relationship between demand and initial performance in indian ipo market-srirajsudhakaran-0449

Relationship between demand and initial performance in Indian IPO market

M. P. Birla Institute of Management

1

RESEARCH PROJECT On

“RReellaatt iioonnsshhiipp bbeettwweeeenn DDeemmaanndd aanndd IInnii tt iiaall

PPeerrffoorrmmaannccee iinn IInnddiiaann IIPPOO MMaarrkkeett” Submitted in partial fulfillment of the requirement for MBA

Degree of Bangalore University BY

Sriraj Sudhakaran Registration Number

04XQCM6097

Under the guidance of

Prof.B.V.Rudramurthy

M.P.Birla Institute of Management

Associate Bharatiya Vidya Bhavan

Bangalore-560001



2

CHAPTER

CONTENTS

PAGE NO.

ABSTRACT 1.

2.

3.

4.

5.

INTRODUCTION:

THOEORETICAL CONSIDERATIONS INDIAN IPO MARKET

LITERATURE REVIEW: RESEARCH METHODOLOGY:

OBJECTIVE OF STUDY ASSUMPTIONS DATA AND SAMPLE OF DATA METHODOLOGY LIMITAION OF STUDY

DATA ANALYSIS:

INITIAL RETURN. DEMAND FOR SCRIPS REGRESSION MODEL. ABNORMAL RETURNS

CONCLUSION:

3 6 9

17

32 32 33 36 37

39 48 49 51

54

REFERENCES: 56



3

Chapter 1

INTRODUCTION



4

IINNTTRROODDUUCCTTIIOONN

Initial public offerings (IPO’s) of common stock, on

average, earn abnormally high initial returns in general as per the

studies by Ibbotson (1975), Ritter (1984), Loughran, et al (1994)]. It is

also well known that IPO firms significantly under perform the market

in the long run (three to five years) following the offering date

[Aggarwal and Rivoli (1990), Loughran and Ritter (1995, 1997), and

Brav and Gompers (1997)]. This IPO return anomaly is observed in

stock markets around the world. According to Ritter (1991), the

relationship between the long-run underperformance to the short-run

under pricing phenomenon is an unresolved mystery in the IPO

literature. Although these puzzling occurrences have prompted

substantial research to investigate the causes of IPO under pricing, we

know very little about why some IPO’s are under priced while others

are not. Moreover, little attention has been paid to the long-run

differences between those IPO’s that are under- or over-priced [one

exception is Mill and Reilly (1987)]. In this study I am trying to find

whether there exits any relationship between demand for new issues of

shares (Initial public offering) and the short term return obtained after

listing



5

IPO under pricing in the sense of abnormal short run returns on

IPO’s has been found in nearly every country in the world (Loughran et

al., 1994). This suggests that IPO under pricing may be the outcome of

basic problems of information and uncertainty in the IPO process, and is

unlikely to be figment of institutional peculiarities of any one market.

Relatively little work has been done so far on IPO under pricing in India

Aggarwal, 1994, Krishnamurthy and Kumar, 1994

The primary market in India is unique by world standards in

many ways it has been shaped by an unusual history of regulation, the

institutional details of how IPO’s take place are singular, the sheer size

and scope of the primary market is enormous and the large scale direct

participation in the primary market by millions of retail investors is

unlike hat in any other country in the world.

Relationship between demand and initial performance in initial IPO market

M. P. Birla Institute of Management 6

TTHHEEOORREETTIICCAALL CCOONNSSIIDDEERRAATTIIOONN

Going public marks an important watershed in the life of a

young company. It provides access to public equity capital and so may

lower the cost of funding the company’s operations and investments. It

also provides a venue for trading the company’s shares, enabling its

existing shareholders to diversify their investments and to crystallize

their capital gains from backing the company – an important

consideration for venture capitalists. The act of going public itself

shines a spotlight on the company, and the attendant publicity may

bring indirect benefits, such as attracting a different caliber of manager.

At the same time, the company acquires new obligations in the form of

transparency and disclosure requirements, and becomes accountable to a

larger group of relatively anonymous shareholders who will tend to vote

with their feet (by selling the shares) rather than assist the company’s

decision-makers in the way a venture capitalist might.

DDEEFFIINNIITTIIOONN

An Initial Public Offering (IPO) is a corporation's first sale of

common shares to public investors. Typically, a company hires an

underwriter, am investment bank, to underwrite (handle) the offering

and a legal firm to assist in drafting the prospectus. The sale of stock is

overseen by financial regulators and where relevant by a stock

exchange. It is usually a requirement that disclosure of the financial

situation and prospects of a company be made to prospective investors



MMeetthhooddss ooff IIPPOO’’ss

Corporate may raise capital in the primary market by way of an

initial public offer, rights issue or private placement. An Initial Public

Offer (IPO) is the selling of securities to the public in the primary

market. This Initial Public Offering can be made through the fixed price

method, book building method or a combination of both.

FFiixxeedd pprriiccee ooffffeerriinngg

The traditional method of doing IPO’s is the fixed price

offering. Here, the issuer and the merchant banker agree on an "issue

price" - e.g. Rs.100. Then you and I have the choice of filling in an

application form at this price and subscribing to the issue.

Extensive research has revealed that the fixed price offering is

a poor way of doing IPO’s. Fixed price offerings, all over the world,

suffer from `IPO under pricing'. In India, on average, the fixed-price

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

obtains 50% lower issue proceeds as compared to what might have been

the case. This average masks a steady stream of dubious IPO’s 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, with a prevalence of under

pricing on average.



BBooookk bbuuiillddiinngg pprroocceessss

Book Building is basically a capital issuance process used in

Initial Public Offer (IPO), which aids price and demand discovery. It is a

process used for marketing a public offer of equity shares of a company.

It is a mechanism where, during the period for which the book for the

IPO is open, bids are collected from investors at various prices, which

are above or equal to the floor price. The process aims at tapping both

wholesale and retail investors. The offer/issue price is then determined

after the bid closing date based on certain evaluation criteria.

Features Fixed Price process Book Building process

Pricing

Price at which the securities are offered /allotted is known in advance to the investor.

Price at which securities will be offered /allotted is not known in advance to the investor. Only an indicative price range is known.

Demand Demand for the securities offered is known only after the closure of the issue

Demand for the securities offered can be known everyday as the book is built.

Payment Payment if made at the time of subscription wherein refund is given after allocation.

Payment only after allocation.



IINNDDIIAANN IIPPOO MMAARRKKEETT

The Indian primary market has come a long way particularly in

the last decade after deregulation of the Indian economy in FY92. Both

the primary and secondary markets have had their fair share of reforms,

structural cum policy changes time to time. The most commendable being

the dismantling of the Controller of Capital Issues (CCI) and introduction

of the free pricing mechanism (which permits the companies to price the

issues). This changed the whole facet of Initial Public Offering (IPO)

market. Free pricing mechanism allowed good corporate to raise money

from the primary market at the right price, which was denied earlier.

However, the decontrol was, to some extent, misused by corporate to

overprice issues.

The government realized the need for a regulated environment and

started to promote its necessity in capital markets. Spearheading this was

the establishment of The Securities and Exchange Board of India (SEBI)

which became active in 1992. SEBI was assigned the role of monitoring

and regulating the working of stockbrokers, bankers to an issue, merchant

bankers, portfolio managers, and other intermediaries who are associated

with stock markets. The effects of these structural changes are apparent

from the trends in the resources raised from primary market, which

includes public issues, rights issues, private placements and overseas

issues.



It is evident that during 1992-94, the bourses started to show signs

of recovery after the securities scam in FY92. The Sensex also touched a

new high during the same period due to the improved economic

environment. Though total funds mobilised during FY94 went up from

Rs 135 bn in FY93 to Rs 188 bn in FY94, a number of companies started

to cash in on the buoyant primary market, notably the finance companies.

Besides, as the domestic companies went on for overseas issues (GDR,

FCCBs and ECBs), there was a sharp increase in funds raised through

overseas issues, which shot up by 959% from Rs 8 bn in FY93 to Rs 80

bn in FY94. The trend continued in 1995 backed by robust industrial

production and higher gross domestic product growth. IPO market had

another impressive year. Public issue proceeds moved up to Rs 249 bn, a

growth of a 32% compared to FY94.

