CHAPTER I

INTRODUCTION

1

INTRODUCTION

Initial Public Offerings are very important, mainly because of India being a

developing country and lot of growth in various sectors which leads a country to

ultimate success. And when we talk about 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 company to work with, limited finance and this is where IPO plays an

important role.

This report talks about how IPO helps in raising fund for the companies going

public, what are its pros and cons, and also it gives us detailed idea why companies go

public. It gives us idea of how IPO is driven in the market and what are various factors

taken into consideration before going for an IPO. And it also tells us how we can more

or less judge a good IPO. It also gives us some idea about what are the expenses that a

company undertakes during an IPO.

IPO has been one of the most important generators of 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.

2

OBJECTIVES OF THE STUDY

To understand various dimensions and problems in IPO process and to suggest

recommendations.

To analyze the various IPOs and recommend others to invest in good initial

public offerings after thorough research.

To understand post IPO performance.

To study the upcoming IPOs and suggest investors in investing these IPOs.

3

LIMITATIONS OF THE STUDY

The study is limited to Initial Public Offerings in India.

The study was carried out for a period of 45 days and due to paucity of time an

in-depth study was not possible.

The IPO market is a dynamic one. Therefore data related to last few months was

only considered and interpreted.

Secondary information may not be authentic.

4

METHODOLGY & PROCEDURE

Data Collection

The data collected was mainly secondary in nature and the

sources were website and textbooks. Interacting with guide and

other personalities also collected some primary data.

Data Analysis

The collected data was grouped under relevant headings. The

various topics were then so arranged those give logical studies of

the topics.

Conclusions

The suggestions and conclusions were made mainly based on the

observations from the data collected.

5

SCOPE OF THE STUDY

The scope of the study is identified after and during the study is conducted. The

study covers only the IPOs in India for the last two years. The study attempts to study

the IPOs that have come up in the last two years and the IPOs that are expected to come

up in the next one year.

6

CHAPTER II

REVIEW OF LITERATURE

7

A company can raise capital through issue of shares or debentures. The various

types of issues are:

Public Issue, Rights Issue, Bonus Issue, Private Placement and Bought Out Deal

There can be two kinds of public issues, namely:

Initial Public Offer (IPO)

Further Public Offer (FPO)

Classification of Issues

8

IPO

An Initial Public Offer (IPO) is the selling of securities to the public in the

primary market. It is when an unlisted company makes either a fresh issue of securities

or an offer for sale of its existing securities or both for the first time to the public. This

paves way for listing and trading of issuer’s securities. The sale of securities can be

through book building or normal public issue.

FPO

Further Public Offers are issued by companies or corporate bodies whose shares

are already being traded in the capital market and they are issuing fresh shares either to

fund the expansion of their existing business or to invest into other business activities.

Reasons for Going Public

Raising funds to finance capital expenditure programs like expansion,

diversification, modernization, etc.

Financing of increased working capital requirements

Financing acquisitions like a manufacturing unit, brand acquisitions, tender

offers for shares of another firm, etc.

Debt Refinancing

Exit Route for Existing Investors

9

Advantages of Going Public

Facilitates future funding by means of subsequent public offerings

Enables valuation of company

Provides liquidity to existing shares

Increases the visibility and reputation of the company

Commands better pricing than placement with few investors

Enables the company to offer its shares as purchase consideration or as an

exchange for the shares of another company

Disadvantages of Going Public

Dilution of Stake makes co vulnerable to future takeovers

Involves substantial Expenses

Need to make continuous disclosures

Increased regulatory monitoring

Listing fees and Documentations

Cost of maintaining Investor relations

Takes substantial amount of management time and efforts

10

EVOLUTION AND GROWTH OF INDIAN PRIMARY MARKET

Early Liberalization Phase: 1992-1995 (Fixed Pricing)

The initiation of the process of reform in India also would not have been

possible without changes in the regulatory framework. The New Economic policy

(1991) led to a major change in the regulatory framework of the capital market in India.

The Capital Issues (Control) Act 1947 was repealed and the Office of the Controller of

Capital Issues (CCI) was abolished. The Securities and Exchange Board of India

(SEBI), established in 1988 and armed with statutory powers in 1992, came to be

established as the regulatory body with the necessary authority and powers to regulate

and reform the capital market. SEBI came to be recognized as a regulatory body for the

capital market after the abolition of the CCI. The control on pricing of capital issue has

been abolished and easy access is provided to the capital market. Initial Public Issue

caught the attention of general public only after the success of Reliance, when millions

of small investors made huge returns which were unheard of till then. Dhirubhai

Ambani was the first promoter who raised huge amounts through the public issue route

to finance large facilities.

The issue process was smoothened, procedures were simplified and free pricing

was allowed, although with certain restrictions, The Indian market had the concept of

par value of equity shares, and anything above par was considered premium. The only

companies that were allowed to come with premium issues were those, which had a

three year profit-track record for the preceding five years. New companies without this

record could float premium issues if their promoting companies had the same track

record and they had to hold 50% of the post issue capital. Any new company floated by

first generation entrepreneurs could only issue equity at par. There was no restriction

about prices in a premium issue.

11

The offer was always at a fixed price, whether premium or par. The companies

had to appoint intermediaries like merchant bankers, registrars, bankers etc. Merchant

bankers had the responsibility of fixing the prices, in consultation with the company,

carrying out with due diligence, preparing the prospectus (offer documents) etc. The

prospectus had to be submitted to SEBI for getting scrutiny.

The trend continued in the early nineties as many large projects were launched

after the economy was liberalised. Many of these companies came out with public

issues and the retail participation increased dramatically. But many of the companies

which raised money during this period just disappeared without a trace.

Late Liberalisation Period: 1996-2005 (Book Building)

The late nineties and the first few years of the current decade did not see much

activity in the primary market even though we saw a huge bull run led by technology

stocks at the turn of the decade. The bad experiences of retail investors kept them away

from the market and made it difficult for companies to launch successful issues. The

corporate sector was recovering from the damage caused by large capacity expansions

and new projects set up in the nineties.

The dormant primary issues market came alive after 2003 mostly because of the

divestment programme of the government. The issue of Maruti Udyog, through which

the government sold part of its stake in the company, rekindled retail investor interest in

the primary market. The issue was made at a very reasonable price and investors made

very good returns immediately.

The year 2004 saw the primary market activity at its historic peak as some large

private companies also came out with issues. Further divestment by the government;

including the largest ever issue by an Indian company from ONGC, attracted more

retail investors into the market. The IPO market continues to buzz in the current year as

well. Taking advantage of the strength in the secondary market, many high profle

companies are lining up to raise money from the market. The year started with the issue

12

from Jet Airways which attracted a lot of interest from investors. As a result of tougher

regulations, the quality of the issues has gone up substantially.

2006 onwards scenario:

India's IPO market emerged as the eighth largest with $7.23 billion (Rs 30,000

crore) in net proceeds through 78 public issues, global research and consultancy firm

Ernst & Young said in its Global IPO report. Across the world, the companies raised

$246 billion, up from $167 billion in 2005, through a total of 1,729 IPOs, led by

Chinese companies at the top with net proceeds of $56.6 billion. However, the biggest

number of IPOs came from the United States with 187 offerings, followed by Japan

with 185 and China with 175 IPOs. According to the study, India's increasing number

of larger deals has been driven by the growth of Indian corporations and their need for

additional capital for potential acquisitions. In 2007 Indian IPOs continue to surge in

numbers. Continued strength is expected in the real estate and energy sector. "The rapid

growth in emerging market economies has resulted in a migration of capital from the

developed economies into the emerging markets," E&Y said.

The localisation trend in India is evidenced by several billion-dollar IPOs hosted

by Indian exchanges. In 2006, India's largest IPO, Reliance Petroleum raised $1.8

billion, followed by the oil production and exploration company, Cairn Energy, which

raised $1.3 billion with both companies listing on domestic exchanges.

However, some Indian companies are also listing abroad, especially London,

Singapore and Luxembourg, primarily for higher valuations and visibility, the report

noted.

13

REGULATORY FRAMEWORK FOR IPO S

Eligibility Conditions for Companies Issuing Securities

The companies issuing securities offered through an offer document shall satisfy the

following at the time of filing the draft offer document with SEBI and also at the time of

filing the final offer document with the Registrar of Companies/ Designated Stock

Exchange:

Filing of offer document

No issuer company shall make any public issue of securities, unless a draft

Prospectus has been filed with the Board through a Merchant Banker, at least

30 days prior to the filing of the Prospectus with the Registrar of Companies

(ROC):

Provided that if the Board specifies changes or issues observations on

the draft Prospectus (without being under any obligation to do so), the issuer

company or the Lead Manager to the Issue shall carry out such changes in the

draft Prospectus or comply with the observation issued by the Board before

filing the Prospectus with ROC.

Companies barred not to issue security

No company shall make an issue of securities if the company has been

prohibited from accessing the capital market under any order or direction passed

by the Board.

Application for listing

No company shall make any public issue of securities unless it has made

an application for listing of those securities in the stock exchange

14

Issue of securities in dematerialized form

No company shall make public or rights issue or an offer for sale of

securities, unless:

a. The company enters into an agreement with a depository for

dematerialization of securities already issued or proposed to be

issued to the public or existing shareholders; and

b. The company gives an option to subscribers/ shareholders/

investors to receive the security certificates or hold securities in

dematerialized form with a depository.

IPO Grading

No unlisted company shall make an IPO of equity shares unless the

following conditions are satisfied as on the date of filing of Prospectus with

ROC:

a. The unlisted company has obtained grading for the IPO from at

least one credit rating agency

b. Disclosures of all the grades obtained, along with the rationale/

description furnished by the credit rating agency(ies) for each of

the grades obtained.

Eligibility Norms for IPO

An unlisted company may make an initial public offering (IPO) of equity shares

only if: -

The company has net tangible assets of at least Rs. 3 crores in each of the

preceding 3 full years (of 12 months each), of which not more than 50% is held

in monetary assets.

15

The company has a track record of distributable profits in terms of Section 205

of the Companies Act, 1956, for at least three (3) out of immediately preceding

five (5) years.

The company has a net worth of at least Rs. 1 crore in each of the preceding 3

full years (of 12 months each).

In case the company has changed its name within the last one year, atleast 50%

of the revenue for the preceding 1 full year is earned by the company from the

activity suggested by the new name.

The aggregate of the proposed issue and all previous issues made in the same

financial year in terms of size (i.e., offer through offer document + firm

allotment + promoters’ contribution through the offer document), does not

exceed five (5) times its pre-issue networth as per the audited balance sheet of

the last financial year.

