General Meaning of IPO In India:

The government of India has been playing proactive role in the real estate market by the commencement of
the In an IPO the company may procure the support of the countersigned enterprise, which assists in
establishing what kind of security to issue, competitive offering cost and the period in which it should be
launched in market. An IPO can be an unsafe venture for it is tough for an investor to predict how the stock
or share will perform on its first trading day and afterwards. Moreover, the historical information available
with the company is not sufficient enough to analyse the performance of the stock in Indian market.

Most IPOs are of the firms that are undergoing through momentary growth duration, and they are hence
entitled to auxiliary vagueness related to their future performance. While IPOs are effectual at raising
revenues, being catalogued at a stock exchange demands immense authoritarian observance and treatment
needs.

The Initial Public Offering assumes that the firm is a significant market presence, is flourishing and has the
obligatory past record to raise assets in public equity market. If the firm later trades recently tendered shares
once again to the equity market, it is known as seasoned equity offering. When an investor trades shares, it is
referred to as secondary offering and the investor and not the firm that has initially proposed the shares,
maintains the advances of the offering. These phases are usually perplexes and only a firm which proposes a
share can indulge in chief offering or the IPOs. Secondary offering takes place in a secondary equity market,
where investors and not the firm purchase and trade from one another.

Definition:

IPO means Initial Public Offering. It is a process by which a privately held company becomes a publicly
traded company by offering its shares to the public for the first time. A private company, that has a handful
of shareholders, shares the ownership by going public by trading its shares. Through the IPO, the company
gets its name listed on the stock exchange.
Importance of IPO:

Merchant bank executives understand the important role initial public offerings can play in determining the
success of a business venture. An initial public offering, or IPO for short, allows a privately held company to
raise capital by offering equity interests in the company to the public. The effect of an IPO is to transform a
company founded by private investors into a public company.

Companies involved in initial public offerings, such as KIT Capital, are aware of the benefits a successful
IPO can have on a company and its private investors. As its shares are purchased by investors on a public
stock exchange, the money taken in by a company on an IPO increases its growth capital. The company’s
pre-existing private investors see their stake in the company converted into large holdings of newly issued
shares of stock. As the price of those shares rises through public trading, so too does the value of the stake in
the company held by the private investors.

Initial public offerings are not new in the United States. The first IPO in the United States was in 1783 when
Bank of America went public by selling shares of stock. IPOs in Europe go back even further to the Roman
Empire. The Dutch East India Company issued public shares in 1602 to raise capital to fund expansion of its
operations.

Many believe that the ability to raise much-needed capital through public offerings offers advantages to the
owners and managers of privately held companies. An IPO immediately enlarges the ownership base of a
company and infuses it with large amounts of capital. The funds raised are cheaper than debt financing and
do not require repayment.

Besides creating new financing opportunities, an IPO has the immediate effect of increasing a company’s
public exposure. Better public exposure usually leads to more interest in the company from those interested
in joining its management team. For a company contemplating expansion into new markets or new
industries, having its shares publicly traded offers the potential for a merger or acquisition through stock
financing.

An initial public offering can also present disadvantages to a company and its owners. The costs of an IPO
can be significant because of marketing, legal and accounting requirements. Owners of a privately held
company going public must comply with financial disclosure requirements tied to IPOs that allow public
scrutiny of aspects of the company that were once shielded from public view. Public disclosure suddenly
allows a company’s competitors and customers to have access to previously confidential and private
information about its operations.

A significant disadvantage of an IPO for many business owners is the loss of control over the company once
new shareholders acquire an ownership interest. This problem of lost control has resulted in companies
attempting to buy back their publicly held shares of stock in order to return the business to private
ownership. The difficulty reverting to private ownership is the high cost of acquiring the shares in a publicly
traded marketplace.

IPOs can be beneficial to a company seeking to raise expansion capital, but they require planning and
timing. The success of an IPO usually depends on the skills of the investment bankers selected by the
company to handle everything from valuation of the shares to marketing, regulatory compliance and other
details of the offering.