Buoyed by the business scenario most of the manufacturing

companies went for huge capacity expansions and diversification. The

impact of this was visible as excess capacity cramped margins and many

companies went into the red. Public issues started drying up. The total

fund mobilised during FY96 came down by 40% as the proceeds from

public, rights and overseas issues fell by 27%, 47% and 67%

respectively. That is the reason why both proceeds from private

placement as well as overseas markets moved up sharply by 60% and

121% respectively in FY97. But, then came the South East Asian crises,

which hit the trade and economic growth. So, FIIs shifted their portfolio,

which resulted in reduced exposure towards developing economies like

India. The market remained flat, as investors preferred to put money in

banks rather than investing in shares.



But during the latter half of FY98, markets witnessed the boom in

software stocks. Software stock valuations soared through the roof. This

boom in the secondary market caught on to the primary market as well.

More than 50% of new issues were from software companies in FY99.

They received tremendous response from investors with over-

subscription rates ranging anywhere between 20 times-55 times the issue

size. Subsequently, these companies got listed at huge premiums to their

offer price, which triggered interest among investors. The private

placement market witnessed a surge in mobilizations. This was largely

due to promoter’s shoring up their stakes in companies, in light of the

takeover code taking a more concrete shape. Also, as the primary markets

for both equity and debt turned bearish, companies opted for the low cost

option of private placements.

Since inception, the role that market regulator SEBI has played

in reforming primary market is commendable. Stringent norms have been

imposed as and when required. Pre-issue requirements of issuing

company and Lead Managers, filing due-diligence report at the time of

filing of draft-prospectus and post-issue obligations of revealing the

allotment basis are some of the regulatory measures, which were enacted

to safeguard investors and to bring transparency in the system. Other

notable norms include the lock-in period norms for promoters as well as

mutual funds in the issuing company. Besides, project appraisal route as

an alternative to the profit track record route was replaced by book-

building route, where qualified institutional investors (QIBs) where

allowed to subscribe 60% of the issue.



Though these measures did prevent the investors from

fraudulent practices, the quality of new issues, however, seemed to be

deteriorating. Companies with good track record, teams and institutional

backing were overtaken by companies, which zoomed in to cash in on

this new economy boom.

Though public issue receipts showed 10% YoY growth in FY00,

funds mobilised from primary market remained flat (1%). The primary

market moved in tandem with secondary markets. For instance,

Television–18 got a tremendous response while public issue from Ajanta

Pharma just managed to sail through. Further, established software

companies preferred the private placement route for raising funds in

FY00. As a result, proceeds from private placement showed a sharp rise

of 60% to Rs 403 bn. For the second consecutive year, non-financial

public sector undertakings and government companies remained absent

from public issue market. Though private placement receipts fell during

FY00, some bond issues received good responses which include bond

issue from Indian Oil Corporation and Hindustan Petroleum Corporation

Limited.

The IPO market has come a long way since the boom of FY94.

However lot has to be done since the market seems to be heading the same

direction as it way during the early nineties when non-banking financial

institutions tamed the primary market. Besides, recent statistics also

indicate that the average size of public issues have shrinked to Rs 100 m in

FY01. Added to the woe, only five issues in the first half of the current

year managed to get more than 5 times over-subscription compared to 30

last year. This is expected to continue as long as unscrupulous companies

who do not have any infrastructure facilities, manpower, revenue model,

continue to raise money from the markets.



TTrreennddss iinn IInnddiiaann IIPPOO mmaarrkkeett

1) WWaanniinngg rreessppoonnssee:

Investor response to new offerings is cooling off from red-hot to

lukewarm. A majority of the book-built offers of 2004 attracted

subscriptions for well over 10 times the offer size. Particularly fancied

ones, such as Indoco Remedies and Bharti Shipyard, attracted bids for 60

and 72 times the offer size!

Compared to this, the tally for 2005 is unimpressive. Only five of

the 10 new companies that launched IPO’s in 2005 attracted even double-

digit subscription numbers; with a majority of the recent ones drawing

bids for 5-7 times the offer size. However, reasonably priced offers with

good credentials defied this trend. Gokaldas Exports and Gateway

Distriparks attracted subscriptions of 46 and 28 times respectively in

their book-built offers.

An over-subscription of 5-7 times indicates that while investors are

not yet giving IPO’s the short shrift, their appetite is certainly waning.

This is especially because subscription numbers for the retail and high-

net-worth category are usually inflated. Investors typically put in bids for

several times their actual requirement to improve the chances of securing

allotment.



2) AAggggrreessssiivvee bbiiddddiinngg ccoonnttiinnuueess:

Though the extent of over-subscription to IPO’s is on the wane,

the majority of individual investors who participate in the offers appear

to bid quite aggressively.

The lion's share of the bids is made either at the cut-off price or at

upper end of the price band. This indicates that a good number of

investors are either unsure how to bid or bid aggressively so that they are

certain of securing allotment.

Eight of the 10 book-built offers made in 2005 received 90 per cent of

the bids at the upper end of the price band or the cut-off price. Nor has

the asking price for an IPO influenced bidding patterns. The Shoppers'

Stop IPO, which valued the stock at about 40 times its earnings at the

upper end of the price band, attracted 92 per cent of the bids at this price

.

During the course of a book-built offer, responses from institutional

investors usually come in early; they are also more likely to bid at in-

between points in the price band.

Bids from individuals (both retail and high net-worth) usually seem to

come in at the last minute, the majority being at the cutoff price or at the

higher end of the price band. However, in some of the recent offers, such

as Shoppers' Stop, India Infoline and Allsec Technologies, the company

has taken the cue from institutional bids, to fix the offer price at a mid-

way point or at the lower end of the price band.



3) IInnccoonnssiisstteenntt lliissttiinngg ggaaiinnss:

Given an ambitious asking price and reduced demand from

investors for the new shares, not many of the recently listed stocks soared

on their debut. The recent crop of offers has an inconsistent record of

delivering gains on listing. Four of the six book-built IPO’s since March

closed below the offer price on the day of listing. Allsec Technologies,

Shringar Cinema, 3I Infotech and Jaiprakash Hydro Power listed below

the offer price, while India Infoline listed barely above. Only Gokaldas

Exports and Gateway Distriparks generated high listing gains reminiscent

of 2004; this can probably be attributed to their moderate pricing.

44)) CChhaannggiinngg iinnvveessttoorr pprrooffiillee

However, there could be healthy aspects to the recent trends in

book-built IPO’s. In a trend that began with the Jet Airways offer and has

become well-established since April, institutional investors such as

mutual funds, FIIs and venture capital funds have replaced non-

institutional investors (read high net-worth investors), as the largest

category of bidders in recent offers.

In some of the recent IPO’s, institutions accounted for a dominant

proportion of the bids. About 70 per cent of the bids for the India

Infoline offer, 85 per cent of the bids for Allsec Technologies and 48 per

cent of the bids for the Shoppers' Stop IPO came from institutions. This

trend is likely to gain strength, after the recent changes in SEBI

regulations relating to book-built offers.



Since May, companies have been required to trim the proportion of

the offer set aside for non-institutional bidders from 25 to 15 per cent;

and peg up the reservation for retail investors from 25 per cent to 35 per

cent in book-built offers.

55)) BBlleessssiinngg iinn ddiissgguuiissee

The changing profile of investors in IPO’s is a healthy trend, both

for the companies who tap the capital market and for investors seeking to

invest through IPO’s. For one, institutional investors may be in a better

position to take advantage of the book-building process to help in fair

price discovery during the offer. This is because institutions may find it

less difficult than individual investors to assess the prospects for

companies that hail from a diverse range of offbeat businesses, which

have been tapping the market in recent times.

Second, as institutional investors are less likely to invest with an

eye on short-term listing gains, sizeable institutional holdings in a stock

may lead to more stable trends in stock prices after listing. This has been

borne out by some of the recently listed stocks such as India Infoline and

Shringar Cinema, which have made significant gains post-listing.