PROCEDURE FOR IPOS

Fixed Pricing versus True Pricing (Book- Building)

The traditional method of doing IPOs is the fixed price offering. Here, the issuer

and the merchant banker agree on an “issue price”. Then the investor has a choice of

filling in an application form at this price and subscribing to the issue. Extensive

research has revealed that the fixed price offering is a poor way of doing IPOs. Fixed

price offerings, all over the world, suffer from `IPO underpricing'. In India, on average,

the fixed-price seems to be around 50% below the price at first listing; i.e. the issuer

obtains 50% lower issue proceeds as compared to what might have been the case. This

average masks a steady stream of dubious IPOs who get an issue price which is much

higher than the price at first listing. Hence fixed price offerings are weak in two

directions:

Dubious issues get overpriced and

Good issues get under priced.

16

BOOK-BUILDING

A mechanism where, during period for which the IPO is open, bids are collected

from investors at various prices which are above or equal to the floor price (the

minimum price). The final price of the share is determined after the bid closing date,

based on certain evaluation criteria.

The SEBI (Disclosure and Investor Protection) Guidelines, 2000, define the

term `book-building' in a rather complex language as "a process undertaken by which a

demand for the securities proposed to be issued by a body corporate is elicited and

built-up and the price for such securities is assessed for determination of the quantum

of such securities to be issued by means of a notice, circular, advertisement, document

or information memoranda or offer document.''

Book building process is a common practice used in most developed countries

for marketing a public offer of equity shares of a company. However, Book building

acts as scientific as well as flexible price discovery method through which a consensus

price of IPO’s may be determined by the issuer company along with the Book Running

Lead Manager (i.e. merchant banker) on the basis of feedback received from individual

investors as well as most informed investors (who are institutional and corporate

investors like, UTI, LICI, GICI, FIIs, and SFCI etc). The method helps to make a

correct evaluation of a company’s potential and the price of its shares.

17

Book-Building Process

18

ISSUER

BOOK RUNNING LEAD MANAGERS

MUTUAL FUNDSUNDERWRITERSMERCHANT BANKERS STOCK

BROKERS

I N V E S T O R S

MFs Financial Foreign Financial NRIs Corporations HNIs Retail Investors Institutions Institutions

In simple terms, book-building is a mechanism by which the issue price is

discovered on the basis of bids received from syndicate members/brokers and not by

the issuers/merchant bankers.

An Issuer Company can issue capital through book building in following two

ways:

75% Book Building process

–

Under this type of public offer, the issue of securities has to be categorized into:

Placement portion category

Net offer to the public

The option of 75% Book Building is available to all body corporate that are

otherwise eligible to make an issue of capital to the public. The securities issued

through the book building process are indicated as 'placement portion category' and

securities available to public are identified as 'net offer to public'. In this option,

underwriting is mandatory to the extent of the net offer to the public. The issue price for

the placement portion and offers to public are required to be same

100% of the net offer to the public through Book Building process - In the

100% of the net offer to the public, entire issue is made through Book Building process.

However, there can be a reservation or firm allotment to a maximum of 5% of the issue

size for the permanent employees, shareholders of the company or group companies,

persons who, on the date of filing of the draft offer document with the Board, have

business association, as depositors, bondholders and subscribers to services, with the

issuer making an initial public offering.

19

The number of bidding centres, in case of 75% book building process should

not be less than the number of mandatory collection centres specified by SEBI. In case

of 100% book building process, the bidding centres should be at all the places where

the recognised stock exchanges are situated.

Book Building Process in India

(1) The steps which are usually followed in the book building process can be

summarized below:

The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

(2) Initially, the issuer company consults with the BRLM in drawing up a draft

prospectus (i.e. offer document) which does not mention the price of the issues, but

includes other details about the size of the issue, past history of the company, and a

price band. The securities available to the public are separately identified as “net offer

to the public”.

(3) The draft prospectus is filed with SEBI which gives it a legal standing.

(4) A definite period is fixed as the bid period and BRLM conducts awareness

campaigns like advertisement, road shows etc.

(5) The BRLM appoints a syndicate member, a SEBI registered intermediary to

underwrite the issues to the extent of “net offer to the public”.

(6) The BRLM is entitled to remuneration for conducting the Book Building

process.

(7) The copy of the draft prospectus may be circulated by the BRLM to the

institutional investors as well as to the syndicate members.

(8) The syndicate members create demand and ask each investor for the number of

shares and the offer price.

20

(9) The BRLM receives the feedback about the investor’s bids through syndicate

members.

(10) The prospective investors may revise their bids at any time during the bid

period.

(11) The BRLM on receipts of the feedback from the syndicate members about the

bid price and the quantity of shares applied has to build up an order book showing the

demand for the shares of the company at various prices. The syndicate members must

also maintain a record book for orders received from institutional investors for

subscribing to the issue out of the placement portion.

(12) On receipts of the above information, the BRLM and the issuer company

determine the issue price. This is known as the market-clearing price.

(13) The BRLM then closes the book in consultation with the issuer company and

determine the issue size of (a) placement portion and (b) public offer portion.

(14) Once the final price is determined, the allocation of securities should be made

by the BRLM based on prior commitment, investor’s quality, price aggression,

earliness of bids etc. The bid of an institutional bidder, even if he has paid full amount

may be rejected without being assigned any reason as the Book Building portion of

institutional investors is left entirely at the discretion of the issuer company and the

BRLM.

(15) The Final prospectus is filed with the registrar of companies within 2 days of

determination of issue price and receipts of acknowledgement card from SEBI.

(16) Two different accounts for collection of application money, one for the private

placement portion and the other for the public subscription should be opened by the

issuer company.

21

(17) The placement portion is closed a day before the opening of the public issue

through fixed price method. The BRLM is required to have the application forms along

with the application money from the institutional buyers and the underwriters to the

private placement portion.

(18) The allotment for the private placement portion shall be made on the 2nd day

from the closure of the issue and the private placement portion is ready to be listed.

(19) The allotment and listing of issues under the public portion (i.e. fixed price

portion) must be as per the existing statutory requirements.

(20) Finally, the SEBI has the right to inspect such records and books which are

maintained by the BRLM and other intermediaries involved in the Book Building

process

Pricing

Before establishment of SEBI in 1992, the quality of disclosures in the offer

documents was very poor.

The main drawback of free pricing was the process of pricing of issues. The

issue price was determined around 60-70 days before the opening of the issue and the

issuer had no clear idea about the market perception of the price determined.

In Book Building the price is determined on the basis of demand received or at price

above or equal to the floor price.

The Allotment Process through Book-building:

Step1-The Company will 'discover' its price

Earlier, the company determined a fixed price for the stock issue. The issue was

marketed to the general public through advertisements and a media campaign.

Today, companies prefer a book building process. Book building is the process of price

discovery. That means there is no fixed price for the share. Instead, the company

issuing the shares comes up with a price band. The lowest price is referred to as the

22

floor and the highest, the cap. Bids are then invited for the shares. Each investor states

how many shares s/he wants and what s/he is willing to pay for those shares (depending

on the price band). The actual price is then discovered based on these bids.

Step2-Players of the game

Three classes of investors can bid for the shares:

Qualified Institutional Buyers: QIBs include mutual funds and Foreign

Institutional Investors. At least 50% of the shares are reserved for this category.

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

investor. At least 25% is reserved for this category.

The balance bids are offered to high networth individuals and employees of the

company.

Individuals who apply for the IPO put in their bids.

The process is transparent. One can check on the issue subscription at the BSE and

NSE Web sites.

After evaluating the bid prices, the company will accept the lowest price that will allow

it to dispose the entire block of shares. That is called the cut-off price.

The process can be illustrated with an example:

Number of shares issued by the company = 100.

Price band = Rs 30 - Rs 40.

If individuals have bid for prices as follows:

23

Bid Number of

shares

Price per share

1 20 Rs 40

2 10 Rs 38

3 20 Rs 37

4 30 Rs 36

5 20 Rs 35

6 20 Rs 33

7 20 Rs 30

The shares will be sold at the Bid 5 price of 20 shares for Rs 35.?

Because Bidders 1 to 5 are willing to pay at least Rs 35 per share.

The total bids from Bidders 1 to 5 ensure all 100 shares will be sold (20 + 10 +

20 + 30 + 20). 

The cut-off price is therefore Bid 5's price = Rs 35.

Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't get an allotment

because their bids are below the cut-off price.

The bids are first allotted to the different categories and the over-subscription (more

shares applied for than the shares available) in each category is determined.

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

If a retail investor has applied for 200 shares in the issue, and the issue is over-

subscribed five times in the retail category, he qualify to get 40 shares (200 shares/5).

Sometimes, the over-subscription is huge or the issue is priced so high that the bidder

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.

24

If a retail investor has applied for 5 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 among.

ILLUSTRATION EXPLAINING THE PROCEDURE OF ALLOTMENT

1.         Total shares on offer@ Rs. 600 per share: 10 crore shares

2.         Shares on offer for retail category: 2.5 crore shares

3.         The total issue is over subscribed 4 times whereas the retail category is over

subscribed 8.25 times

4.        Issuer decides to fix the minimum application / bid size as 9 shares (falling within

the range of Rs. 5000- 7000). Application can be made for a minimum of 9 shares

and in multiples thereof.

25

Assume three retail investors A, B & C. A has applied for 81 shares. B has applied

for 72 shares and C has applied for 45 shares. As per allotment procedure, the allotment to

retail individual investors would be on proportionate basis i.e., at 1/8.25 th of the total

number of shares applied for. The actual entitlement shall be as follows:

Sr.

No.

Name of

Investor

Total Number of

shares applied for

Total number of shares eligible to be allotted

(No. of shares applied for / 8.25)

1 A 81 81/8.25 = 9.82 shares rounded off to 10 shares

2 B 72 72/8.25 = 8.73 shares rounded off to 9 shares (i.e.

minimum application size).

3 C 45 shares 45/8.25=5.45 shares.

Application liable to be rejected. (as the

entitlement is less than the minimum application

size). However, the successful applicants out of

the total applicants shall be determined by

drawal of lots.

Reverse Book Building

Reverse book-building is a mechanism by which companies listed on a stock

exchange can delist their shares. The reasons for delisting may be several and

sometimes intentional.

The reverse book building is an efficient price discovery mechanism of de-

listing of securities, which is provided for capturing the sell orders on online basis from

the shareholders through respective BRLM. In the reverse book-building scenario, the

acquirer or promoter of a company offers to get back shares from the shareholders. It is

a mechanism where, during the period for which the reverse book building is open,

offers are collected at various prices, which are above or equal to the floor price from

26

the share holders through trading members appointed by the acquirer or promoter of a

company. The reverse book building price (i.e. final price/ exist price) is determined by

BRLM in consultation with the acquirer or promoter of the company after the offer

closing date in accordance with the SEBI (De-listing of Securities) Guidelines, 2003.

which desires to get de-listed, in accordance to book building process. The offer price

has a floor price, which is fixed for de-listing of securities below which no offer can be

accepted. The floor price is the average of 26 weeks traded price quoted on the stock

exchange where the shares of the company are most frequently traded preceding 26

weeks from the date of public announcement is made. There is no ceiling on the

maximum price.

ROLE OF VARIOUS INTERMEDIARIES IN IPO

Intermediary’s help corporations design securities that will be attractive to

investors, buy these securities from the corporations, and then resell them to savers in

the primary markets.