Objectives of the Study

 The objectives of the study are the following,

 To analyse the pattern of IPOs under-pricing across time, issue size and market segment.
 To identify factors that affects short-run under-pricing of IPOs in India.
 To examine the relationship between mispricing of IPOs managed /co-managed by investment banks and
change in their market share during a given period.
 To identify the factors that influences the performance of IPOs in long run.
 Limitations of Study:

The study has been undertaken based on provisions of Companies Act 2013; not the Companies Act 1956
and also the SEBI (Issue of Capital and Disclosure Requirements) 2009 as amended.

The sample of 464 IPOs (365 book-built IPOs and 99 fixed-price IPOs) that went public from the financial
year 2001 to 2011 are selected for the study. The study period covers 15 years from the financial year 2001
to 2015. The sample is restricted to IPOs that are compulsorily listed on Bombay Stock Exchange (BSE).
Daily share prices have been taken from the corporate database of CMIE–Prowess.
Literature Review:

Listing day underpricing:

Baron (1982) developed an “information asymmetry theory” in which the investment banker is better
informed than the issuer regarding the market conditions and pricing of the issue. The issuer must reward the
investment banker for the superior information. Consequently, the decision to set the issue price is delegated
to investment banker which is set by him below its true value for his own benefits. However, testing Baron’s
model Muscarella and Vetsuypens (1989) find that even IPOs of investment banks (self-marketed offerings)
are characterised by statistically significant underpricing when compared to other IPOs; thus, contradict the
model. Also, Cheung and Krinsky’s (1994) study failed to establish lower degree of underpricing for the
sample of investment bankers’ IPOs. Rock (1986) developed another version of information asymmetry
theory in which he claimed underpricing is required because of the information asymmetry between two
groups of investors—informed and uninformed. Informed investors subscribe only to “good issues” and they
stay away when “bad issues” come to the market. Because of this, the uninformed group gets only bad
issues; hence, they stay away from the market. Therefore, to attract even uninformed investors to the market,
all the issues are compulsorily underpriced. Using a sample of IPOs listed on Stock Exchange of Singapore,
Lee, Taylor, and Walter (1999) showed that large investors (better informed) tend to preferentially request
participation in IPOs with higher initial returns which is consistent with Rock’s model.

Analysing “hot issue” market of the 1980s in the US (between January 1980 and March 1981), Ritter (1984)
documents average initial return of 16.3% for the rest of the 1977–1982 period, as against 48.4% for the hot
issue period. Taking a sample of 664 firm commitment and 364 best efforts offers, Ritter (1987) found
underpricing of 14.8 and 47.78% for these two sub-groups.

Allen and Faulhaber (1989), Grinblatt and Hwang (1989) and Welch (1989) developed “signalling model”
explaining why underpricing occurs. According to the model, underpricing is a deliberate action by the
issuers to signal the superior quality of the issuing firms. They do so with the hope of recouping this loss by
means of charging higher price for follow-on public offerings. Low-quality firms cannot do this because
their true picture will be revealed before they approach the market again. Findings of Hameed and Lim
(1998) supported the signalling theory, that is, high-quality firms underpriced their IPOs to signal their
quality. However, Garfinkel (1993), through reports of underpricing of IPOs, documented that underpricing
is not a signal of the quality of the issuing firms. Welch (1992) has developed “herding” theory explaining
why IPOs are underpriced. According to the theory, IPOs come to the market sequentially and later potential
investors take their decisions by observing the purchasing decisions of earlier investors. The demand for
issues is so elastic that even risk-neutral issuers underpriced their issues to avoid failure. Testing both Rock’s
winner’s curse and Welch’s herding theory, Amihud, Hauser, and Kirsh (2003) found that underpricing is
negatively related to the rate of allocation to uninformed investors which confirms the presence of adverse
selection. Also, investors either subscribe overwhelmingly or largely abstain from new issues which confirm
the herding effect.

Affleck-Graves, Hegde, Miller, and Reilly (1993) found that in the US NYSE listed IPOs, on an average, are
underpriced by 4.82% while AMEX listed IPOs are underpriced by 2.16%. Testing the “lawsuit avoidance”
theory of IPO underpricing, Lowry and Shu (2002) documented that firms which have greater legal exposure
are likely to underprice their issues by a significantly larger amount. However, Drake and Vetsuypens (1993)
found that IPOs that were sued for mis-statements in the IPO prospectus or registration statement in the US
were not overpriced; in fact, were underpriced as other IPOs of similar size. Michaely and Shaw (1994)
attributed underpricing to the presence of information asymmetries between informed and uninformed
investors; thus, support the information asymmetry theory. However, the study found little support for
signalling theory. Firms with greater underpricing are associated with weaker future earnings performance,
fewer and smaller dividend initiations, and less frequent trips to the capital market.