The absence of phenomenal gains on the day of listing could also

turn out to be a blessing in disguise. After the recent experience, fewer

investors are likely to bid for an IPO with the intention of making a quick

gain on listing. This could create more space in book-built offers for

serious bidders, who plan to stay with the company for the long term.



Chapter 2

LETRATURE REVIEW



LLiitteerraattuurree rreevviieeww::

1) Sumit Agarwal, Chunlin Liu, S. Ghon Rhee

“Investors demand for IPO’s and after market performance: Evidence from

Hong Kong stock market” - [University of Hawaii’s financial working papers 2003.]

In this study the author is trying to determine the relationship

between investors demand prior to offering and aftermarket performance

of IPO firms. The data for this study is obtained from two sources: the

Stock Exchange of Hong Kong (SEHK) and the Pacific-Basin Capital

Markets (PACAP) Research Center of the University of Rhode Island.256

IPO’s from 1993 to 1997 is used fro the study.

MMeetthhooddoollooggyy

The methodology used in the study is as follows,

1) Initial Returns

IRi = (Pi - Si)/ Si

IRi = Initial return for the stock

Pi = listing days adjusted closing price

Si = price at which share was issued to share holders



The following regression model is performed:

IRi = α0 + α1Ratioi + α2Sizei + α3Fundi + α4SDi + α5DIV + α6Indi + α7Yeari +εi

Where Ratio is the over-subscription ratio, Size is the natural

logarithm of the issuing firm’s market capitalization (inflation adjusted

to the 1993 value), Fund is the natural logarithm of the offering

proceeds (inflation adjusted to the 1993 value), SD is the standard

deviation of daily returns for the twenty-five days after listing, DIV is

the first annual cash dividend yield after IPO’s, Ind is a series of

industry dummy variables and Year is a series of dummy variable

indicating IPO’s year.

2) Long-Run Excess Returns

ER iT = R iT – RR iT

To assess the relationship between investor demand and IPO’s

long-run performance two regressions are performed:

ERi = β0 + β1Ratioi + β2Sizei + β3Fundi+ β4IRi+ β5DIVi+ β6Indi + β7Yeari + µ

Rp - Rf = γ0 + γ1 (Rm -Rf) + γ2 SMB + γ3 HML + η

where Rp represents the monthly return on a portfolio of IPO’s,

Rf represents the risk- free interest rate, SMB is the difference in the

returns of a value-weighted portfolio of small stocks and large stocks,



and HML is the difference in the returns of a value-weighted portfolio of

high book-to-market stocks and low book-to-market stocks. The estimate

of the intercept, γ 0, provides a test of null hypothesis that the mean

monthly abnormal return on the calendar portfolio is zero. The number of

IPO’s is not constant from month to month, thus we use weighted least

squares to account for the time-varying number of observations used to

create calendar portfolios. The calendar portfolios also are value-

weighted.

The study finds a strong relationship between investor demand

and the short- and long-run post-issue performance of IPO’s. First, he

proves that investor demand for IPO’s is positively related to the initial

returns of these firms. The returns on the first trading day indicate that

the IPO’s with high investor demand are significantly under priced, while

the IPO’s with low investor demand are overpriced. Second, finding is

that the long-run size-adjusted excess returns of IPO’s are negatively

related to the investors’ demands. This also shows that the high- demand

IPO portfolio significantly underperforms the market and the low-

demand IPO portfolio outperforms the market. Overall, the paper finds

that the IPO’s with high investor demand have large positive initial

returns but negative longer-run excess returns, while the IPO’s with low

investor demand have negative initial returns but positive longer-run

excess returns.



2) Paul McGuiness

“An examination of under pricing of initial public offering” - Journal of

Business Finance & Accounting 1992.

This study examines the level of under pricing of IPO’s for a

more recent and extensive period. It also focuses the level of under

pricing recorded, across the various issues.

Empirical methods used:

MARj,t = [ (Pj,t/Pj,t-1) - (Hj,t/Hj,t ) ]

MARj,t = Market adjusted return on stock j at period t

Pj,t = CLOSING PRICE OF STOCK J FROM INITIAL TRADING (t =I

refers to the end of first day trading)

Pjt-1 =closing price of stock j on the t-1st day of trading (when t=1, t-1 to the offering

price of the IPO shares)

Hj,t = market index at the close of trading on the T th day of trading for stock j

Hj,t-I = market index at the close of trading for stock j on the t-1 day of trading.



This equation measures the initial trading returns in the excess

market return form.The different variables and measurement used in the

study

DEPENDAND VARIABLE

UND: defined using MARj,t measure over the period between the opening of trading in

the issue and the close of trading of the first day

EXPLANATORY VARIABLE

MMeeaassuurree ooff eexx--aannttee uunncceerrttaaiinnttyy

SD: Standard deviation of daily returns in the newly listed stock between the close in the

first day and the 15 th day of trading.

USES: The LN of one plus the number of different uses for fund raised by the firm from

the offering disclosed in the prospectus document to the issue.

ANA:Net asset adjusted for the net proceeds raised from issue.



Measure of advising agent quality

INV2:Categorical value accorded a value of 1 bif 2 of more investment banks are

employed to underwrite and manages an issue; coded 0 otherwise.

IQ1: Variable coded 3 if the investment banker to the issue is highly experienced’ 2 if

moderately and 1 in other cases

IQ2: variable coded 1 if any of the investment bankers to an issue are revealed to be big

bankers: coded 0 otherwise.

ACC: Variable coded 1 if the reporting accountant to an issue belong to a big 6 group

and coded 0 if not.

ACC1:Variable coded 1 if two reporting accountants are employed for an issue: coded 0

otherwise.

Measures of intrinsic firm’s value:

MCAP: market capitalization of the issuing firm at the close of the tenth day of trading.

Incidence of the secondary issue market:

SI: dummy variable coded 1 if a secondary issue of common stock is made within 12

months of IPO



Market states variables

MS; State of the market variables average percentage change in the index over

weekly intervals

Analysis

1) Correlation matrix for continuous variables

2) OLS Regression of the explanatory variables

Conclusion

The study concludes that post listing returns for the IPO indicates that

significant positive returns occur during there first day and disappear

there after. The second finding is that the incidence of secondary returns

of stock, following an IPO is significantly and positively related to initial

IPO returns. This suggests that issuing firms can significantly under price

in order to promote a subsequent issue. He also finds that the trend of

market prior to issue is positively related to IPO under pricing. So IPO

returns are relatively high in bull market than bear markets.



3) Halil Kiymaz

“The initial and aftermarket performance of IPOs in an emerging market: evidence

from Istanbul stock exchange” : Journal of Multinational Financial Management

This paper empirically analyzes the initial and after-market returns for

the Turkish initial Public offerings (IPO’s) to provide an emerging

market case of international evidence on performances of IPO’s.

DDaattaa

The population of the study consists of 168 firms listed and subsequently

traded on the ISE during the period of January 1, 1990 and December 31,

1996.

MMeetthhooddoollooggyy

1) Average abnormal returns (AARs)

2) After-market cumulative abnormal returns (CARs)

3) MULTIVARIATE REGRESSION MODEL



CCoonncclluussiioonn

This paper suggests that investors purchasing IPO’s at the offer price

earn abnormal returns on initial trading day. This paper aims to provide

additional international evidence on the IPO’s by examining the Istanbul

Stock Exchange, which is considered as one of the fastest growing

emerging markets.

4) Li Li Eng

“An Analysis of Factors Affecting Investor Demand for Initial Public Offerings

in Singapore”: Multinational Finance Journal,

Introduction

This article investigates the impact of fundamentals of initial public

offering (IPO) firms on two categories of investors, large and small

investors.

Data

The sample consists of 63 initial public offerings listed on the SES Main

Board and Sesdaq from January 1993 through January 1997.



Methodology

The following regression models are used to examine the factors affecting

large and small investors’ demand for initial public offerings:

d I y = β0 + β1E/Pi + β2Logsizei + β3B/Mi+ β4UNDPRCi+ β5OFFTYPEi + ε

AND

d I y = β0 + β1E/Pi + β2Logsizei + β3B/Mi+ β4LTGAINi+ β5OFFTYPEi + ε

Where

di,y -Application proportion for company i’s initial public offering by each

defined category of investors expressed as a percentage of the total demand; y

= small, or large investors respectively.