Merchant Bankers/ Lead Manager

Merchant bankers play an important role in issue management process. Lead

managers have to ensure correctness of the information furnished in the offer

document. They have to ensure compliance with SEBI rules and regulations as also

Guidelines for Disclosures and Investor Protection. To this effect, they are required to

submit to SEBI a due diligence certificate confirming that the disclosures made in the

draft prospectus or letter of offer are true, fair and adequate to enable the prospective

investors to make a well informed investment decision. The role of merchant bankers in

performing their due diligence functions has become even more important with the

strengthening of disclosure requirements and with SEBI giving up the vetting of

prospectuses. Their functions are:

To act as intermediaries between the company seeking to raise money and the

investors. They must possess a valid registration from SEBI enabling them to do

this job.

27

They are responsible for complying with the formalities of an issue, like

drawing up the prospectus and marketing the issue.

If it is a book building process, the lead manager is also in charge of it. In such a

case, they are also called Book Running Lead Managers.

Post issue activities, like intimation of allotments and refunds, are their

responsibility as well.

Underwriters

Underwriters are required to register with SEBI in terms of the SEBI

(Underwriters) Rules and Regulations, 1993. In addition to underwriters registered with

SEBI in terms of these regulations, all registered merchant bankers in categories I, II

and III and stockbrokers and mutual funds registered with SEBI can function as

underwriters. Part III gives further details of registration of underwriters. In 1996-97,

the SEBI (Underwriters) Regulations, 1993 were amended mainly pertaining to some

procedural matters.

Bankers to an Issue

Scheduled banks acting as bankers to an issue are required to be registered with

SEBI in terms of the SEBI (Bankers to the Issue) Rules and Regulations, 1994. These

regulations lay down eligibility criteria for bankers to an issue and require registrants to

meet periodic reporting requirements. Part III gives further details of registration of

bankers to an issue.

Portfolio managers

Portfolio managers are required to register with SEBI in terms of the SEBI

(Portfolio Managers) Rules and Regulations, 1993. The registered portfolio managers

exclusively carry on portfolio management activities. In addition all merchant bankers

28

in categories I and II can act as portfolio managers with prior permission from SEBI.

Part III gives further details of the registration of portfolio managers.

Registrars to an Issue and Share Transfer Agents

Registrars to an issue (RTI) and share transfer agents (STA) are registered with

SEBI in terms of the SEBI (Registrar to the Issue and Share Transfer Agent) Rules and

Regulations, 1993. Under these regulations, registration commenced in 1993-94 and is

granted under two categories: category I - to act as both registrar to the issue and share

transfer agent and category II - to act as either registrar to an issue or share transfer

agent. With the setting up of the depository and the expansion of the network of

depositories, the traditional work of registrars is likely to undergo a change.

IPO Grading

IPO grading (initial public offering grading) is a service aimed at facilitating

the assessment of equity issues offered to public. The grade assigned to any individual

issue represents a relative assessment of the ‘fundamentals’ of that issue in relation to

the other listed equity securities in India. IPO grading is positioned as a service that

provides ‘an independent assessment of fundamentals’ to aid comparative assessment

that would prove useful as an information and investment tool for investors. Moreover,

such a service would be particularly useful for assessing the offerings of companies

accessing the equity markets for the first time where there is no track record of their

market performance.

IPO grade assigned to any issue represents a relative assessment of the

‘fundamentals’ of that issue in relation to the universe of other listed equity securities in

India. This grading can be used by the investor as tool to make investment decision.

The IPO grading will help the investor better appreciate the meaning of the disclosures

in the issue documents to the extent that they affect the issue’s fundamentals. Thus, IPO

grading is an additional investor information and investment guidance tool.

29

Credit Rating agencies (CRAs) like ICRA, CRISIL, CARE and Fitch Ratings

who are registered with SEBI will carry out IPO grading. SEBI does not play any role

in the assessment made by the grading agency. The grading is intended to be an

independent and unbiased opinion of that agency. IPO grading is not mandatory but is

optional and the assigned grade would be a one time assessment done at the time of the

IPO and meant to aid investors who are interested in investing in the IPO. The grade

will not have any ongoing validity.

SEBI GUIDELINES ON IPO GRADING

No unlisted company shall make an IPO of equity shares or any other security

which may be converted into or exchanged with equity shares at a later date,

unless the following conditions are satisfied as on the date of filing of

Prospectus (in case of fixed price issue) or Red Herring Prospectus (in case of

book built issue) with ROC:

The unlisted company has obtained grading for the IPO from at least one

credit rating agency;

Disclosures of all the grades obtained, along with the

rationale/description furnished by the credit rating agency(ies) for each

of the grades obtained, have been made in the Prospectus (in case of

fixed price issue) or Red Herring Prospectus (in case of book built

issue); and

The expenses incurred for grading IPO have been borne by the unlisted

company obtaining grading for IPO.

Most of the market analysts have welcomed this move of SEBI as it will help

the investors in a volatile market to know whether the merchant banker has carried the

exercise in determining the price of an issue in a proper manner or not. It will also help

the investors in knowing whether the price of the issue is justified or not. They even

said that management of a good company will never get afraid of getting graded of their

IPOs if they are good.

30

FEATURES OF IPO GRADING

IPO grading covers both internal and external aspects of a company seeking to

make an IPO in general. The internal factors include competence and effectiveness of

the management, profile of promoters, marketing strategies, size and growth of

revenues, competitive edge, technology, operating efficiency, liquidity and financial

flexibility, asset quality, accounting quality, profitability and hedging of risks. Among

external factors, the key one is the industry and economic/business environment for the

issuer. Here, it is important to note that internationally, the global rating agencies such

as Standard & Poors and Moodys do not perform grading of IPOs at all. While

Standard & Poors is the majority stakeholder in CRISIL Ltd, Moodys is the single

biggest stakeholder in ICRA Ltd. Similarly, the third global player Fitch IBCA (which

acquired another rating agency Dun & Bradstreet in 2000) also does not grade IPOs as

yet. The IPO grading is indicated on a five point scale and a higher score indicating

stronger fundamentals.

An IPO grading Scale

IPO grade Assessment

5/5 Strong fundamentals

4/5 Above average fundamentals

3/5 Average fundamentals

2/5 Below average fundamentals

1/5 Poor fundamentals

31

Data-flow diagram showing the entire IPO-grading procedure

This process will ideally require 2-3 weeks for completion, so it may be a good

idea for companies to initiate the grading process about 6-8 weeks before the targeted

IPO date to provide sufficient time for any contingencies.

32

Cost Involved In IPO Grading

Though nothing has been declared officially but most of the credit rating has

said that IPO-grading would not cost much to the issuers. They would be charging 10

basis points of the amount to be raised with a ceiling of about Rs 10-15 lakhs. Thus,

even in the case of a mega IPO, there would be a cap on fees, he noted. Around 100

IPOs hit the market on an average every year. However, despite this seemingly big

number, the total receipts for the entire rating industry on account of grading fees

would be only about Rs 10-15 crore.

Benefits of IPO Grading

There are various positive sides of an IPO grading. The most significant factors that go

in favor of IPO grading are:

(a) Professional and Independent Appraisal: IPO grading will create awareness

about the fundamentals of the company’s IPO and will provide focused company

information as a key input to prospective investors that will be helpful in taking an

investment decision, in a manner similar to what a credit rating is for debt investors.

(b) Removal of Information Burden: Where disclosures of issues are large and

complex, a service analyzing and interpreting these disclosures independently and

quickly will be extremely useful in cutting through the clutter. Thus, the usefulness of

IPO grading would be particularly high for small investors as it will serve as a guide

about the company coming out with the issue.

(c) Impediment for Weak Companies: While fundamentally sound companies will

gain from the market, companies whose fundamentals are not very strong will be

impeded in building up speculative demand among investors. Such weak companies

will need to offer pricing, which will adequately compensate investors for the risks they

33

take. Therefore, IPO grading provides disincentives for weak companies planning to

come to the market to raise easy capital.

(d) Improved Investors’ Sophistication: It is perceived that an independent and

informed opinion on the fundamental quality of the company will bring about greater

level of investor sophistication in a scientific manner. In fact, investors may take

investment decisions in a better way on the basis of opinion of CRAs regarding IPO

grading. However, the assessment is not a recommendation to buy or not buy a stock. It

is, instead, a powerful tool to assist the investors in making up their mind about the

quality of a company proposing to offer an IPO investment option.

34

CHAPTER III

INDUSTRY PROFILE

35

FINANCIAL MARKETS

Finance is the pre-requisite for modern business and financial institutions play a

vital role in the economic system. It is through financial markets and institutions that

the financial system of an economy works. Financial markets refer to the institutional

arrangements for dealing in financial assets and credit instruments of different types

such as currency, cheques, bank deposits, bills, bonds, equities, etc.

Financial market is a broad term describing any marketplace where buyers and

sellers participate in the trade of assets such as equities, bonds, currencies and

derivatives. They are typically defined by having transparent pricing, basic regulations

on trading, costs and fees and market forces determining the prices of securities that

trade.

Generally, there is no specific place or location to indicate a financial market.

Wherever a financial transaction takes place, it is deemed to have taken place in the

financial market. Hence financial markets are pervasive in nature since financial

transactions are themselves very pervasive throughout the economic system. For

instance, issue of equity shares, granting of loan by term lending institutions, deposit of

money into a bank, purchase of debentures, sale of shares and so on.

In a nutshell, financial markets are the credit markets catering to the various

needs of the individuals, firms and institutions by facilitating buying and selling of

financial assets, claims and services.

36

CLASSIFICATION OF FINANCIAL MARKETS

37

Capital Market

The capital market is a market for financial assets which have a long or

indefinite maturity. Generally, it deals with long term securities which have a period of

above one year. In the widest sense, it consists of a series of channels through which

the savings of the community are made available for industrial and commercial

enterprises and public authorities. As a whole, capital market facilitates raising of

capital.

The major functions performed by a capital market are:

1. Mobilization of financial resources on a nation-wide scale.

2. Securing the foreign capital and know-how to fill up deficit in the required

resources for economic growth at a faster rate.

3. Effective allocation of the mobilized financial resources, by directing the same

to projects yielding highest yield or to the projects needed to promote balanced

economic development.

Capital market consists of primary market and secondary market.

Primary market

Primary market is a market for new issues or new financial claims. Hence it is

also called as New Issue Market. It basically deals with those securities which are

issued to the public for the first time. The market, therefore, makes available a new

block of securities for public subscription. In other words, it deals with raising of fresh

capital by companies either for cash or for consideration other than cash. The best

example could be Initial Public Offering (IPO) where a firm offers shares to the public

for the first time.

Secondary market

Secondary market is a market where existing securities are traded. In other

words, securities which have already passed through new issue market are traded in this

market. Generally, such securities are quoted in the stock exchange and it provides a

continuous and regular market for buying and selling of securities. This market consists

of all stock exchanges recognized by the government of India.