Dewenter and Malatesta (1997) found that IPOs of state-owned companies in the UK are significantly more
underpriced than their private sector counterparts, while in the case of Canada and Malaysia the opposite is
true. Examining why managers do not sell any of their own shares in an IPO, but wait until the end of the
lockup period, Aggarwal, Krigman, and Womack (2002) found that firms with greater underpricing receive
significantly more recommendations from the research analysts in the months which are closer to the lockup
expiration than do firms with less underpricing. Ljungqvist and Wilhelm (2002) found that initial returns
(underpricing) are directly related to information production and inversely related to institutional allocations.
In their prospect theory, Loughran and Ritter (2002) found that IPOs that are underpriced are usually those
where the issue price and the initial market price are higher than what was initially expected.
Examining the pricing of US IPOs by foreign firms that are already seasoned in their home countries, Burch
and Fauver (2003) found that these IPOs are underpriced (on an average) experiencing a first day return of
12.7%. Demers and Lewellen (2003) examined the impact of IPO underpricing on the website traffic of
internet companies and found that underpricing is positively associated with post-issue growth in web-traffic
for the IPO companies. In their comparative analysis of the pricing and aftermarket performance of IPOs by
ADRs and a matching sample of US firms, Ejara and Ghosh (2004) found that ADR IPOs are significantly
less underpriced than comparable US IPOs. IPOs from developed countries are more underpriced and
privatisation of IPOs is less underpriced than non-privatisations. Examining the intraday patterns of IPOs in
Hong Kong, Cheng, Cheung, and Po (2004) found that underpricing of IPOs occurs only at the pre-listing
market and disappears afterwards i.e. Hong Kong market is efficient in adjusting for IPO underpricing.
Cook, Kieschnick, and Ness (2006) found that initial returns (underpricing) are positively correlated with
pre-issue publicity for IPOs. Testing the relationship between underpricing and share ownership dispersion
in the aftermarket, Hill (2006) found that IPO underpricing did not play a significant role in determining the
proportion of block holding in the share ownership structure of the firm, either at the IPO or over the long
run.

Lowry and Murphy (2007) found no evidence that firms which go public in the US (with IPO options to
their top executives) are underpriced as compared to firms not granting such options. This implies that the
top executives of firms with such options do not deliberately set the offer price low to increase the value of
these options.

In India, Narasimhan and Ramana (1995) found significant underpricing of Indian IPOs consistent with
international observations. Study also revealed that premium issues are underpriced than par issues.
Attempting to identify the causal variables responsible for underpricing of Indian IPOs, Chaturvedi, Pandey,
and Ghosh (2006) found that the extent of oversubscription of an IPO determines the first day gain; signals
that lead to oversubscription are market index during the period of IPO, type and nature of business, foreign
collaboration, or the track record of promoters/company. Garg, Arora, and Singla (2008) also documented
that Indian IPOs are significantly underpriced and noted that the level of underpricing does not vary much in
the hot and cold IPO market. Studying book-built and fixed-price IPOs in India, Bora, Adhikary, and Jha
(2012) found underpricing of 21.42% for fixed-price IPOs and 18.22% for book-built IPOs. However, when
adjusted for market movement, the corresponding figures are 16.71 and 16.75, respectively. Einar (2015)
using a sample of more than 5,000 IPOs, documented significant abnormal returns up towards 5%
(excluding Initial Day Returns) during the first months of trading. These abnormal returns are greater and
more persistent if general market conditions are strong, supporting a bounded rationality explanation.

Long run performance:

Investigating the long run aftermarket performance of US IPOs from the closing price on the listing day up
to 250 trading days (one year), Aggarwal and Rivoli (1990) found that investors who purchased these IPO
shares at the closing price on the listing day lose significantly after adjusting for market movement. Ritter
(1991) found that companies that went public in the US between 1975 and 1984 substantially
underperformed a sample of matching firms. Loughran (1993) reported that IPOs underperform during the
six calendar years after going public. Examining the long run return performance of IPOs in Hong Kong,
Mcguinness (1993) found that during the two year (500 trading days) post-listing period, the returns were
positive for the first few months of listing; but the trend reversed resulting in a long-term decline in returns
with significant negative returns between listing day and the 400th and 500th days of listing.