E/Pi- Earnings yield of company i measured by its earnings per share divided

by issue price per share.

LogSIZEi- Size of company i measured by the logarithm of its total assets.

B/Mi- Book-to-market ratio of company i measured by the book value of its

equity (including paid-in capital and reserve accounts) per share divided by

its issue price per share.



UNDPRCi -Under pricing of company i given by the closing price on the first

day of listing minus the issue price divided by the issue price.

OFFTYPEi- Issue type of company i’s initial public offering ; indicator

variable with the value one representing a Singapore dollar denominated issue

and zero for a foreign currency denominated issue.

LTGAINi- Cumulative abnormal returns over 36 months from the first month

of listing.

CCOOCCLLUUSSIIOONN

The following were the findings of this study. First, large

investor demand is higher for issues that have higher earnings yield,

higher under pricing, but perform less well in the long-run. Small

investors take the opposite view on earnings yield, and they apply for

stocks that are under priced less but do better in the long-run. It is

expected that earnings performance would be positively related with the

long-term equilibrium prices of stocks, but an intriguing observation is a

relation in the opposite direction.



5) Wolfgang Drobetz

“Performance of Initial Public Offerings: The Evidence for Switzerland”

(University of Basel)

This article try to examine the under pricing and long-term

performance of a broad set of Swiss IPO’s from 1983 to 2000.both the

short run and long run performance is measured

DDaattaa

The data for the study was taken from of Swiss IPO’s on all

different segments of the Swiss Stock Exchanges during the 1962 to 2000

period.

EEmmppiirriiccaall mmeetthhooddoollooggyy



TEST FOR SIGNIFICANCE: skew-adjusted t-test and the non-

parametric sign test

CCOONNCCLLUUSSIIOONN

The study finds a fresh evidence for under pricing and long-term

performance of a broad set of Swiss IPO’s from 1983 to 2000.



Chapter 3

RESEARCH

METHODOLOGY



OObbjjeeccttiivveess ooff tthhee ssttuuddyy

To Determine whether there exists any relationship between investors

demand prior to IPO offering and aftermarket performance of the same

stocks on the initial days of listing

To find if there is any abnormal return in the first 30 days after listing.

AAssssuummppttiioonnss mmaaddee oonn tthhee ssttuuddyy

The first assumption made in the study is that investor sentiments will

be same during the entire period of study.

The investor may sell the stock at any time during the entire one

month

TTYYPPEE OOFF RREESSEEAARRCCHH

The type of research used in the study is Descriptive research which is

quantitative in nature.



DDaattaa

The data used for the study are secondary data for the given period of

study, I.e. financial year 2005-06

SSoouurrccee ooff ddaattaa

The data for the study is obtained from corporate databases including

prowess and capital line plus and also from the national stock exchange

website (nseindia.com).

SSaammppllee ssiizzee

The data sample consists of 47 initial public offering listed in the

National stock exchange during the financial year 2005-06.Those IPO’s

which came with a follow on issue where ignored from the sample. First

30 days opening and closing prices after listing are taken to find the

average price for the day.

The following were the 47 IPO’s taken as the sample for the study



Table 1

SL NAME OF COMPANY Date of Listing

1 Visa Steel Ltd. 17-Mar-06

2 NITCO Tiles Ltd. 21-Mar-06

3 J. K. Cement Ltd. 14-Mar-06

4 Mahindra & Mahindra Financial Services Ltd. 17-Mar-06

5 B. L. Kashyap & Sons Ltd. 17-Mar-06

6 Pratibha Industries Ltd. 16-Mar-06

7 Gitanjali Gems Ltd. 10-Mar-06

8 Sadbhav Engineering Ltd. 1-Mar-06

9 GVK Power & Infrastructure Ltd. 27-Feb-06

10 INOX Leisure Ltd. 23-Feb-06

11 Jagran Prakashan Ltd. 22-Feb-06

12 Gujrat State Petronet Ltd. 16-Feb-06

13 Entertainment Network (India) Ltd. 15-Feb-06

14 Royal Orchid Hotels Ltd. 6-Feb-06

15 Nitin Spinners Ltd. 2-Feb-06

16 Bartronics India Ltd. 12-Jan-06

17 Celebrity Fashions Ltd. 12-Jan-06

18 Educomp Solutions Ltd. 13-Jan-06

19 Punj Lloyd Ltd . 6-Jan-06

20 Tulip IT Services Ltd. 5-Jan-06

21 PVR Ltd. 4-Jan-06

22 Kernex Microsystems (I) Ltd. 20-Dec-05

23 Repro India Ltd. 22-Dec-05

24 Everest Kanto Cylinder Ltd. 15-Dec-05

25 Triveni Engineering & Industries Ltd. 13-Dec-05

26 AIA Engineering Ltd. 14-Dec-05

27 Bombay Rayon Fashions Ltd. 5-Dec-05

28 Piramyd Retail Ltd 6-Dec-05

29 Prithvi Information Solutions Ltd. 16-Nov-05

30 Bannari Amman Spinning Mills Ltd. 14-Nov-05



SL NAME OF COMPANY Date of Listing

31 Shree Renuka Sugars Ltd. 31-Oct-05

32 Aurionpro Solutions Ltd. 25-Oct-05

33 Suzlon Energy Ltd. 19-Oct-05

34 Amar Remedies Ltd. 16-Sep-05

35 Sasken Communication Technologies Ltd. 9-Sep-05

36 HT Media Ltd. 1-Sep-05

37 Infrastructure Development Finance Company Ltd. 12-Aug-05

38 Shri Ramrupai Balaji Steels Ltd. 2-Aug-05

39 IL&FS Investmart Limited 27-Jul-05

40 SPL Industries Ltd. 26-Jul-05

41 Nectar Lifesciences Limited 18-Jul-05

42 Yes Bank Ltd. 12-Jul-05

43 Provogue (India) Ltd. 7-Jul-05

44 Shoppers Stop Ltd. 23-May-05

45 Allsec Technologies Limited 9-May-05

47 Gokaldas Exports Ltd. 27-Apr-05

48 3i Infotech Ltd. 22-Apr-05

HHyyppootthheessiiss

H0: There is no relationship between investors demand, i.e. is the amount of oversubscription and amount of return for the stock

H1: There exists relationship between demand and return



MMEETTHHOODDOOLLOOGGYY

The methodology is the major phase of research in which the investigator

makes a number of decisions about the methods and materials to be used

to study the research problem, basically through collection of data. The

methodological decision generally has control implications for the

validity of the study findings

The two important components used for this study are the demand and return

RReettuurrnn

To measure the return of the different IPO’s for the first 30 days the

following formula is used

Return = (average price – issue price)

Where, average price is the average of the days opening and closing

price. This is taken instead of the closing price because the investor may

sell the stock at any time during the days trading and so it is not possible

to find the return using the closing price for the day.

Issue price is the price at which the share is issued to the share holder.

This return is determined for the first 30 trading days of the scrip.



DDeemmaanndd

The times of oversubscription is taken as the demand for the share. Only

retail investors demand is taken as they will only sell there shares in 1st

month to book a profit. No institutional investor will be diluting his stock

in the initial month of listing.

RReeggrreessssiioonn

In order to find the relationship between demand and initial return a

single linear equation is run for 30 trading days starting from the listing

day of each stock.

Y= a+ bx

Where demand is taken as independent variable and return as dependent

variable. ”T” test significance of 5% level is used to accept or reject the

hypothesis.

LLiimmiittaattiioonnss ooff tthhee ssttuuddyy

The study considers only stocks listed in the national stock

exchange during the period of study.

30 days period is a very less duration to make a prediction.



Chapter 4

DATA ANALYSIS



DDaattaa aannaallyyssiiss

11 IInniittiiaall rreettuurrnn

First step in the analysis part is determining the daily return for

each stock during the first 30 days after listing. This return is obtained

using the following formula

Return = (average price – issue price)

Average price = (opening price+ closing price)

2

Issue price = The price at which share is issued to the share holder

Average price is taken into consideration to find the return

because of the assumption that the investor may sell the stock at anytime

during the initial days of trading. The initial 30 days return for all the 47

scrip’s are calculated in the following table.