38

Money Market

Money markets are the markets for short-term, highly liquid debt securities.

Money market securities are generally very safe investments which return relatively

low interest rate that is most appropriate for temporary cash storage or short term time

needs. It consists of a number of sub-markets which collectively constitute the money

market namely call money market, commercial bills market, acceptance market, and

Treasury bill market.

Derivatives Market

The derivatives market is the financial market for derivatives, financial instruments

like futures contracts or options, which are derived from other forms of assets. A

derivative is a security whose price is dependent upon or derived from one or more

underlying assets. The derivative itself is merely a contract between two or more

parties. Its value is determined by fluctuations in the underlying asset. The most

common underlying assets include stocks, bonds, commodities, currencies, interest

rates and market indexes. The important financial derivatives are the following:

Forwards: Forwards are the oldest of all the derivatives. A forward contract

refers to an agreement between two parties to exchange an agreed quantity of an

asset for cash at a certain date in future at a predetermined price specified in that

agreement. The promised asset may be currency, commodity, instrument etc.

Futures: Future contract is very similar to a forward contract in all respects

excepting the fact that it is completely a standardized one. It is nothing but a

standardized forward contract which is legally enforceable and always traded on

an organized exchange.

Options: A financial derivative that represents a contract sold by one party

(option writer) to another party (option holder). The contract offers the buyer

the right, but not the obligation, to buy (call) or sell (put) a security or other

financial asset at an agreed-upon price (the strike price) during a certain period

of time or on a specific date (exercise date). Call options give the option to buy

39

at certain price, so the buyer would want the stock to go up. Put options give the

option to sell at a certain price, so the buyer would want the stock to go down.

Swaps: It is yet another exciting trading instrument. Infact, it is the combination

of forwards by two counterparties. It is arranged to reap the benefits arising

from the fluctuations in the market – either currency market or interest rate

market or any other market for that matter.

Foreign Exchange Market

It is a market in which participants are able to buy, sell, exchange and speculate

on currencies.  Foreign exchange markets are made up of banks, commercial

companies, central banks, investment management firms, hedge funds, and retail forex

brokers and investors. The forex market is considered to be the largest financial market

in the world. It is a worldwide decentralized over-the-counter financial market for the

trading of currencies. Because the currency markets are large and liquid, they are

believed to be the most efficient financial markets. It is important to realize that the

foreign exchange market is not a single exchange, but is constructed of a global

network of computers that connects participants from all parts of the world.

Commodities Market

It is a physical or virtual marketplace for buying, selling and trading raw or

primary products. For investors' purposes there are currently about 50 major

commodity markets worldwide that facilitate investment trade in nearly 100 primary

commodities. Commodities are split into two types: hard and soft commodities. Hard

commodities are typically natural resources that must be mined or extracted (gold,

rubber, oil, etc.), whereas soft commodities are agricultural products or livestock (corn,

wheat, coffee, sugar, soybeans, pork, etc.)

40

INDIAN FINANCIAL MARKETS

India Financial market is one of the oldest in the world and is considered to be

the fastest growing and best among all the markets of the emerging economies. The

history of Indian capital markets dates back 200 years toward the end of the 18th

century when India was under the rule of the East India Company. The development of

the capital market in India concentrated around Mumbai where no less than 200 to 250

securities brokers were active during the second half of the 19th century. The financial

market in India today is more developed than many other sectors because it was

organized long before with the securities exchanges of Mumbai, Ahmadabad and

Kolkata were established as early as the 19th century. By the early 1960s the total

number of securities exchanges in India rose to eight, including Mumbai, Ahmadabad

and Kolkata apart from Madras, Kanpur, Delhi, Bangalore and Pune. Today there are

21 regional securities exchanges in India in addition to the centralized NSE (National

Stock Exchange) and OTCEI (Over the Counter Exchange of India).

However the stock markets in India remained stagnant due to stringent controls

on the market economy that allowed only a handful of monopolies to dominate their

respective sectors. The corporate sector wasn't allowed into many industry segments,

which were dominated by the state controlled public sector resulting in stagnation of

the economy right up to the early 1990s. Thereafter when the Indian economy began

liberalizing and the controls began to be dismantled or eased out; the securities markets

witnessed a flurry of IPO’s that were launched. This resulted in many new companies

across different industry segments to come up with newer products and services.

A remarkable feature of the growth of the Indian economy in recent years has

been the role played by its securities markets in assisting and fuelling that growth with

money rose within the economy. This was in marked contrast to the initial phase of

growth in many of the fast growing economies of East Asia that witnessed huge doses

of FDI (Foreign Direct Investment) spurring growth in their initial days of market

decontrol. During this phase in India much of the organized sector has been affected by

41

high growth as the financial markets played an all-inclusive role in sustaining financial

resource mobilization. Many PSUs (Public Sector Undertakings) that decided to offload

part of their equity were also helped by the well-organized securities market in India.

The launch of the NSE (National Stock Exchange) and the OTCEI (Over the

Counter Exchange of India) during the mid 1990s by the government of India was

meant to usher in an easier and more transparent form of trading in securities. The NSE

was conceived as the market for trading in the securities of companies from the large-

scale sector and the OTCEI for those from the small-scale sector. While the NSE has

not just done well to grow and evolve into the virtual backbone of capital markets in

India the OTCEI struggled and is yet to show any sign of growth and development. The

integration of IT into the capital market infrastructure has been particularly smooth in

India due to the country’s world class IT industry. This has pushed up the operational

efficiency of the Indian stock market to global standards and as a result the country has

been able to capitalize on its high growth and attract foreign capital like never before.

The regulating authority for capital markets in India is the SEBI (Securities and

Exchange Board of India). SEBI came into prominence in the 1990s after the capital

markets experienced some turbulence. It had to take drastic measures to plug many

loopholes that were exploited by certain market forces to advance their vested interests.

After this initial phase of struggle SEBI has grown in strength as the regulator of

India’s capital markets and as one of the country’s most important institutions.

FINANCIAL MARKET REGULATIONS

Regulations are an absolute necessity in the face of the growing importance of

capital markets throughout the world. The development of a market economy is

dependent on the development of the capital market. The regulation of a capital market

involves the regulation of securities; these rules enable the capital market to function

more efficiently and impartially.

42

A well regulated market has the potential to encourage additional investors to

partake, and contribute in, furthering the development of the economy. The chief

capital market regulatory authority is Securities and Exchange Board of India (SEBI).

SEBI is the regulator for the securities market in India. It is the apex body to

develop and regulate the stock market in India It was formed officially by the

Government of India in 1992 with SEBI Act 1992 being passed by the Indian

Parliament. Chaired by C B Bhave, SEBI is headquartered in the popular business

district of Bandra-Kurla complex in Mumbai, and has Northern, Eastern, Southern and

Western regional offices in New Delhi, Kolkata, Chennai and Ahmedabad. In place of

Government Control, a statutory and autonomous regulatory board with defined

responsibilities, to cover both development & regulation of the market, and independent

powers has been set up.

The basic objectives of the Board were identified as:

To protect the interests of investors in securities;

To promote the development of Securities Market;

To regulate the securities market and

For matters connected therewith or incidental thereto.

Since its inception SEBI has been working targeting the securities and is

attending to the fulfillment of its objectives with commendable zeal and dexterity. The

improvements in the securities markets like capitalization requirements, margining,

establishment of clearing corporations etc. reduced the risk of credit and also reduced

the market.

SEBI has introduced the comprehensive regulatory measures, prescribed

registration norms, the eligibility criteria, the code of obligations and the code of

conduct for different intermediaries like, bankers to issue, merchant bankers, brokers

and sub-brokers, registrars, portfolio managers, credit rating agencies, underwriters and

others. It has framed bye-laws, risk identification and risk management systems for

43

Clearing houses of stock exchanges, surveillance system etc. which has made dealing in

securities both safe and transparent to the end investor.

Another significant event is the approval of trading in stock indices (like S&P

CNX Nifty & Sensex) in 2000. A market Index is a convenient and effective product

because of the following reasons:

It acts as a barometer for market behavior;

It is used to benchmark portfolio performance;

It is used in derivative instruments like index futures and index options;

It can be used for passive fund management as in case of Index Funds.

Two broad approaches of SEBI is to integrate the securities market at the

national level, and also to diversify the trading products, so that there is an increase in

number of traders including banks, financial institutions, insurance companies, mutual

funds, primary dealers etc. to transact through the Exchanges. In this context the

introduction of derivatives trading through Indian Stock Exchanges permitted by SEBI

in 2000 AD is a real landmark.

SEBI has enjoyed success as a regulator by pushing systemic reforms

aggressively and successively (e.g. the quick movement towards making the markets

electronic and paperless rolling settlement on T+2 bases). SEBI has been active in

setting up the regulations as required under law.

STOCK EXCHANGES IN INDIA

Stock Exchanges are an organized marketplace, either corporation or mutual

organization, where members of the organization gather to trade company stocks or

other securities. The members may act either as agents for their customers, or as

principals for their own accounts.

As per the Securities Contracts Regulation Act, 1956 a stock exchange is an

association, organization or body of individuals whether incorporated or not,

44

established for the purpose of assisting, regulating and controlling business in buying,

selling and dealing in securities.

Stock exchanges facilitate for the issue and redemption of securities and other

financial instruments including the payment of income and dividends. The record

keeping is central but trade is linked to such physical place because modern markets are

computerized. The trade on an exchange is only by members and stock broker do have

a seat on the exchange.

List of Stock Exchanges in India

Bombay Stock Exchange

National Stock

Exchange

OTC Exchange of India

Regional Stock

Exchanges

1.

Ahmedabad

2. Bangalore

3.

Bhubaneswar

4. Calcutta

5. Cochin

6.

Coimbatore

7. Delhi

8. Guwahati

9. Hyderabad

10. Jaipur

11. Ludhiana

12. Madhya

Pradesh

13. Madras

14. Magadh

15.

Mangalore

16. Meerut

17. Pune

18.

Saurashtra

Kutch

19. Uttar

Pradesh

20. Vadodara

45

BOMBAY STOCK EXCHANGE

A very common name for all traders in the stock market, BSE,

stands for Bombay Stock Exchange. It is the oldest market not only in the country,

but also in Asia. In the early days, BSE was known as "The Native Share & Stock

Brokers Association." It was established in the year 1875 and became the first stock

exchange in the country to be recognized by the government. In 1956, BSE obtained a

permanent recognition from the Government of India under the Securities Contracts

(Regulation)Act,1956.

In the past and even now, it plays a pivotal role in the development of the country's

capital market. This is recognized worldwide and its index, SENSEX, is also tracked

worldwide. Earlier it was an Association of Persons (AOP), but now it is a

demutualised and corporatised entity incorporated under the provisions of the

Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualization)

Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).

BSE Vision

The vision of the Bombay Stock Exchange is to "Emerge as the premier

Indian stock exchange by establishing global benchmarks."