Levis (1993) documented that IPOs in the UK underperformed different benchmarks 36 months following
their listing. Study also reported that the negative return persisted by the fourth and fifth year anniversaries
of public listing. Aggarwal, Leal, and Hernandez (1993) reported negative long run performance of IPOs for
three of the Latin American countries—Brazil, Chile and Mexico. Loughran and Ritter (1995) showed that
companies issuing stock—both IPOs and FPOs—in the US between 1970 and 1990, have given negative
long run returns to investors when adjusted using a control sample of non-issuers. Examining the long run
performance of German IPOs that went public during the early years of the German reunification, Steib and
Mohan (1997) found that these IPOs, on an average, performed poorly in the long run.

Relating the long run growth projections to the long run aftermarket performance of IPOs, Rajan and
Servaes (1997) found that firms which initially had superior projected growth substantially underperformed
indicating that investors appear to believe the inflated long-term growth projections. Page and Reyneke
(1997) reported that IPOs in South Africa listed on Johannesburg Stock Exchange (JSE) significantly
underperform a set of comparable firms matched by size and P/E ratio and relevant JSE sector indices.
Carter, Dark, and Singh (1998) reported that market-adjusted underperformance of IPOs over the three-year
holding period is less severe for IPOs which are handled by more prestigious underwriters. Brav, Geczy, and
Gompers (2000) found that underperformance primarily is concentrated among small firms with low book-
to-market ratios. Gompers and Lerner (2003) reported underperformance of US IPOs up to five years using
event time buy and hold abnormal returns. However, underperformance disappears when cumulative
abnormal returns are used. Further, using calendar time analysis, study showed that IPOs return at least as
much as the market does over the same period.

Jaskiewicz, González, Menéndez, and Schiereck (2005) reported negative market-adjusted long run
performance for German and Spanish IPOs of family-owned businesses. IPOs of non-family businesses
(from both countries) performed insignificantly better. A study by Álvarez and González (2005) revealed
negative long run abnormal stock returns for Spanish IPOs. This study further revealed positive relationship
between five-year performance of IPO stocks on the one hand, and initial underpricing as well as the number
of SEOs by the IPO firms between second and fifth year of IPO, on the other. Such a relationship was
attributed to the “signaling theory” which states that high-quality firms underpriced their IPOs with the
intention of selling more stocks, later. Investigating the impact of R&D activities on the long run
performance of IPO shares, Guo, Lev, and Shi (2006) reported that long run underperformance is basically
confined to non-R &D IPOs; high R&D IPOs outperform low R&D IPOs which, in turn, outperform non-
R&D IPOs in the long run. Contrary to most of the international findings, Ahmad-Zaluki, Campbell, and
Goodacre (2007) found significant overperformance of Malaysian IPOs using equally weighted event time
CARs and BHRs using two market benchmarks. However, such positive performance was not found to be
significant when matched companies are used as the benchmark or when value-weighted scheme is used.
Using IPO data from Shanghai Stock Exchange, Cai and Liu (2008) found underperformance for Chinese
IPOs which is in line with the existing poor long run performance of IPOs, worldwide.

On the Indian front, Madhusoodanan and Thiripalraju (1997) studied both short run and long run
performance of Indian IPOs taking a sample of 1922 IPOs that went public between 1992 and 1995. This
study reported underpricing of Indian IPOs consistent with international findings. In the long run, Indian
IPOs offered positive returns which contradicted most of the international findings. Using BHARs and a
sample of 438 IPOs that went public between June 1992 and March 2001, Sehgal and Singh (2007) found
that the long run returns have been negative between 18 and 40 months of holding while CAAR exhibited
the existence of underperformance in the second and third years. Hoechle et al. (2017) by studying a sample
of 7,487 US IPOs between 1975 and 2014 showed that mature firms in terms of Carhart-alphas significantly
underperformed over two years (with underperformance peaking one year after going public). They applied
a “regression-based portfolio sort’s approach (RPS)”, which allows to decompose the Carhart-alpha into
firm-specific characteristics and explain one-year IPO underperformance using a multitude of market and
firm characteristics in a statistically robust setting.