SL NAME OF COMPANY DAY 1 DAY 2 DAY 3 DAY 4 1 Visa Steel Ltd. -0.0018 -0.0026 -0.0254 -0.03682 Nitco Tiles Ltd. 0.0811 0.1085 0.1399 0.14753 J K Cement Ltd. 0.0659 0.0307 0.0294 0.03614 M & M Financial Services Ltd. 0.1439 0.1746 0.1989 0.19035 B L Kashyap & Sons Ltd. 0.2947 0.5017 0.5921 0.58186 Pratibha Industries Ltd. 0.3804 0.6140 0.8894 1.16447 Gitanjali Gems Ltd. -0.0318 -0.1372 -0.1383 -0.17408 Sadbhav Engineering Ltd. 0.4612 0.8407 0.8109 0.73579 G V K Power & Infrastructure Ltd. 0.1159 0.0079 -0.0088 -0.0201

10 Inox Leisure Ltd. 0.4469 0.5179 0.5356 0.471711 Jagran Prakashan Ltd. -0.0127 -0.1573 -0.1680 -0.168312 Gujarat State Petronet Ltd. 0.6102 0.4583 0.3583 0.413013 Entertainment Network (India) Ltd. 0.5577 0.6278 0.5562 0.515014 Royal Orchid Hotels Ltd. 0.4618 0.3676 0.3382 0.348515 Nitin Spinners Ltd. 0.3333 0.2167 0.2226 0.319016 Bartronics India Ltd. 0.4450 0.4893 0.6423 0.735717 Celebrity Fashions Ltd. 0.2922 0.2515 0.2594 0.272418 Educomp Solutions Ltd. 0.7562 1.4928 1.3984 1.395619 Punj Lloyd Ltd. 0.4389 0.5258 0.4990 0.460620 Tulip I T Services Ltd. 0.3908 0.5679 0.6215 0.634421 P V R Limited 0.2554 0.2880 0.2408 0.233822 Kernex Microsystems (India) Ltd. 0.0728 0.0674 0.0337 -0.010223 Repro India Ltd. 0.3044 0.4695 0.3817 0.346724 Everest Kanto Cylinder Ltd. 0.2592 0.3933 0.6475 0.671625 Triveni Engineering & Inds. Ltd. 0.2229 0.4073 0.3906 0.355726 A I A Engineering Ltd. 0.3944 0.6212 0.7125 0.767427 Bombay Rayon Fashions Ltd. 0.1679 0.1896 0.1739 0.151128 Piramyd Retail Ltd. 0.1323 0.0923 0.1090 0.104029 Prithvi Information Solutions Ltd. 0.1508 0.0775 0.1025 0.106930 Bannari Amman Spinning Mills Ltd. -0.1333 -0.0598 -0.0669 -0.066331 Shree Renuka Sugars Ltd. 0.0093 -0.0580 -0.0719 -0.071832 Aurionpro Solutions Ltd. 0.1586 0.1214 0.0631 -0.056733 Suzlon Energy Ltd. 0.3057 0.3215 0.2834 0.314734 Amar Remedies Ltd. 1.0036 1.0589 1.2018 1.2634

35 Sasken Communication Technologies Ltd. 0.7781 0.7471 0.7433 0.7608

36 H T Media Ltd. 0.1857 0.0158 -0.0114 -0.0402

37 Infrastructure Development Finance Co. Ltd. 0.9044 0.9728 1.0213 1.0287

38 Shri Ramrupai Balaji Steels Ltd. 0.1557 0.0625 0.0420 0.058039 I L & F S Investsmart Ltd. 0.5206 0.4232 0.3988 0.426240 S P L Industries (Shivalik Prints) Ltd. 0.2739 0.4861 0.4561 0.446841 Nectar Lifesciences Ltd. 0.1669 0.0867 0.0882 0.054742 Yes Bank Ltd. 0.4083 0.3300 0.3028 0.312243 Provogue (India) Ltd. 0.6565 0.6283 0.5912 0.578744 Shoppers' Stop Ltd. 0.5290 0.5258 0.4934 0.501645 Allsec Technologies Ltd. 0.0302 -0.0487 -0.0683 -0.076146 Gokaldas Exports Ltd. 0.3289 0.4705 0.5142 0.494647 3I Infotech Ltd. 0.0805 -0.0308 -0.0547 -0.0525



SL NAME OF COMPANY DAY 5 DAY 6 DAY 7 DAY 8 1 Visa Steel Ltd. -0.0263 -0.0382 -0.0583 -0.07412 Nitco Tiles Ltd. 0.1348 0.1344 0.1966 0.23623 J K Cement Ltd. 0.0302 0.0253 0.0313 0.04104 M & M Financial Services Ltd. 0.1933 0.2334 0.2279 0.24635 B L Kashyap & Sons Ltd. 0.6447 0.7250 0.7637 0.71786 Pratibha Industries Ltd. 1.2131 1.3121 1.3706 1.28857 Gitanjali Gems Ltd. -0.2082 -0.1962 -0.1596 -0.16598 Sadbhav Engineering Ltd. 0.7103 0.6669 0.6761 0.72859 G V K Power & Infrastructure Ltd. -0.0179 -0.0107 -0.0095 -0.0261

10 Inox Leisure Ltd. 0.4158 0.4458 0.4906 0.560811 Jagran Prakashan Ltd. -0.1948 -0.2030 -0.2013 -0.208412 Gujarat State Petronet Ltd. 0.3917 0.3352 0.3435 0.373113 Entertainment Network (India) Ltd. 0.5100 0.4733 0.4664 0.486414 Royal Orchid Hotels Ltd. 0.3236 0.3314 0.3503 0.350515 Nitin Spinners Ltd. 0.3512 0.3155 0.2964 0.259516 Bartronics India Ltd. 0.6643 0.7270 0.8280 0.895317 Celebrity Fashions Ltd. 0.2486 0.2626 0.2842 0.258318 Educomp Solutions Ltd. 1.4038 1.4174 1.4182 1.400019 Punj Lloyd Ltd. 0.4693 0.4748 0.4443 0.442920 Tulip I T Services Ltd. 0.6075 0.6121 0.6294 0.631321 P V R Limited 0.2471 0.2289 0.2318 0.215422 Kernex Microsystems (India) Ltd. -0.0268 -0.0367 -0.0744 0.014423 Repro India Ltd. 0.3483 0.3591 0.4021 0.386124 Everest Kanto Cylinder Ltd. 0.6517 0.7005 0.6902 0.641425 Triveni Engineering & Inds. Ltd. 0.3880 0.4771 0.5401 0.572926 A I A Engineering Ltd. 0.6962 0.6598 0.6694 0.679027 Bombay Rayon Fashions Ltd. 0.1807 0.2279 0.2264 0.220428 Piramyd Retail Ltd. 0.0746 0.0573 0.0350 0.005029 Prithvi Information Solutions Ltd. 0.0622 0.0459 0.0439 0.034830 Bannari Amman Spinning Mills Ltd. -0.0730 -0.0922 -0.0870 -0.108931 Shree Renuka Sugars Ltd. -0.0672 -0.0642 0.0010 0.055132 Aurionpro Solutions Ltd. -0.0931 0.0153 -0.0206 -0.026733 Suzlon Energy Ltd. 0.2750 0.3214 0.3380 0.299734 Amar Remedies Ltd. 0.9804 0.8786 1.0250 1.087535 Sasken Communication Technologies Ltd. 0.7334 0.7375 0.7144 0.710036 H T Media Ltd. -0.0412 -0.0619 -0.0847 -0.0864