BSE Management

Bombay Stock Exchange is managed professionally by Board of Directors. It

comprises of eminent professionals, representatives of Trading Members and the

Managing Director. The Board is an inclusive one and is shaped to benefit from the

market intermediaries participation.

The Board exercises complete control and formulates larger policy issues. The

day-to-day operations of BSE are managed by the Managing Director and its school

of professional as a management team.

46

BSE Network

The Exchange reaches physically to 417 cities and towns in the country. The

framework of it has been designed to safeguard market integrity and to operate with

transparency. It provides an efficient market for the trading in equity, debt

instruments and derivatives. Its online trading system, popularly known as BOLT, is a

proprietary system and it is BS 7799-2-2002 certified. The BOLT network was

expanded, nationwide, in 1997. The surveillance and clearing & settlement functions

of the Exchange are ISO 9001:2000 certified.

BSE Facts

BSE as a brand is synonymous with capital markets in India. The BSE SENSEX is

the benchmark equity index that reflects the robustness of the economy and finance. It

was the –

First in India to introduce Equity Derivatives

First in India to launch a Free Float Index

First in India to launch US$ version of BSE Sensex

First in India to launch Exchange Enabled Internet Trading Platform

First in India to obtain ISO certification for Surveillance, Clearing &

Settlement

'BSE On-Line Trading System’ (BOLT) has been awarded the globally

recognized the Information Security Management System standard

BS7799-2:2002.

First to have an exclusive facility for financial training

Moved from Open Outcry to Electronic Trading within just 50 days

BSE with its long history of capital market development is fully geared to continue

its contributions to further the growth of the securities markets of the country, thus

helping India increases its sphere of influence in international financial market.

47

NATIONAL STOCK EXCHANGE OF INDIA

LIMITED

The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which

recommended promotion of a National Stock Exchange by financial institutions (FI’s)

to provide access to investors from all across the country on an equal footing. Based

on the recommendations, NSE was promoted by leading Financial Institutions at the

behest of the Government of India and was incorporated in November 1992 as a tax-

paying company unlike other stock Exchange in the country.

On its recognition as a stock exchange under the Securities Contracts

(Regulation) Act, 1956 in April 1993, NSE commenced operations in the Wholesale

Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment

commenced operations in November 1994 and operations in Derivatives segment

commenced in June 2000.

NSE GROUP

National Securities Clearing Corporation Ltd. (NSCCL)

It is a wholly owned subsidiary, which was incorporated in August 1995 and

commenced clearing operations in April 1996. It was formed to build confidence in

clearing and settlement of securities, to promote and maintain the short and consistent

settlement cycles, to provide a counter-party risk guarantee and to operate a tight risk

containment system.

NSE.IT Ltd.

It is also a wholly owned subsidiary of NSE and is its IT arm. This arm of the

NSE is uniquely positioned to provide products, services and solutions for the

securities industry. NSE.IT primarily focuses on in the area of trading, broker front-

48

end and back-office, clearing and settlement, web-based, insurance, etc. Along with

this, it also provides consultancy and implementation services in Data Warehousing,

Business Continuity Plans, Site Maintenance and Backups, Stratus Mainframe

Facility Management, Real Time Market Analysis & Financial News.

India Index Services & Products Ltd. (IISL)

It is a joint venture between NSE and CRISIL Ltd. to provide a variety of

indices and index related services and products for the Indian Capital markets. It was

set up in May 1998. IISL has a consulting and licensing agreement with the Standard

and Poor's (S&P), world's leading provider of investible equity indices, for co-

branding equity indices.

National Securities Depository Ltd. (NSDL)

NSE joined hands with IDBI and UTI to promote dematerialization of

securities. This step was taken to solve problems related to trading in physical

securities. It commenced operations in November 1996.

NSE Facts

It uses satellite communication technology to energize participation from

around 400 cities in India.

NSE can handle up to 1 million trades per day.

It is one of the largest interactive VSAT based stock exchanges in the world.

The NSE- network is the largest private wide area network in India and the

first extended C- Band VSAT network in the world.

Presently more than 9000 users are trading on the real time-online NSE

application.

Today, NSE is one of the largest exchanges in the world and still forging ahead. At

NSE, we are constantly working towards creating a more transparent, vibrant and

innovative capital market.

49

OVER THE COUNTER EXCHANGE OF INDIA

OTCEI was incorporated in 1990 as a section 25 company under the

companies Act 1956 and is recognized as a stock exchange under section 4 of the

securities Contracts Regulation Act, 1956. The exchange was set up to aid

enterprising promotes in raising finance for new projects in a cost effective manner

and to provide investors with a transparent and efficient mode of trading Modeled

along the lines of the NASDAQ market of USA, OTCEI introduced many novel

concepts to the Indian capital markets such as screen-based nationwide trading,

sponsorship of companies, market making and scrip less trading. As a measure of

success of these efforts, the Exchange today has 115 listings and has assisted in

providing capital for enterprises that have gone on to build successful brands for

themselves like VIP Advanta, Sonora Tiles & Brilliant mineral water, etc.

Need for OTCEI

Studies by NASSCOM, software technology parks of India, the venture

capitals funds and the government’s IT tasks Force, as well as rising interest in IT,

Pharmaceutical, Biotechnology and Media shares have repeatedly emphasized the

need for a national stock market for innovation and high growth companies.

Innovative companies are critical to developing economics like India, which is

undergoing a major technological revolution. With their abilities to generate

employment opportunities and contribute to the economy, it is essential that these

companies not only expand existing operations but also set up new units. The key

issue for these companies is raising timely, cost effective and long term capital to

sustain their operations and enhance growth. Such companies, particularly those that

have been in operation for a short time, are unable to raise funds through the

traditional financing methods, because they have not yet been evaluated by the

financial world.

50

CHAPTER IV COMPANY PROFILE

51

ABOUT INDIABULLS

India bulls are India’s leading Financial Services and Real Estate company

having over 640 branches all over India. Indiabulls serves the financial needs of more

than 4,50,000 customers with its wide range of financial services and products from

securities, derivatives trading, depositary services, research & advisory services,

consumer secured & unsecured credit, loan against shares and mortgage & housing

finance. With around 4000 Relationship Managers, Indiabulls helps its clients to

satisfy their customized financial goals. Indiabulls through its group companies has

entered Indian Real Estate business in 2005. It is currently evaluating several large-

scale projects worth several hundred million dollars.

India bulls Financial Services Ltd is listed on the National Stock Exchange,

Bombay Stock Exchange and Luxembourg Stock Exchange. The market

capitalization of India bulls is around USD 3,330 million (30th September 2007).

Consolidated net worth of the group is around USD 950 million (30th September

2007). India bulls and its group companies have attracted more than USD 800 million

of equity capital in Foreign Direct Investment (FDI) since March 2000. Some of the

large shareholders of India bulls are the largest financial institutions of the world such

as Fidelity Funds, Goldman Sachs, Merrill Lynch, Morgan Stanley and Farallon

Capital.

Business of the company has grown in leaps and bounds since its inception.

Revenue of the company grew at a CAGR of 159% from FY03 to FY07. During the

same period, profits of the company grew at a CAGR of 184%. Indiabulls

Abulls

Indiabulls became the first company to bring FDI in Indian Real Estate

through a JV with Farallon Capital Management LLC, a respected US based

investment firm. Indiabulls has demonstrated deep understanding and commitment to

Indian

Real Estate market by winning competitive bids for landmark properties in

Mumbai and Delhi.

52

Indiabulls is India’s leading Financial Services and Real Estate company

having over 640 branches all over India. Indiabulls serves the financial needs of more

than 4,50,000 customers with its wide range of financial services and products from

securities, derivatives trading, depositary services, research & advisory services,

consumer secured & unsecured credit, loan against shares and mortgage & housing

finance. With around 4000 Relationship Managers, Indiabulls helps its clients to

satisfy their customized financial goals. Indiabulls through its group companies has

entered Indian Real Estate business in 2005. It is currently evaluating several large-

scale projects worth several hundred million dollars.

Indiabulls Financial Services Ltd is listed on the National Stock Exchange,

Bombay Stock Exchange and Luxembourg Stock Exchange. The market

capitalization of Indiabulls is around USD 3,330 million (30th September 2007).

Consolidated net worth of the group is around USD 950 million (30th September

2007). Indiabulls and its group companies have attracted more than USD 800 million

of equity capital in Foreign Direct Investment (FDI) since March 2000. Some of the

large shareholders of Indiabulls are the largest financial institutions of the world such

as Fidelity Funds, Goldman Sachs, Merrill Lynch, Morgan Stanley and Farallon

Capital.

Business of the company has grown in leaps and bounds since its inception. Revenue

of the company grew at a CAGR of 159% from FY03 to FY07. During the same

period, profits of the company grew at a CAGR of 184%.

Indiabulls became the first company to bring FDI in Indian Real Estate

through a JV with Farallon Capital Management LLC, a respected US based

investment firm. Indiabulls has demonstrated deep understanding and commitment to

Indian

53

Real Estate market by winning competitive bids for landmark properties in Mumbai

and Delhi

With a market value of Rs 29,000 crore and a net worth of Rs 8,000 crore, the eight-

year-old Indiabulls group has sky-high ambitions. Property development and

consumer finance are the current thrust areas. Retailing, insurance, banking, mutual

funds, power and telecom are on the cards.

Chairman Sameer Gehlaut (34) and Co-founder Rajiv Rattan (35) are in build-up

mode, but are the foundations strong enough.

February 2000: On a wintry morning in London, four gentlemen get into a

huddle at the headquarters of Mittal Steel (now Arcelor-Mittal), the world’s largest

steel manufacturer. It’s biting cold outside, but inside an air of warm optimism

prevails.

Sameer Gehlaut and Saurabh Mittal, two of the co-founders of Indian stock

broking upstart Indiabulls Financial Services Ltd (IBFSL), are in the last lap of

negotiations for angel funding from steel baron Lakshmi N. Mittal (no relation to

Saurabh Mittal). Present at the meeting are Mittal’s son, Aditya Mittal, then Vice

Chairman on the board of directors of LNM Holdings, and Rishi Khosla, Mittal’s

fund manager.

The three promoters of Indiabulls (the third is Rajiv Rattan), all alumni of IIT

Delhi, had mandated a Mumbai-based investment bank, Avendus Advisors, to scout

around for an investor.

Gaurav Deepak, cofounder of Avendus, stumbles upon Khosla, who is

sniffing for potential growth stories across the globe. Aditya Mittal and Gehlaut, from

54

Mumbai, begin negotiations on the phone. Mittal obviously liked what he heard. The

numbers—an investment of $1 million at Rs 5 per share—are agreed upon

telephonically. The deal is signed in London.

“It was pure gut feel that made us invest in Indiabulls. We backed the

individual after we were confident about his business plans (e-trade broking) and

execution capabilities,” says Khosla. Adds Sameer Gehlaut, the “individual” Khosla

is talking about, and the Founder & Chairman of the Indiabulls group: “Mittal Saab

came in as an angel investor in Indiabulls perhaps after seeing the success of similar

business models in the US, of firms like Charles Schwab and E-Trade.”