Sabarinathan’s research article titled “Attributes of Companies Making IPOs in India- Some Observations
published by Social Science Research Network on December 30, 2010 pertain to different windows of IPO
activity, starting with the establishment of the Securities and Exchange Board of India (SEBI) in 1992.
However, no study so far has examined the evolution of the attributes of the issuer. The establishment of
SEBI in its current empowered incarnation has been acknowledged to be a milestone in the evolution of the
Indian securities market. This paper is based on the belief that understanding the evolution of IPOs since the
establishment of SEBI may help in understanding the phenomena in the IPO market better. The paper also
tries to relate the changes in the profile of the issuers to certain regulatory developments which may have
been intended to influence those attributes of issuers and issuances. The observations in this paper provide
useful pointers to further research which may unravel the working of the Indian IPO market better. More
importantly, they may be useful in designing new securities market which could serve as alternatives to or
complement the existing market mechanisms.

ManasMayur, Sanjiv Mittal in their research article titled “Waves of Indian IPOs: Evolution and Trend”
published by Asia-Pacific Journal of Management Research and Innovation on July 2011 aims at
understanding the waves and pattern of Indian IPOs. It was found that most of the IPOs were from private
sector companies. The industry-wise trend in IPOs showed that most of the IPOs were launched by IT sector
companies. It was observed that year 1999–2000 and year 2005–06 was best in terms of investors' response
whereas the period from 2001 to 2003 was worst in terms of investors' optimism. Current waves of Indian
IPOs are divided into hot market IPOs and cold market IPOs. A multivariate regression model is applied to
empirically analyse issuers' approach to time their issue with hot market condition. The result suggests that
Market timers, identified as firms that go public when the market is hot, tried to maximize the total proceeds
at the time of IPO.

Manas Mayur, Manoj Kumar in their article titled “Determinants of Going-Public Decision in an Emerging
Market- Evidence from India” on January-March, 2013 investigates the determinants of going-public
decision of the Indian firms. The determinants were investigated by examining both ex-ante characteristics
of the IPO firms and ex-post IPO consequences of the IPOs. The ex-post analysis reveals that firms go
public to: finance their growth and investments, diversify owners’ risk, rebalance their capital structure, and
bring down their borrowing rates. This study provides useful insights for corporate managers, investors,
market intermediaries, stock exchange authorities, as well as for academic and business researchers. An
understanding of the motivation and costs associated with the going-public decision of Indian firms can
enable the corporate managers of private Indian firms to take an informed decision whether to become
public or remain private.

Fernando, A Rosary Ramona; Deo, Malabika; Zhagaiah, R in their research titled “Stock Price Performance
of Initial Public Offerings: Evidence from India” published by International Journal of Research in Social
Sciences on May, 2013 examines the price performance of Initial Public Offerings (IPOs) in India. The
study was conducted among 27 book building IPOs in India comprising of a period of five years from 1990
to 2004. All the issues were priced at premium. Since all are premium issues, they were categorized as low
premium IPOs and high premium IPOs. Low premium IPOs were taken as those whose issue price is five
times the face value of its shares and High premium IPOs were those whose issue price is ten times the face
value of their shares. The sample comprised 5 low premiums and 22 high premium IPOs. For the purpose of
the analysis, Shapiro Wilks “W” test and Mann Whitney “U” test were conducted. The study shows that
there is no much difference between low and high premium issues, and suggests that mostly low premium
issues are under-priced and are more consistent as regards to returns than that of the high premium issues.

HemaDivya on research titled “A Study on Performance of Indian IPO’s during the Financial Year 2010-
2011” published by International Journal of Marketing, Financial Services & Management Research on 7
July, 2013 analysed the performance of the IPO’s in the market during the financial year 2010-2011 and
ascertain the factors contributing to the under-pricing or over-pricing of IPO in India. This study attempts to
identify causal variables behind high initial gains for Indian IPOs using earlier researches and testing them
over a sample of Indian IPOs to examine the influence of non-fundamental factors and signaling effects on
under-pricing.This study includes the data set of 54 IPOs, out of 2 IPOs got cancelled before listing. The
Analysis from the statistical data that cover the IPOs of various companies adopting the book-building route
also faces underpricing. There is an extent of over subscription of an IPO, which will determine the First
Day Gains. The over subscription will leads to larger First Day Gains for the IPOs. The analysis helps in
finding whether the stocks are underpriced or overpriced.