38 Shri Ramrupai Balaji Steels Ltd. 0.0659 0.0568 0.0864 0.139839 I L & F S Investsmart Ltd. 0.4036 0.3728 0.4672 0.517440 S P L Industries (Shivalik Prints) Ltd. 0.5225 0.5693 0.5482 0.550741 Nectar Lifesciences Ltd. 0.0309 0.0424 0.0236 0.006442 Yes Bank Ltd. 0.4089 0.4328 0.4178 0.404443 Provogue (India) Ltd. 0.5103 0.4520 0.4178 0.432344 Shoppers' Stop Ltd. 0.5335 0.5930 0.6230 0.628745 Allsec Technologies Ltd. -0.0267 0.0037 0.0909 0.130946 Gokaldas Exports Ltd. 0.4616 0.4373 0.4992 0.583447 3I Infotech Ltd. -0.0422 -0.0538 -0.0193 -0.0620




10 Inox Leisure Ltd. 0.6031 0.6042 0.6113 0.683511 Jagran Prakashan Ltd. -0.2020 -0.1958 -0.1955 -0.148112 Gujarat State Petronet Ltd. 0.3741 0.3620 0.3556 0.321313 Entertainment Network (India) Ltd. 0.5106 0.4806 0.4224 0.401214 Royal Orchid Hotels Ltd. 0.3395 0.2779 0.2555 0.210515 Nitin Spinners Ltd. 0.2405 0.2202 0.1607 0.110716 Bartronics India Ltd. 0.9463 0.9340 0.8817 0.830717 Celebrity Fashions Ltd. 0.2819 0.2936 0.2321 0.157218 Educomp Solutions Ltd. 1.3748 1.3488 1.3008 1.255419 Punj Lloyd Ltd. 0.4625 0.4847 0.4603 0.494720 Tulip I T Services Ltd. 0.5740 0.5804 0.6369 0.648821 P V R Limited 0.2004 0.1703 0.2022 0.216622 Kernex Microsystems (India) Ltd. 0.0989 0.0706 0.0733 0.064423 Repro India Ltd. 0.3662 0.3474 0.3527 0.330924 Everest Kanto Cylinder Ltd. 0.6372 0.7309 0.7709 0.753925 Triveni Engineering & Inds. Ltd. 0.6161 0.5234 0.5516 0.715126 A I A Engineering Ltd. 0.6735 0.6672 0.6840 0.725727 Bombay Rayon Fashions Ltd. 0.2011 0.1850 0.1882 0.161428 Piramyd Retail Ltd. -0.0025 0.0258 0.0231 0.027329 Prithvi Information Solutions Ltd. 0.0344 0.0544 0.0561 0.072530 Bannari Amman Spinning Mills Ltd. -0.1226 -0.1109 -0.0972 -0.109431 Shree Renuka Sugars Ltd. 0.0112 -0.0011 0.0251 0.033632 Aurionpro Solutions Ltd. -0.0122 0.0122 0.1303 0.132833 Suzlon Energy Ltd. 0.3525 0.3999 0.4187 0.436634 Amar Remedies Ltd. 1.0848 1.1348 1.0946 1.050035 Sasken Communication Technologies Ltd. 0.7067 0.6322 0.5491 0.602036 H T Media Ltd. -0.0961 -0.1058 -0.1062 -0.1133


38 Shri Ramrupai Balaji Steels Ltd. 0.1239 0.1557 0.1614 0.154539 I L & F S Investsmart Ltd. 0.4578 0.4962 0.5752 0.591840 S P L Industries (Shivalik Prints) Ltd. 0.5379 0.5018 0.4921 0.484641 Nectar Lifesciences Ltd. -0.0127 -0.0010 0.0248 0.031642 Yes Bank Ltd. 0.3872 0.3822 0.3783 0.409443 Provogue (India) Ltd. 0.4448 0.4070 0.3795 0.364044 Shoppers' Stop Ltd. 0.6371 0.6246 0.6141 0.607745 Allsec Technologies Ltd. 0.1880 0.2519 0.2459 0.210446 Gokaldas Exports Ltd. 0.5936 0.5783 0.5480 0.550447 3I Infotech Ltd. -0.0620 -0.0597 -0.0240 -0.0438




10 Inox Leisure Ltd. 0.7483 0.8035 0.7913 0.697711 Jagran Prakashan Ltd. -0.1160 -0.1542 -0.1722 -0.182012 Gujarat State Petronet Ltd. 0.3157 0.3259 0.3139 0.302813 Entertainment Network (India) Ltd. 0.3844 0.3707 0.3818 0.382714 Royal Orchid Hotels Ltd. 0.1580 0.1647 0.1633 0.157115 Nitin Spinners Ltd. 0.1405 0.1405 0.0583 0.059516 Bartronics India Ltd. 0.8413 0.8180 0.7253 0.652717 Celebrity Fashions Ltd. 0.2004 0.2260 0.1824 0.154418 Educomp Solutions Ltd. 1.2134 1.1646 1.1224 1.153219 Punj Lloyd Ltd. 0.5267 0.5649 0.6208 0.606420 Tulip I T Services Ltd. 0.7329 0.7829 0.9450 1.050621 P V R Limited 0.2366 0.2781 0.3157 0.317722 Kernex Microsystems (India) Ltd. 0.0520 0.0875 0.1211 0.091623 Repro India Ltd. 0.3611 0.4203 0.4264 0.422624 Everest Kanto Cylinder Ltd. 0.7408 0.7400 0.7888 0.832325 Triveni Engineering & Inds. Ltd. 0.7120 0.6880 0.7078 0.735926 A I A Engineering Ltd. 0.7479 0.6931 0.6910 0.735627 Bombay Rayon Fashions Ltd. 0.1532 0.1850 0.2554 0.288228 Piramyd Retail Ltd. 0.0379 0.0429 0.0519 0.077729 Prithvi Information Solutions Ltd. 0.1267 0.1439 0.1481 0.120330 Bannari Amman Spinning Mills Ltd. -0.1181 -0.1196 -0.1228 -0.130431 Shree Renuka Sugars Ltd. 0.0160 0.0470 0.0982 0.101532 Aurionpro Solutions Ltd. 0.1169 0.1208 0.1256 0.099733 Suzlon Energy Ltd. 0.4681 0.4770 0.4853 0.509534 Amar Remedies Ltd. 1.0625 1.0357 0.9634 0.941135 Sasken Communication Technologies Ltd. 0.6096 0.6006 0.5573 0.551736 H T Media Ltd. -0.1326 -0.1532 -0.1930 -0.2273


38 Shri Ramrupai Balaji Steels Ltd. 0.1273 0.1352 0.1341 0.060239 I L & F S Investsmart Ltd. 0.5944 0.5840 0.5792 0.575440 S P L Industries (Shivalik Prints) Ltd. 0.4557 0.4421 0.4854 0.557941 Nectar Lifesciences Ltd. 0.0242 0.0305 0.0322 -0.001842 Yes Bank Ltd. 0.4000 0.4039 0.5067 0.578343 Provogue (India) Ltd. 0.3880 0.3815 0.3703 0.345544 Shoppers' Stop Ltd. 0.6142 0.6210 0.6453 0.647445 Allsec Technologies Ltd. 0.1626 0.1494 0.1385 0.103546 Gokaldas Exports Ltd. 0.5522 0.5911 0.6269 0.601247 3I Infotech Ltd. -0.0458 -0.0560 -0.0543 -0.0572






38 Shri Ramrupai Balaji Steels Ltd. 0.0977 0.1239 0.1375 0.136439 I L & F S Investsmart Ltd. 0.5398 0.5056 0.4806 0.498840 S P L Industries (Shivalik Prints) Ltd. 0.5693 0.6075 0.5429 0.482541 Nectar Lifesciences Ltd. 0.0102 0.0140 0.0339 0.072142 Yes Bank Ltd. 0.5744 0.5894 0.5844 0.562243 Provogue (India) Ltd. 0.3868 0.3717 0.3265 0.310344 Shoppers' Stop Ltd. 0.6433 0.6215 0.5981 0.576245 Allsec Technologies Ltd. 0.1193 0.1207 0.0998 0.105046 Gokaldas Exports Ltd. 0.6232 0.6145 0.6071 0.598847 3I Infotech Ltd. -0.0525 -0.0413 -0.0258 -0.0135