The Early Days, It’s an investment Mittal won’t forget in a hurry. For one, it

was his first in India. More importantly, it’s yielded him returns of a phenomenal 100

times. ‘Of all our global investments, Indiabulls has given us the highest return,”

beams Khosla. Mittal was back seven years later to put more money into the

Indiabulls group.

The difference? He was now investing at not Rs 5 per share but at Rs 531 per

share (via an issue of global depository receipts, or GDR’s). Mittal today has a net

worth of Rs 1,200 crore in the group by virtue of LNM India Internet Ventures’ 1.85

per cent in flagship IBFSL and 1.60 per cent in a recently de-merged property

developer, IBREL. In addition, the global metals magnate has committed Rs 120

crore to a multi-project special economic zone (SEZ) that IBREL is putting up at

Raigad in Maharashtra.

If corporate growth is expected at 15 per cent, financial services will grow at

30 per cent. And in the next 10 years we will grow 10 times in the consumer finance

business from $3 billion to $30 billion (in market cap),” says Gehlaut, who after

working with petroleum and energy giant Halliburton in the US came to India to start

a mining and earth moving business. In October 1999, along with Rattan and Mittal,

Gehlaut started Indiabulls after acquiring a Delhi brokerage.Analysts tracking the

group expect these three companies to rack up total sales of roughly Rs 3,600 crore

55

by the year ending March 2008, with profits of around Rs 1,500 crore and a net worth

of a little over Rs 10,000 crore.

That would be a mind-boggling growth of 228 per cent in profits (at the group

level) over the previous year. Significantly, broking, the business that Indiabulls

started out with, will account for just 10 per cent of revenues.

That’s not bad going at all for an eight-year-young upstart. “We were extremely lucky

to be at the forefront of the India growth story. We did not have much clarity when

we started with the broking business. However, as we went about penetrating the

retail market, we realized there was huge untapped potential in the consumer finance

and real estate businesses,” says the 34-year-old Gehlaut. In real estate, IBREL has

put together a land bank of 4,000 acres, at an acquisition cost of over Rs 2,250 crore.

That makes it the country’s third-largest property developer, after DLF and Unitech—

again, not bad for a company that came into being only six months ago.

Gagan Banga

The real estate push also gives Indiabulls an opportunity to diversify into

another sunrise sector, that of organised retailing. Here, the promoters are exploring

formats like hypermarkets and multiplex-cum-mall, and are busy acquiring properties

for this purpose. Gehlaut has earmarked Rs 1,500 crore for this project, and has been

busy acquiring land via auctions in cities like Madurai, Jodhpur, Hyderabad, Agra

and Kanpur. “Financial services, real estate and retail are the key sectors for growth

that will deliver double-digit growth over the next 20 years. Retail is a missing piece

in our pie and we are seeing it as a definite business option as the sector coincides

with the real estate story,” says Rattan, the 35-year-old CFO of the group, who

worked as an operations manager for Schlumberger before confounding Indiabulls.

Indiabulls is also keen to merge with an existing bank by swapping shares,

rather than applying for a new licenses or throwing its hat into the ring whenever a

56

bank is put under moratorium by the Reserve Bank—the company had earlier

unsuccessfully bid for United Western Bank.

Divyesh Shah

Outside of financial services, Indiabulls will be one of the many firms keen to

redevelop the slum of Dharavi. It also has telecom in its sights—it has applied for

licenses for 22 circles, although operating these circles will be a strategic partner. For

its Nashik SEZ, Indiabulls has also lined up a 500 MW power plant. For all these new

ventures, the group will invest a little over Rs 4,500 crore over the next couple of

years.

Such aggression, such risk taking, such haste haven’t been heard of in a long

time—certainly not from an eight-year-young wannabe mega-corp. Are Gehlaut and

company for real, and are they here to stay? These are questions that sections of the

market have been pondering for some time now. Competitors who’ve been around for

decades privately wonder how Indiabulls has been able to grow at such a heady pace;

others can’t hide their awe about the group’s marquee of investors. Blame it on envy

or competitive rivalry, but most of Indiabulls’ competitors in the broking space have

few kind words for them—all of them in anonymous whispers, needless to say.

The charges range from an expertise in “managing the environment” to

trading with investor money, without their knowledge. Says the promoter of a

Mumbai brokerage: “At times they’ve got away with murder (figuratively, of course)

courtesy their financial muscle power and close proximity to 10 Janpath (the

residence of Sonia Gandhi, President of the Congress party and Chairperson of the

57

ruling UPA).” Adds a fund manager: “Corporate governance levels are very low at

the group. I wouldn’t touch the stocks with a barge pole.”

Reinforcing such theories are a couple of facts: Market regulator, the

Securities & Exchange Board of India (Sebi), came after Indiabulls not once, not

twice but three times. This, argue detractors, is evidence of the malpractices taking

place at the group. However, on all three occasions, Indiabulls emerged unscathed,

getting away with just a rap on the knuckles (see Run-ins with Sebi). In fact, during

last year’s IPO scam, when Sebi ordered a ban on Indiabulls for allegedly trying to

corner shares during allotment, the order was dust-binned in less than 24 hours. The

company top brass was apparently able to convince Sebi that the IPO shares heaped

in their accounts were those of clients.

Rashesh Shah

As one market man points out: “The day after the order was passed the doors

of Sebi were opened as early as 6:30 in the morning for them.” This proves that their

connections with people in power are adequate to override the regulators, say the

Let’s move on to the run-ins with Sebi. Consider the first one, during the penny stock

scandal of 2005, when micro-cap stocks in the B2, S and Z categories were rigged up

to ridiculous levels. Sebi came down on Indiabulls, amongst other brokerages, for

contributing to the increase in turnover in a few penny stocks. This in turn could be

construed as price manipulation by these brokerages. Indiabulls’ defence has been

58

that it is not possible to keep a tab on such rogue clients, and the contribution to

turnover from such stocks was a minuscule part of total turnover. However, since that

scandal Indiabulls decided not to trade ever in such stocks; today they restrict

themselves only to the large and mid caps in the A and B1 groups.

Road Ahead

Clearly, Gehlaut believes in being proactive in protecting the firm, with the

benefit of hindsight. Consider, for instance, the charge of playing around with the

portfolio of retail investors without their knowledge. No action was taken against

Indiabulls but the dirt has stuck. Now, to counter such negative perceptions, the

company records every single call that comes into its 400 broking branches

nationwide.

“Some 6,000 lines are recorded and archived daily. It’s an expensive solution,

which costs Rs 10 lakh per day,” says Gagan Banga, CEO, Indiabulls Credit Services.

Shrugs Gehlaut. “Broking is a thankless business.” With new ventures likes consumer

finance and real estate, broking has been relegated to the backburner. But he says he

won’t let go of it, and the leadership status that he claims, with a 6 per cent market

share. “It’s close to our hearts, it would be bad for the morale of the army if we lose

on our home turf,” adds the Chairman.

In the IPO scam, Indiabulls officials explain that they arranged meetings in

Kolkata between Sebi officials and 230 of the 559 clients from which it had received

credits in its accounts. They also claim to have taken them to the residences of 30-40

of the clients. As for Mittal and the Farallon connection, Rattan and Gehlaut rubbish

the link, although agreeing that Mittal’s presence in the US financial markets

provides a huge leg-up when it comes to raising funds from international investors.

The clamour in some nooks of Dalal Street not withstanding, there are those

who admire Indiabulls for the fire in their belly, their entrepreneurial skills and their

execution capabilities. Says Rashesh Shah, CEO & Managing Director, Edelweiss

59

Securities, a Mumbai based investment bank: “They entered the market when

competition in retail broking was low. Retail broking is a high-risk, high-reward

segment and they were aggressive in tapping that sector. Remember this was at a time

when small players were shutting shop as they couldn’t come to terms with the sea

change in the broking environment following the closure of regional stock exchanges,

the abolition of badla (an indigenous form of carry-forward trading) and the

introduction of screen-based trading. They saw the opportunity and capitalized by

investing heavily in setting up broking facilities and that has paid off.” Adds

Ambareesh Baliga, Vice President, Karvy Stock Broking: “Since the beginning they

had strong system and processes in place. Their impressive back office operations

provide them with an edge over other brokerages.”

Cautious, but Aggressive

In many ways Indiabulls is a business house that’s pretty much a typical one

from the rest of the crowd (although Gehlaut quips: “We are the crowd; the only

difference is that we are more efficient.”) For instance, the promoters don’t like

putting big-ticket numbers in terms of investments for their proposed ventures; they

don’t talk about acquisitions or joint venture partners, preferring to build rather than

buy (although in insurance there’s a view that a partner may be needed, and in a

proposed foray into institutional broking an acquisition may be considered); and

they’re not taken in by the other flavors of the season—going international is not a

priority, staying focused on the domestic consumption-oriented growth story is.

Couple the group’s aggression with the India growth story, and you have a

business group that’s aiming for leadership status in each of its ventures; and one that

believes in setting new standards and benchmarks. In insurance, for instance (where

A.K. Shukla, a former Chairman of Life Insurance Corporation, has been roped in to

head the foray), the plan is to break even in three years, something no private sector

player has been able to do since the sector was opened up eight years ago.

60

As Rattan points out: “Our advantage will be our low operating costs, as we

will be targeting the same customer in the securities business for our life insurance

business.” And also for mutual funds. “By the fiscal year-end we will have 1 million

customers in the securities business. If we can penetrate 30-40 per cent of that

customer base with our new mutual fund products, then on day zero I will have a

customer base of 3-4 lakh in the urban and semi-urban regions of the country,” adds

Gehlaut.

The aggression, insists Gehlaut, is tempered with conservatism. “We take

calculated risks. Being cautious (about capital) doesn’t mean we can’t be aggressive,”

he points out. That attitude can be illustrated with the group’s approach to retail. It’s

starting small, with a rollout of small formats in a few cities. “If those stores make

profits we will scale up. If they don’t we will not hesitate to back out of the retail

project,” says the Chairman. Adds Khosla (L.N. Mittal’s fund manager quoted

earlier): “So far the group has diversified successfully, but if a project isn’t going to

be viable, they won’t hesitate to book losses.”

Caution, however, doesn’t involve any compromise with speed. Standing atop

the storey Jupiter Mills commercial complex that’s under development, Gehlaut takes

in a bird’s eye view of the frenetic construction activity that’s under way in Central

Mumbai. A few kilometers towards the suburb is another one of his properties,

Elphinstone Mills, where IBREL will put up Mumbai’s tallest tower with all of 65-

storeys. But Gehlaut is quick to focus on how fast work is taking place at Jupiter

Mills. He points to an adjoining mill where a retail project is under way. Both mills

were acquired at the same time, and it’s clear that the IBREL project has made rapid

progress.

