employees. Issue data includes offering date, number of shares issued, amount raised, offer price, first after market price, and other offering details. Total issue cost in their research is defined as the first aftermarket price instead of actual issue price. During the whole period, the total issue cost against the aftermarket price in book built IPOs is an average of 28,04%, whereas the auction priced cost is only 8,17%. However, the second sample (1996-1998) notes values of 15.3% and 7% respectively. The data demonstrates that the book building method provides more flexibility, making small issues appear to be more feasible, and decreasing the cost of going public for larger companies. The empirical analysis demonstrates that under the auetions-only system, issuers are older and larger than book built issuers. The analysis also reveals that underpricing is a substitute cost for lower fees, thus when all else being equal, increased underpricing reduces the fee as a percentage of the aftermarket price. The method used for analysis in Kenji’s and Smith’s study was regression analysis, with reliance on previously identified variables. When analyzing total issue cost and issue size, it was found that issuer age, sales revenue, and equity to book value are not significantly related to the total cost of auctioned IPOs. In the book ues, the percentage cost is less for large issuers with established track records study, the difference in equally-weighted average issue cost compares What the issue cost would have been in both book building and auction scenarios for any given company individually. Kenji and Smith found that auctioning reduces mean total issue cost by an average ARUN GULERIA [email protected]of 6% of the first aftermarket price. Additionally, they predicted that pricing through the auction method is projected to have resulted in lower total costs at least in 82,5% of the subsample. In conclusion, Kenji and Smith found that under the auction method, high quality issuers had a limited ability to distinguish themselves from low quality issuers. Furthermore, the research found that small and risky firms, as a group, incur higher costs with book building, whereas larger and better-established issuers realize savings with this particular method. Overall in this sample of Japanese IPOs, the average total issue cost, measured as a percentage of the initial aftermarket price, was significantly higher in the book building regime than in the auction regime. However, it was found that aggregate underpricing would have been lower under the book building, on the basis of either the full sample, or the subsample 2, Sherman and Jagannathan (2009) In their study Sherman and Jagannathan identify the underlying reason for the relative unpopularity of auetions as a means of going public. This study appears to be the most comprehensive endeavor in terms of attempting to holistically identify the reasons auctions have not been as attractive as other means of going public. Their research studies international trends in auctions use. Here, the evidence overwhelmingly indicates that auctions have been tried in over 20 countries but are rarely used today. “In other words, out of more than 45 countries, we have not been able to find even one country in which auctions are currently the dominant method.” (Sherman and Jagannathan 2005, 14) Sherman and Jagannathan delve into commonly used stereotypical explanations for why auctions are not used. The two most common notions are (1) auctions are not used because they are still experimental and unproven, and (2) issuers are pressured into book building due to higher fees. Nonetheless, through international research, it was proven that even in markets Where auctions have been used for a long time, there was a decline in their use as soon as book building or some other method became available. For the second issue, the authors found that competition in the market would drive down prices of book building issues. Additionally, other research has shown that fixed price offers lead to even lower spreads. compared to auctions. In their study Sherman and Jagannathan find that on a global scale initial returns are not the most important aspect of the issue for the issuer. This was evident from data collected on IPOs in Singapore, where both auctions and fixed price offers were available. In this ease, statistics revealed that the fixed price method was chosen as the dominant means of going public, although auctions consistently provided lower underpricing. Finally, the study also deemed whether any perceivable effect can be distinguished from adding modern Internet technologies to enable bidding for the IPO auction. The results illustrate that the median return for Open IPOs is 2%, which is excellent. However, the research points out that there are significant outliers in the group. In conclusion, Sherman and Jagannathan find that auctions have been tried and tested in many markets, but have lost popularity due to poor control on the part of the issuer in terms of the price and effort that are applied. They also identify that auctions provide lower underpricing. This would imply that issuers are not only looking to optimize underpricing, but are moreover interested in other attributes of the issue. “Without some ARUN GULERIA [email protected]