38 Shri Ramrupai Balaji Steels Ltd. 0.1670 0.1591 0.1477 0.145539 I L & F S Investsmart Ltd. 0.5318 0.5552 0.5832 0.610240 S P L Industries (Shivalik Prints) Ltd. 0.5218 0.5421 0.5304 0.492941 Nectar Lifesciences Ltd. 0.0644 0.0966 0.1256 0.104042 Yes Bank Ltd. 0.5722 0.5956 0.5800 0.559443 Provogue (India) Ltd. 0.3012 0.2967 0.2828 0.258244 Shoppers' Stop Ltd. 0.5599 0.5419 0.5324 0.539345 Allsec Technologies Ltd. 0.1085 0.1037 0.1239 0.143746 Gokaldas Exports Ltd. 0.5923 0.5921 0.5672 0.532447 3I Infotech Ltd. -0.0017 0.0040 -0.0310 -0.0353




10 Inox Leisure Ltd. 0.7319 0.7492 0.7881 0.777911 Jagran Prakashan Ltd. -0.0848 -0.0840 -0.0821 -0.083312 Gujarat State Petronet Ltd. 0.4083 0.3981 0.4028 0.374113 Entertainment Network (India) Ltd. 0.4142 0.4123 0.4196 0.407414 Royal Orchid Hotels Ltd. 0.1918 0.2115 0.1939 0.179415 Nitin Spinners Ltd. 0.0060 0.0131 -0.0060 -0.034516 Bartronics India Ltd. 0.5883 0.5163 0.5270 0.530317 Celebrity Fashions Ltd. 0.0837 0.0746 0.1054 0.094318 Educomp Solutions Ltd. 1.2868 1.2998 1.3324 1.286819 Punj Lloyd Ltd. 0.6667 0.6700 0.6565 0.618120 Tulip I T Services Ltd. 1.0610 1.1015 1.0633 1.080621 P V R Limited 0.2001 0.2532 0.3003 0.298422 Kernex Microsystems (India) Ltd. 0.0780 0.0997 0.1436 0.145923 Repro India Ltd. 0.6441 0.6188 0.5805 0.536824 Everest Kanto Cylinder Ltd. 1.1267 1.1403 1.1338 1.141725 Triveni Engineering & Inds. Ltd. 0.7151 0.7193 0.7531 0.829726 A I A Engineering Ltd. 0.7955 0.8010 0.8033 0.750627 Bombay Rayon Fashions Ltd. 0.4275 0.4400 0.4636 0.483228 Piramyd Retail Ltd. 0.4673 0.5227 0.6067 0.832729 Prithvi Information Solutions Ltd. 0.2317 0.2203 0.2488 0.261930 Bannari Amman Spinning Mills Ltd. -0.1594 -0.1593 -0.1676 -0.177431 Shree Renuka Sugars Ltd. 0.2894 0.2979 0.3106 0.340832 Aurionpro Solutions Ltd. -0.0017 -0.0017 0.0064 0.010333 Suzlon Energy Ltd. 0.4794 0.5070 0.5679 0.648534 Amar Remedies Ltd. 0.5473 0.6688 0.5652 0.638435 Sasken Communication Technologies Ltd. 0.4556 0.4420 0.4179 0.368936 H T Media Ltd. -0.1703 -0.1483 -0.1287 -0.1174


38 Shri Ramrupai Balaji Steels Ltd. 0.1420 0.1432 0.1159 0.115939 I L & F S Investsmart Ltd. 0.6372 0.6564 0.6334 0.606040 S P L Industries (Shivalik Prints) Ltd. 0.4993 0.5446 0.5511 0.535041 Nectar Lifesciences Ltd. 0.0770 0.0560 0.0897 0.124842 Yes Bank Ltd. 0.5383 0.5406 0.5283 0.502243 Provogue (India) Ltd. 0.2638 0.2608 0.2577 0.262244 Shoppers' Stop Ltd. 0.5412 0.5193 0.4811 0.491545 Allsec Technologies Ltd. 0.1369 0.1152 0.1481 0.167646 Gokaldas Exports Ltd. 0.5171 0.5326 0.5348 0.526347 3I Infotech Ltd. -0.0308 -0.0313 -0.0422 -0.0438



SL NAME OF COMPANY DAY 29 DAY 30 1 Visa Steel Ltd. -0.0461 -0.0447 2 Nitco Tiles Ltd. 0.2647 0.2768 3 J K Cement Ltd. 0.3166 0.2182 4 M & M Financial Services Ltd. 0.1745 0.1573 5 B L Kashyap & Sons Ltd. 1.1858 1.2096 6 Pratibha Industries Ltd. 1.9429 2.0019 7 Gitanjali Gems Ltd. -0.0987 -0.0923 8 Sadbhav Engineering Ltd. 1.0569 1.0568 9 G V K Power & Infrastructure Ltd. -0.1721 -0.1690

10 Inox Leisure Ltd. 0.7898 0.8344 11 Jagran Prakashan Ltd. -0.0898 -0.0907 12 Gujarat State Petronet Ltd. 0.3528 0.3454 13 Entertainment Network (India) Ltd. 0.3872 0.3796 14 Royal Orchid Hotels Ltd. 0.1947 0.1912 15 Nitin Spinners Ltd. -0.0643 -0.1345 16 Bartronics India Ltd. 0.4840 0.4417 17 Celebrity Fashions Ltd. 0.0749 0.0542 18 Educomp Solutions Ltd. 1.2510 1.2252 19 Punj Lloyd Ltd. 0.5760 0.5840 20 Tulip I T Services Ltd. 1.0944 1.0148 21 P V R Limited 0.2434 0.3089 22 Kernex Microsystems (India) Ltd. 0.1073 0.0873 23 Repro India Ltd. 0.4577 0.4348 24 Everest Kanto Cylinder Ltd. 1.1291 1.2788 25 Triveni Engineering & Inds. Ltd. 0.8208 0.8005 26 A I A Engineering Ltd. 0.8114 0.9952 27 Bombay Rayon Fashions Ltd. 0.5450 0.5268 28 Piramyd Retail Ltd. 0.9642 0.9310 29 Prithvi Information Solutions Ltd. 0.2864 0.2581 30 Bannari Amman Spinning Mills Ltd. -0.2017 -0.2039 31 Shree Renuka Sugars Ltd. 0.3593 0.4368 32 Aurionpro Solutions Ltd. -0.0167 -0.0150 33 Suzlon Energy Ltd. 0.6779 0.7094 34 Amar Remedies Ltd. 0.6661 0.5652 35 Sasken Communication Technologies Ltd. 0.3454 0.3007 36 H T Media Ltd. -0.1064 -0.1123

37 Infrastructure Development Finance Co. Ltd. 12.9294 12.8375

38 Shri Ramrupai Balaji Steels Ltd. 0.1682 0.1852 39 I L & F S Investsmart Ltd. 0.6114 0.6260 40 S P L Industries (Shivalik Prints) Ltd. 0.5061 0.4643 41 Nectar Lifesciences Ltd. 0.1482 0.1561 42 Yes Bank Ltd. 0.4672 0.4317 43 Provogue (India) Ltd. 0.2523 0.2463 44 Shoppers' Stop Ltd. 0.5072 0.5154 45 Allsec Technologies Ltd. 0.1474 0.1417 46 Gokaldas Exports Ltd. 0.5413 0.5435 47 3I Infotech Ltd. -0.0430 -0.0447



DDEEMMAANNDD FFOORR TTHHEE SSCCRRIIPPSS

Demand in this context mean demand for the particular share

prior to IPO. This is calculated on the basis of the times of

oversubscription of each shares at the closing date of issue. We are

taking only retailers demand for the purpose of the study by taking an

assumption that only retail traders will be interested in selling those

shares with in first month in the market. Institutional buyers always

prefer to have long term return as the amount of investment will be very

high. Table 3

SL NAME OF COMPANY TIMES OF

SUBSCRIPTION 1 Visa Steel Ltd. 1.64 2 Nitco Tiles Ltd. 2.5751 3 J K Cement Ltd. 0.94 4 M & M Financial Services Ltd. 10.13 5 B L Kashyap & Sons Ltd. 4.69 6 Pratibha Industries Ltd. 25.72 7 Gitanjali Gems Ltd. 9.39 8 Sadbhav Engineering Ltd. 23.44 9 G V K Power & Infrastructure Ltd. 13.65

10 Inox Leisure Ltd. 17.75 11 Jagran Prakashan Ltd. 5.99 12 Gujarat State Petronet Ltd. 12.69 13 Entertainment Network (India) Ltd. 15.65 14 Royal Orchid Hotels Ltd. 28.35 15 Nitin Spinners Ltd. 38.13 16 Bartronics India Ltd. 42.91 17 Celebrity Fashions Ltd. 11.72 18 Educomp Solutions Ltd. 211.52 19 Punj Lloyd Ltd. 9.78 20 Tulip I T Services Ltd. 25.94 21 P V R Limited 4.04 22 Kernex Microsystems (India) Ltd. 15.23



RREEGGRREESSSSIIOONN MMOODDEELL

A regression line is run for every days return do determine

whether that day it has significance with demand during issue.