Completion is scheduled for April 2008. “By the next calendar year we will

start receiving nearly Rs 1,100 crore of rent from the 3.5 million square feet of

commercial space from the two mills (Jupiter and Elphin stone) in Mumbai,” says

61

Banga, one of the group’s first employees. Knight Frank, a Mumbai based real estate

consultancy, has valued the 3.5 million sq. ft of land at Rs 7,700 crore. Indiabulls had

purchase the two mills for Rs 1,100 crore. That’s just the real estate activity under

way in Mumbai. “In the next 24-36 months we will be ready with 50,000 apartments

in Delhi and Chennai,” adds Banga. Says Nirmal Jain, Chairman & Managing

Director, India Infoline, a Mumbai brokerage that started roughly around the same

time Indiabulls did: “Along with their ability to raise capital, Indiabulls’ master stroke

was to enter the real estate business at the right time.”

As Indiabulls moves into larger-scale, high growth areas, the mother business

of securities isn’t being given the short shrift. Divyesh Shah, CEO, ISL (the to-be-

soon demerged securities firm), says a portfolio management scheme (PMS) is on the

cards. For this, ISL’s base of six lakh customers along with its 400 offices in 200

cities will provide it with a head start. A foray into institutional broking might just

take off too.

“We want PMS to account for 20 per cent of our securities business, which

will grow by 40 per cent in the next two years. For our institutional business we may

take the inorganic route,” adds Shah. “When we began we were clear that we couldn’t

beat the Merrill Lynchs and Morgan Stanleys of the world.

RULES & BY-LAWS OF EXCHANGE

62

A Stock Exchange is recognized only after the govt. is satisfied that its rules

and By-Laws confirm to the conditions prescribed for ensuring for dealing and

protection to investors.

The rules of exchange are related in general to

The constitution of the exchange

The powers of the management of its governing body and its constitution

The admission for membership

The qualification for membership

The expulsion suspension and readmission of member

63

CHAPTER V

DATA ANALYSIS

&

INTERPRETATION

64

BSE IPO Index

Initial Public Offerings (IPOs) are a great opportunity for promoters to sell

shares at a very high price and for the investing public to make some listing gains if

possible. Buying a stock that has just got listed after an IPO is a foolish idea. The

BSE IPO index has performed badly since its launch on 24 August 2009. The index

closed at 1947.54 on the day of its launch. By the end of December 2010, exactly 16

months after its launch, the BSE IPO index was at 1,908.90, down almost 40 points.

In the same period, the Sensex is up by 28%.

65

The Bombay Stock Exchange (BSE) launched the BSE IPO index to track the

value of the companies listing subsequent to a successful completion of an IPO. The

index currently has 72 companies. But this figure is continually changing, depending

on how many companies are listed, as an IPO company is kept on the index only for

two years.

Interpretation

In the above sales Analysis we can see the ratio from August 2009 to April

2010 the index remained almost constant with minimum and negligible fluctuations

but from April 2010 to December 2010 we can see a considerable price in the index.

IPO Monthly Trends

Month

Jan-

11

Feb-

11

Mar-

11

Apr-

11

May-

11

Jul-

11

Aug-

11

Sep-

11

Oct-

11

Nov-

11

Dec-

11

# of

IPOs 4 9 6 5 6 4 3 2 18 2 5

Interpretation

The total no of companies coming for IPO have increased in 2011 compared

to 2010. There were 65 IPOs that were listed in 2011 as compared to only 17 IPOs in

2010. 2010 was mostly affected by recession and companies were not coming for

IPOs due to lack of investor confidence. Of the 65 companies that have come for IPO,

only 21 companies are not trading at a profit while 43 companies are now trading at a

loss. Close to 100 companies are in the pipe line to raise money through IPOs in the

coming months.

66

IPOs By Month

02468101214161820

# of

IPO

s

Interpretation

From the above chart we can see that the monthly trends from

September 2009 to November 2009 was constant with following a

decline in November 2009 which till January 2010. In March 2010 we

can analyse a considerable price in the monthly trend. The highest

trend was recorded in the month of November 2010.

Financial Year

Number

of Issue

Fresh

Capita

l

Offer

for

Sale

Total Amount

Raised (in Rs

crore) FPO IPO

2001-2002 6 1013 0 1013 0 1013

2002-2003 6 980 59 1039 0 1039

2003-2004 28 2293 15514 17807 14616 3191

2004-2005 29 14869 6563 21432 6769 14663

2005-2006 102 21998 1668 23666 12868 10798

67

2006-2007 85 24033 961 24994 1287 23707

2007-2008 90 49530 2689 52219 10896 41323

2008-2009 21 1985 49 2034 0 2034

2009-2010 44 24537 22404 46941 21993 24948

2010-2011 (Till

September

2010) 32 8090 4195 12,285 1000 11285

Trend of IPOs Year on Year

68

Book Running/Lead

ManagersTotal

Issues 2010 Good Bad

Total

Issues

2009 Good Bad

Kotak Mahindra Capital Company

Limited, 10 8 2 10 5 5

Enam Securities Private Limited 9 3 6 9 5 4

SBI Capital Market 7 3 4 9 6 3

IDFC Capital Limited 6 3 3 4 4  

JM Financial Consultants Private Limited 6 2 4 5 4 1

ICICI Securities Limited 5 1 4 3 2 1

Edelweiss Capital Limited 4 2 2 3 2 1

Morgan Stanley India Company Private

Limited 3 2 1 6 3 3

Axis Bank 3 1 2 1   1

Keynote Corporate Services Limited 2 2   3 1 2

Performance of Book Running/Lead

69

Interpretation

In the above graph we can see that the performance in the first and second

quarter was almost constant. In the third quarter the performance of the east was at its

highest level thus we can conclude that there was optimum utilization of all the

resources, where as the fourth quarter experienced a fall in its performance.

TOP IPOs IN PIPELINECompany Issue   Size    (Rs. Cr)

Indian Oil 20000

Sail 18000

ONGC 15000

Jindal Power 7200

Sterlite Energy 5100

Reliance Infratel 5000

Power Grid 4000

Lodha Developers 2500

Embassy Property Developments 2400

Gujarat State Petroleum 2050

Lavasa Corporation 2000

Emaar MGF Land 1600

BPTP 1500

70

Hindustan Copper 1500

L&T Finance Holdings 1500

Ambience 1293

Avantha Power & Infrastructure 1250

Ind-Barath Power 1140

Kalpataru 1008

Raheja Universal 864

Interpretation

In the above graph we can see that the highest performance was recorded by

the Indian oil company followed by SAIL and ONGC performance of Jindal Power,

Sterlite Energy, Reliance Infratel was acceptable the performance by Ind-Barath,

Kalpataru, Raheja Universal Power can be said to be underprivileged.

71

TOP IPO GAINER

Name of the issue Book Running Lead Manager

Issue Size

Total Subscription

Issue Price (Rs.)

Current Price

% chg

ASTER SILICATES Saffron,Capital Advisors Pvt Ltd

53.1 4.68 118 49 -58

TIRUPATI INKS Ashika Capital Ltd

51.5 9.2 43 19.95 -54

TARAPUR TRANSFORMERS

Comfort Securities Pvt Ltd

63.75 1.65 75 35.75 -52

CANTABIL RETAIL INDIA

Spa Merchant Bankers Ltd

105 1.98 135 92.55 -31

PARABOLIC DRUGS

Avendus Capital Pvt Ltd

200 1.03 75 55.35 -26

MICROSEC FINANcCIAL SERVICES

SBI Capital Markets Ltd

147.5 11.99 118 89.1 -24

RAMKY INFRASTRUCTURE

Enam Securities Pvt Ltd

530 2.73 450 356.25 -21

INDOSOLAR Enam Securities Private Limited

357 1.43 29 23.3 -20

NITESH ESTATES ICICI Securities

405 1.13 54 43.55 -19

ENGINEERS INDIA IDFC Capital 959.35 13.35 290 350.25 21

72

Pvt LtdOBEROI REALTY Kotak

Mahindra Pvt Ltd

1028.61 10.12 260 295.4 14

CHAPTER VI

FINDINGS,

SUGGESTIONS &

CONCLUSION

73

FINDINGS

IPOs have fared very badly in the last one year in spite of a drastic increase in

the number of IPOs compared to 2009.

The BSE IPO index has performed badly since its launch on 24 August 2009.

The index closed at 1947.54 on the day of its launch.

By the end of December 2010, exactly 16 months after its launch, the BSE

IPO index was at 1,908.90, down almost 40 points. In the same period, the

Sensex is up by 28%.

The total no of companies coming for IPO have increased in 2010 compared

to 2009. There were 65 IPOs that were listed in 2010 as compared to only 17

IPOs in 2009.

2009 was mostly affected by recession and companies were not coming for

IPOs due to lack of investor confidence.

Of the 65 companies that have come for IPO, only 21 companies are not

trading at a profit while 43 companies are now trading at a loss.

Close to 100 companies are in the pipe line to raise money through IPOs in

the coming months.

74

SUGGESTIONS

Looking at the historical trends, Investors should be cautious while investing

in Initial Public Offerings.

Investors in IPOs should look at the growth the company and the industry in

which it is operating in.

Investors should also look at the overall market conditions before investing in

an IPO.

Investors should come out of the opinion that all the IPOs will be traded at a

premium.

For companies, Book-building is preferred over the fixed price method in

IPOs, because the allotment of shares is generally done at a price determined

by the lead merchant banker and issuer within the price band. Since QIBs are

the dominant players and bid at somewhat higher prices within the band, the

issuer and merchant banker fix the price at the higher end such that retail

investors have to accept it.

The grading process will not take into account price valuation, a key

parameter in any stock investment decision. The market does not work on

fundamentals. A good company is a bad investment at a high price. The small

investors, for whom the grading exercise is basically meant, would despite

disclaimers expect a high graded IPO to quote above the offer price. The

whole purpose of grading an IPO would be defeated if it cannot help an

investor decide what stock to choose and at what price.

75

CONCLUSIONS

Companies should be careful while going for an IPO as well as after the IPO

process. The essential points to take care of to see that IPOs are successful and

investors benefit from investing in the IPOs include:

1. The underwriter is focused on your industry: The IPO marketplace is a crowded

marketplace and the significant sums you are spending for professional advice to go

public need to be targeted to a firm with real expertise in your industry. Partial

evidence of appropriate expertise would be having an analyst devoted to your

industry.

2. The market relies heavily on analyst projections and recommendations:

Specifically, the underwriting firm's analyst in your industry must: Have the capacity

to cover your company with sufficient attention; Understand your company,

customers, and competition; and Indicate sincere commitment to covering your

company.

3. Due to the importance of a successful road show, the underwriter must have the

ability and contacts to identify the right investor groups for your presentation and get

them committed to attend. References from previous IPO successes are essential.

4. There must be sufficient evidence of being able to build a quality "book" of

potential orders for your stock.

5. There should be a history regarding the ability to identify the right offer price and

size.

6. Finally, but rarely understood by many companies, there must be significant

aftermarket support in terms of maintaining and supporting trading in the stock,

providing subsequent research reports on the company, and continuing institutional

exposure to the company.