Poonam Raniin her research article titled “Regulatory Transition in Initial Public offers of Corporate Sector:
An Indian Perspective” published by International Journal of Management and Social Sciences Research
(IJMSSR) on August, 2014 traces the changes that have come in the regulatory environment surrounding
and engulfing the Indian IPO Market and observed that all these changes were introduced to make healthy
philanthropic process. The relevant credentials of pertinent act as well recent reform substantiates it very
well. It complements the extant literature by presenting recent reforms in systematic manner. The researcher
has studied the governing acts and regulations that have witnessed transition over a period of time to suit the
changing market scenario and catalyse the procedure of making an IPO.

Baishali Agarwal in an article titled “Foreign Institutional Investors and the Indian IPO Market – An
Investigation from 2009-2011” published by Asia-Pacific Journal of Management Research and Innovation
on September 2014 stated that the Indian capital market post liberalisation underwent various reforms and
deregulations which heavily attracted foreign investments particularly the portfolio investments. The Indian
primary market on the other hand is an integral part of the capital market which infuses fresh capital into the
system by mechanisms like Initial Public Offering (IPO). This article thus attempts to make an
understanding of few major causes like IPO size and market capitalisation as major forces in attracting
foreign institutional investors (FII) inflows into the Indian primary market and thereby analysing the role of
FIIs into capital formation.

Pandey, Ajay (2004) study based on a sample of 84 Indian IPOs from the period 1999 to 2002 concluded
that the fixed price offerings are used by issuers offering large proportion of their capital by raising a small
amount of money. The initial returns were found to be higher and more uncertain on fixed price offerings
and all types of Indian IPOs in our sample under performed in the first two years subsequent to listing. The
IPOs from issuers belonging to industries under the spell of "hot issue" market, showed a result of under-
performance more than the rest. Deb & Mishra (2009) studied the performance of the Indian IPOs from
April 2001 to March 2009 for the long run. Results show that there exist positive returns on the listing day. It
is found that the down-market is a major cause for the poor listing-day performance of the negative group,
whereas a positive group does not gain anything from an up-market preceding the IPO. With respect to the
average holding-period return, for the negative group (starting day-1, not day-0) becomes significant only
after four years, while it is positive throughout for the positive group. The study concluded that IPOs in the
long yield a return equal to the market, when initial return is ignored. Sahoo & Rajib (2010) focused on the
evaluation of price performance of 92 Indian IPOs issued during the period 2002-2006 up to a period of 36
months including the listing day and also examined the usefulness of IPO characteristics at the time of issue
to seek an explanation for the post-issue price performance. It reported that on an average the Indian IPOs
are underpriced to the tune of 46.55 per cent on the listing day compared to the market index. The empirical
results suggest that the investors who are investing in IPOs through direct subscription are earning a positive
market adjusted return throughout the period. Nevertheless, investors who have purchased shares on the IPO
listing day are earning negative returns up to 12 months from the listing date and expect to earn positive
market-adjusted return thereafter. Younesi et al (2012) examined the IPO performance in Malaysia for the
year 2007 to 2010. The Results obtained showed that under-pricing exists on the first day of trading.
Empirical results also show that none of the return determinants which included age, size, and total unit
offered, offering price and KLCI index movement are able to effect on IPO initial return. It concluded that
investors who invest in IPOs cannot gain by purchasing stocks and holding them for a period of one year.
Seal & Matharu (2012) tried to estimate the long run performance of IPOs and Seasoned Equity Offerings
(SEOs) in India with the help of event study methodology wherein stock returns are examined around the
date when new information about the performance of a company is announced for a period from 1999 to
2005. It was found that the average 5-year Buy and Hold Return for IPOs is 156.79% as compared to the
average return of 427.33% from the size matched firms which clearly demonstrates the long term
underperformance of IPOs. Some recent studies have also demonstrated the underperformance as well
including the one by Thomadakis et al (2012) and Gregory et al (2010) in the European markets. However,
over performance too is seen in few studies such as the study by Chi et al (2010) in the Chinese market.