Regression is run for each of the 30 initial date of trading with demand.

The findings are given in below table

SL NAME OF COMPANY TIMES OF

SUBSCRIPTION 23 Repro India Ltd. 7.3424 Everest Kanto Cylinder Ltd. 9.8425 Triveni Engineering & Inds. Ltd. 2.0126 A I A Engineering Ltd. 12.4227 Bombay Rayon Fashions Ltd. 19.528 Piramyd Retail Ltd. 16.1729 Prithvi Information Solutions Ltd. 16.6530 Bannari Amman Spinning Mills Ltd. 9.9431 Shree Renuka Sugars Ltd. 6.3332 Aurionpro Solutions Ltd. 25.8433 Suzlon Energy Ltd. 6.1434 Amar Remedies Ltd. 56.3935 Sasken Communication Technologies Ltd. 1.6736 H T Media Ltd. 5.29

37 Infrastructure Development Finance Co. Ltd. 5.36

38 Shri Ramrupai Balaji Steels Ltd. 12.6939 I L & F S Investsmart Ltd. 16.940 S P L Industries (Shivalik Prints) Ltd. 13.341 Nectar Lifesciences Ltd. 11.3942 Yes Bank Ltd. 10.1543 Provogue (India) Ltd. 45.4344 Shoppers' Stop Ltd. 8.1545 Allsec Technologies Ltd. 1.9146 Gokaldas Exports Ltd. 14.8547 3I Infotech Ltd. 6.8



Table 4

The significance is tested at 5 % level of significance and finding is

that out of the first 30 days, first 23 days are statistically significant at

5% confidence level.

DAY AFTER LISTING OF SHARE T-STAT DAY 1 3.082DAY 2 5.073DAY 3 4.493DAY 4 4.310DAY 5 4.231DAY 6 4.105DAY 7 4.009DAY 8 4.014DAY 9 3.994DAY 10 3.989DAY 11 3.827DAY 12 3.441DAY 13 3.293DAY 14 3.072DAY 15 2.742DAY 16 2.727DAY 17 2.770DAY 18 2.571DAY 19 2.662DAY 20 3.028DAY 21 2.919DAY 22 2.722DAY 23 2.760DAY 24 0.187DAY 25 0.158DAY 26 0.156DAY 27 0.137DAY 28 0.113DAY 29 0.083DAY 30 0.054



AAbbnnoorrmmaall rreettuurrnn

Next phase of the study is finding is their abnormal return or not. In

this case all the above average returns are considered abnormal returns

and the finding was as follows for each of the 47 scrip’s

Table 5

SL NAME OF COMPANY

DAYS OF ABNORMAL RETURNS

1 Visa Steel Ltd. 14 2 Nitco Tiles Ltd. 14 3 J K Cement Ltd. 17 4 M & M Financial Services Ltd. 14 5 B L Kashyap & Sons Ltd. 13 6 Pratibha Industries Ltd. 9 7 Gitanjali Gems Ltd. 19 8 Sadbhav Engineering Ltd. 13 9 G V K Power & Infrastructure Ltd. 13

10 Inox Leisure Ltd. 17 11 Jagran Prakashan Ltd. 13 12 Gujarat State Petronet Ltd. 11 13 Entertainment Network (India) Ltd. 11 14 Royal Orchid Hotels Ltd. 11 15 Nitin Spinners Ltd. 13 16 Bartronics India Ltd. 11 17 Celebrity Fashions Ltd. 14 18 Educomp Solutions Ltd. 19 19 Punj Lloyd Ltd. 16 20 Tulip I T Services Ltd. 15 21 P V R Limited 15 22 Kernex Microsystems (India) Ltd. 20 23 Repro India Ltd. 9 24 Everest Kanto Cylinder Ltd. 12 25 Triveni Engineering & Inds. Ltd. 19 26 A I A Engineering Ltd. 15 27 Bombay Rayon Fashions Ltd. 13 28 Piramyd Retail Ltd. 12 29 Prithvi Information Solutions Ltd. 13 30 Bannari Amman Spinning Mills Ltd. 15



SL NAME OF COMPANY

DAYS OF ABNORMAL RETURNS

31 Shree Renuka Sugars Ltd. 13 32 Aurionpro Solutions Ltd. 10 33 Suzlon Energy Ltd. 17 34 Amar Remedies Ltd. 17 35 Sasken Communication Technologies Ltd. 15 36 H T Media Ltd. 15 37 Infrastructure Development Finance Co. Ltd. 7 38 Shri Ramrupai Balaji Steels Ltd. 20 39 I L & F S Investsmart Ltd. 16 40 S P L Industries (Shivalik Prints) Ltd. 15 41 Nectar Lifesciences Ltd. 13 42 Yes Bank Ltd. 14 43 Provogue (India) Ltd. 13 44 Shoppers' Stop Ltd. 15 45 Allsec Technologies Ltd. 18 46 Gokaldas Exports Ltd. 16 47 3I Infotech Ltd. 12



Chapter 5

CONCLUSION



CCoonncclluussiioonn

Indian stock market saw an enormous amount of IPO’s during the

last financial year, with majority of them oversubscribing for more than

10 times. In this study a try was made to find whether there is any

relation between demand and return after listing.

T statistic was used to test the hypothesis and the results obtained

show a declining trend on the T-statistic from day 1 to day 23. There

exist a high level of relationship between demand and return ,hence

alternative hypothesis shall be accepted. However from day 24 to day 30

T- test values are too negligible and null hypothesis shall be accepted for

long durations.

The result of the above study undertaken shall be genaralised as

there exist a relationship between demand and return in Indian stock

market on the initial days of listing. however by passage of time

abnormal returns gets adjusted and tend to become normal return.



Also above these, an attempt was made in the study to find the

existence of abnormal returns. Average returns of these IPO’s studied

were tested with daily return and result show that at an average more

than 14 days abnormal returns are found during the period of study, i.e.

30 days and these returns get normalized in longer period

*******************



RReeffeerreenncceess

Rock, K., 1986, ‘Why New Issues are Underpriced,’ Journal of

Financial Economics, Vol.15, pp. 187-212.

Ritter, J., 1984, ‘The ‘Hot Issue’ Market of 1980,’ Journal of

Business, Vol. 57, pp. 215-241

McGuinness, P., 1992, ‘An Examination of the Under pricing of

Initial Public Offerings in Hong Kong: 1980-90,’ Journal of

Business Finance and Accounting, Vol. 19, pp. 165-186.

Purnanandam, A., and B. Swaminathan, 2002, ‘Are IPO’s Under

priced?’, Working paper.

Sumit Agarwal, Chunlin Liu, S. Ghon Rhee“Investors demand for

IPO’s and after market performance: Evidence from Hong Kong

stock market” - [University of Hawaii’s financial working papers

2003.]



Ritter, J., 1991, ‘The Long-Run Performance of Initial Public

Offerings,’ Journal of Finance, Vol. 46, pp. 3-27.

Aggarwal, R., Leal, R., Hernandez, L., 1993. “The aftermarket

performance of initial public offerings in Latin America”.

Financial Management Spring, 42–53.

relationship between demand and initial performance in indian ipo market-srirajsudhakaran-0449

Documents

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