76

ANNEXURES

Annexure -1: Initial Public Offerings in 2009-2010

Equity Issue Price Current Price %Gain/Loss Month

MOIL 375 435.15 16.04 Dec-10

Punjab & Sind 120 118.85 -0.96 Dec-10

Claris Life 228 192.95 -15.37 Dec-10

RPP Infra Proj 75 57.3 -23.6 Dec-10

A2Z Maintenance 400 300.7 -24.83 Dec-10

Gravita India 125 224.4 79.52 Nov-10

Coal India 245 310.15 26.59 Nov-10

Career Point 310 363.85 17.37 Oct-10

Va Tech Wabag 1310 1507.45 15.07 Oct-10

Tecpro Systems 355 353.5 -0.42 Oct-10

Oberoi Realty 260 245.9 -5.42 Oct-10

Ashoka Buildcon 324 285.1 -12.01 Oct-10

Electrosteel St 11 9.17 -16.64 Oct-10

Bedmutha Ind 102 82.25 -19.36 Oct-10

Eros Intern 175 136.9 -21.77 Oct-10

Prestige Estate 183 140.5 -23.22 Oct-10

Ramky Infra 450 307 -31.78 Oct-10

Orient Green 47 30 -36.17 Oct-10

BS TransComm 248 125.9 -49.23 Oct-10

Microsec Fin 118 52.15 -55.81 Oct-10

Cantabil Retail 135 54.05 -59.96 Oct-10

Sea TV Network 100 36.8 -63.2 Oct-10

Commercial Eng 127 45.4 -64.25 Oct-10

Gyscoal Alloys 71 22.9 -67.75 Oct-10

Tirupati Inks 43 13.6 -68.37 Oct-10

Gujarat Pipavav 46 58.15 26.41 Sep-10

77

Indosolar 29 22.05 -23.97 Sep-10

Midfield Ind 133 79.8 -40 Aug-10

Prakash Steelag 110 125.85 14.41 Aug-10

Bajaj Corp 660 490.3 -25.71 Aug-10

Hindustan Media 166 172.55 3.95 Jul-10

Parabolic Drugs 75 53.7 -28.4 Jul-10

Technofab Engg 240 171.35 -28.6 Jul-10

Aster Silicates 118 34.65 -70.64 Jul-10

Mandhana Ind 130 267.75 105.96 May-10

Talwalkars Fitn 128 228.8 78.75 May-10

SJVN 26 21.95 -15.58 May-10

Jaypee Infra 102 67.9 -33.43 May-10

Nitesh Estates 54 31.35 -41.94 May-10

Tarapur Trans 75 27.8 -62.93 May-10

Persistent 310 436.05 40.66 Apr-10

Shree Gan Jewel 260 188.6 -27.46 Apr-10

Pradip Oversea 110 68.95 -37.32 Apr-10

Intrasoft Tech 145 82.3 -43.24 Apr-10

Goenka Diamond 135 70.8 -47.56 Apr-10

ARSS Infra 450 685.2 52.27 Mar-10

United Bank 66 92.65 40.38 Mar-10

DQ Entertain 80 88.9 11.13 Mar-10

ILandFS Trans 258 272.75 5.72 Mar-10

Man Infra 252 193.85 -23.08 Mar-10

Texmo Pipes 90 40.9 -54.56 Mar-10

Jubilant Food 145 562 287.59 Feb-10

Thangamayil 75 161.5 115.33 Feb-10

Infinite Comp 165 199 20.61 Feb-10

78

VasconEngg 165 124.05 -24.82 Feb-10

Hathway Cable 240 148 -38.33 Feb-10

Syncom Health 75 40.7 -45.73 Feb-10

DB Realty 468 191.15 -59.16 Feb-10

Emmbi Polyarns 45 15.8 -64.89 Feb-10

Aqua Logistics 220 34.4 -84.36 Feb-10

Godrej Proper 490 599.2 22.29 Jan-10

DB Corp 212 244.2 15.19 Jan-10

MBL Infra 180 200.05 11.14 Jan-10

JSW Energy 100 90.1 -9.9 Jan-10

Cox & Kings 330 487.6 47.76 Dec-09

Astec Life 82 55.85 -31.89 Nov-09

Den Networks 195 159.25 -18.33 Nov-09

IndiaBPower 45 26.4 -41.33 Oct-09

Thinksoft 125 79 -36.8 Oct-09

EuroMult 75 21.05 -71.93 Oct-09

Pipavav 58 80.3 38.45 Oct-09

Oil India 1050 1309.35 24.7 Sep-09

Globus Spirits 100 157.45 57.45 Sep-09

Jindal Cotex 75 106.85 42.47 Sep-09

NHPC 36 26.9 -25.28 Sep-09

Adani Power 100 122.25 22.25 Aug-09

Raj Oil Mills 120 39.75 -66.88 Aug-09

Excel Infoways 85 39.7 -53.29 Jul-09

Mahindra Holida 300 367.7 22.57 Jun-09

Rishabhdev Tech 33 5.3 -83.94 Mar-09

79

Annexure -1: Upcoming IPOs (2010 Filings with SEBI)

Company Name Date of Filing

Lokmat Media Dec-10

Max Flex and Imaging System Dec-10

Modern Tube Industries Dec-10

Net Alter Software Dec-10

Olympic Cards Dec-10

Onelife Capital Advisors Dec-10

PTC India Financial Services Dec-10

Reid and Taylor India Dec-10

Sabari Inn Dec-10

Shree Hanuman Sugar and Industries Dec-10

VRL Logistics Dec-10

Bharatiya Global Infomedia Nov-10

Brooks Laboratories Nov-10

Gemini Engi-Fab Nov-10

Lovable Lingerie Nov-10

Palco Recycle Industries Nov-10

Plastene India Nov-10

Readymade Steel India Nov-10

Semantic Space Technologies Nov-10

Emaar MGF Land Oct-10

80

Endurance Technologies Oct-10

Innoventive Industries Oct-10

Marck Biosciences Oct-10

Micromax Informatics Oct-10

Muthoot Finance Oct-10

Nimbus Communications Oct-10

Pride Hotels Oct-10

Scotts Garments Oct-10

Shipping Corporation of India Oct-10

Sonear Industries Oct-10

Tara Health Foods Oct-10

Tara Jewels Oct-10

Tijaria Polypipes Oct-10

Unijules Life Science Oct-10

Vaswani Industries Oct-10

Aanjaneya Lifecare Sep-10

AGS Transact Technologies Sep-10

Blend Financial Services Sep-10

Fineotex Chemical Sep-10

Hindustan Copper Sep-10

IOT Infrastructure and Engergy Services Sep-10

81

Kalpataru Sep-10

L and T Finance Holdings Sep-10

Lavasa Corporation Sep-10

Midvalley Entertainment Sep-10

Paramount Printpackaging Sep-10

PG Electroplast Sep-10

Rama Medicares Sep-10

Sanghvi Forging and Engineering Sep-10

Servalakshmi Paper Sep-10

Shilpi Cable Technologies Sep-10

Sudar Garments Sep-10

SVEC Constructions Sep-10

Timbor Home Sep-10

Betul Oil (DRHP) Aug-10

Birla Pacific Medspa Aug-10

Dev Procon Aug-10

Future Ventures India Aug-10

Galaxy Surfactants Aug-10

Omkar Speciality Chemicals Aug-10

Punjab and Sind Bank Aug-10

A2Z Maintenance and Engineering Services Jul-10

82

Embassy Property Developments Jul-10

Entertainment World Developers Jul-10

Jain Infraprojects Jul-10

Milestone Capital Advisors Jul-10

NKG Infrastructure Jul-10

Rajputana Stainless Jul-10

RPP Infra Projects Jul-10

Shekhawati Poly-yarn Jul-10

SRS Jul-10

Tunip Agro Jul-10

Virgo Engineers Jul-10

VMS Industries Jul-10

Ind-Barath Power Infra Jun-10

Planet 41 Mobi-Venture Jun-10

Greatship ( India) May-10

One97 Communications May-10

C Mahendra Exports Apr-10

Claris Lifesciences Apr-10

ICOMM Tele Apr-10

JP Infrastructure Apr-10

Raheja Universal Apr-10

83

Ravi Kumar Distilleries Apr-10

Shirdi Industries Apr-10

You Broadband and Cable India Apr-10

Acropetal Technologies Mar-10

Avantha Power and Infrastructure Mar-10

Commercial Engineers and Body Builders Co Mar-10

Genus Paper Products Mar-10

Gujarat State Petroleum Corporation Mar-10

RDB Rasayans Mar-10

Rushil Décor Mar-10

SEL Textiles Mar-10

Asian Business Exhibition and Conferences Feb-10

Inventure Growth and Securities Feb-10

Mittal Corp Feb-10

Jindal Power Jan-10

Neptune Developers Jan-10

BIBLIOGRAPHY

BOOKS

84

1. Khan M. Y .and Jain. P.K (2009). Financial management. Pearson publications

2. Meir Kohn, “Financial Institutions and Markets”, 2009 2nd Ed. Oxford

University Press.

3. Khan. M.Y., “Financial Services”, 2010, 5th Ed. Tata McGraw-Hill, Pvt. Ltd.,

New Delhi.

4. Gordon and Natarajan, “Financial Markets and Services’, 2009, HPH, 7th Ed.

Mumbai.

5. Avadhani. V.A., “Financial Services in India”, 2009, 1st Ed. HPH.

6. Vasant Desai, “Financial Markets and Financial Services”, 2009, HPH, 1st Ed.,

Mumbai.

WEBSITES

www.moneycontrol.com

www.capitalline.com

www.nseindia.com

www.sebi.gov.in

www.capitalmarket.com

www.wikipedia.com

www.intimesepctrum.com

www.thehindubusinessline.com

www.financialexpress.com

www. icra ratings.com

NEWSPAPERS

1. Economic Times

Project Summary

85

The capital market is the market for securities, where companies and the

government can raise long term funds. The capital market includes the stock market

and the bond market. Financial regulators ensure that investors are protected against

fraud. The capital markets consist of the primary market, where new issues are

distributed to investors, and the secondary market, where existing securities are

traded.

An Initial Public Offer (IPO) is the selling of securities to the public in the

primary market. It is when an unlisted company makes either a fresh issue of

securities or an offer for sale of its existing securities or both for the first time to the

public. This paves way for listing and trading of issuer’s securities. The sale of

securities can be through book building or normal public issue.

The study covers the Primary Markets with IPOs in particular. The study

attempts to study the advantages and disadvantages of IPOs. The study collects most

of the information from different secondary resources apart from primary information

by discussing with different managers and customers who do online trading. The

study covers only the IPOs in India. The study attempts to study the IPOs that have

come up in the last few years and the IPOs that are expected to come up in the next

one year.

The study is limited to Initial Primary Offerings in India. The study was

carried out for a period of 45 days and due to paucity of time an in-depth study was

not possible. The IPO market is a dynamic one. Therefore data related to last few

months was only considered and interpreted.

86