Chap-1

Introduction

An initial public offering (IPO), referred to simply as an "offering" or "flotation", is

when a company (called the issuer) issues common stock or shares to the public for
the first time. They are often issued by smaller, wenger companies seeking capital to
expand, but can also be done by large privately-owned companies looking to become
publicly traded.

In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it
determine what type of security to issue (common or preferred), best offering price
and time to bring it to market.

An IPO can be a risky investment. For the individual investor it is tough to predict
what the stock or shares will do on its initial day of trading and in the near future
since there is often little historical data with which to analyze the company. Also,
most IPOs are of companies going through a transitory growth period, and they are
therefore subject to additional uncertainty regarding their future value

History

The term initial public offering (IPO) slipped into everyday speech during the tech
bull market of the late 1990s. Back then, it seemed you couldn't go a day without
hearing about a dozen new dotcom millionaires in Silicon Valley who were cashing in
on their latest IPO. The phenomenon spawned the term siliconaire, which described
the dotcom entrepreneurs in their early 20s and 30s who suddenly found themselves
living large on the proceeds from their internet companies' IPOs.

INVESTORS are still wary of equities in the 1990s, to blame are the excesses in the
primary market in the 1990s. Of the thousands of IPOs (initial public offerings) and
offers for sale made between 1994 and 1996, less than a hundred were from
companies with track record.

Even in this shortlist, only a few managed to complete planned projects and deliver
value to investors. The rest just frittered the money away.
The primary market of the mid-1990s was merely used as a channel to move public
funds into private hands. The Securities and Exchange Board of India (SEBI) was late
to wake up to the excesses, but when it did, it improved the disclosure framework,
tightened the prerequisites for an IPO, and towards the end of the decade, introduced
book-building.
( This route brought to market quality, wealth-creating IPOs such as Hughes
Software, i-flex solutions, Maruti, Bharti Tele-Ventures, TV Today and Divi's Labs,
to name a few. Yet the corporate sector has still not fully lived down the
consequences of the excesses of the mid- 1990s.)

Primary and Secondary market

When shares are bought in an IPO it is termed primary market. The primary market
does not involve the stock exchanges. A company that plans an IPO contacts an
investment banker who will in turn called on securities dealers to help sell the new
stock issue.

This process of selling the new stock issues to prospective investors in the primary
market is called underwriting.

When an investor buys shares from another investor at an agreed prevailing market
price, it is called as buying from the secondary market.
The secondary market involves the stock exchanges and it is regulated by a regulatory
authority. In India, the secondary and primary markets are governed by the Security
and Exchange Board of India (SEBI)

Primary market is a place where a corporate may raise capital by way of a :

1. Public Issue : Sale of securities to member of the Public.

2. Rights issue : Method of raising further capital from the existing

shareholders/debenture holders by offering additional shares to them on a pre-emptive
basis.

3. Private placement: As its name suggests it; involves selling securities privately to
a group of investors.

All issues by a new company has to be made at par and for existing companies the
issue price should be justified as per Malegam Committee recommendations by
• The earnings per share (EPS) for the last three years and comparison of pre-
issue price to earnings (P/E) ratio to the P/E ratio of the Industry.
• Latest Net Asset Value.
• Minimum return on increased networth to maintain pre-issues EPS.
Accompany may also raise finance from the international markets by issuing
GDR’s and ADR’s.
 CHAP-2

PRINCIPAL STEPS OF A PUBLIC ISSUE

1. Vetting of prospectus by SEBI

A draft prospectus is prepared giving out details of the Company, promoters

background, Management, terms of the issue, project details, modes of financing, past
financial performance, projected profitability and others. Additionally a Venture
Capital Firm has to file the details of the terms subject to which funds are to be raised
in the proposed issue in a document called the ‘placement memorandum. ‘

(a) Appointment of underwriters: The underwriters are appointed who commit to

shoulder the liability and subscribe to the shortfall in case the issue is under-
subscribed. For this commitment they are entitled to a maximum commission of 2.5
% on the amount underwritten.

(b) Appointment of Bankers: Bankers along with their branch network act as the
collecting agencies and process the funds procured during ;the public issue . The
Banks provide temporary loans for the period between the issue date and the date the
issue proceeds becomes available after allotment , which is referred to as a ‘bridge
loan’.

(c) Appointment of Registrars : Registrars process the application forms, tabulate the
amounts collected during the issue and initiate the allotment procedures.

(d) Appointment of the brokers to the issue: Recognized members of the Stock
exchanges are appointed as brokers to the issue for marketing the issue. They are
eligible for a maximum brokerage of 1.5%.

(e) Filing of prospectus with the Registrar of Companies: The draft prospectus along
with the copies of the agreements entered into with the Lead Manager, Underwriters,
Bankers, registrars and Brokers to the issue is filed with the Registrar of Companies
of the state where the registered office of the company is located.
(f) Printing and dispatch of Application forms: The prospectus and application forms
are printed and dispatched to all the merchant bankers, underwriters, brokers to the
issue.

(g) Filing of the initial listing application: A letter is sent to the Stock exchanges
where the issue is proposed to be listed giving the details and stating the intent ;of
getting the shares listed on the Exchange. The initial listing application has to be sent
with a fee of Rs. 7,500/-.

(h) Statutory announcement: An abridged version of the prospectus and ;the Issue
start and close dates are published in major English ;dailies and vernacular
newspapers.

(i) Processing of applications: After the close of the Public Issue all the application
forms are scrutinized, tabulated and then shares are allotted against these application.

(j) Establishing the liability of the underwriter: In case the Issue is not fully
subscribed to, then the liability for the subscription falls on the underwriters who have
to subscribe to the shortfall, incase they have not procured the amount committed by
them as per the Underwriting agreement.

(k) Allotment of shares: after the issue is subscribed to the minimum level, the
allotment procedure as prescribed by SEBI is initiated.

(l) Listing of the Issue : The shares after having been allotted have to be listed
compulsorily in the regional stock exchange and optionally at the other stock
exchanges.

2. Cost of a Public issue

The cost of a public issue works out between 8% to 12% depending of the issue size
but the maximum has been specified by SEBI as under.

For Equity & Convertible For Non Convertible debentures

• When the issue size is upto n5 • When the issue size is upto 5
crores =Mandatory costs + 5% crores = Mandatory costs + 2%

• When the issue size is greater than • When the Issue size is greater than
5 crores : Mandatory costs + 2% 5 crores : Mandatory costs + 1%
**Mandatory costs includes underwriting commission, brokerage, fees of the lead
managers of the issue , expenses on statutory announcements, listing fees and stamp
duty.

3. Eligibility for an IPO

An Indian Company is allowed to make an IPO if:

1. The company has a track record of dividend paying capability for 3 out of the
immediately preceding 5 years;
2. A public financial institution or scheduled commercial banks has appraised the
project to be financed through the proposed offer and the appraising agency
participates in the financing of the project to the extent of at least 10% of the
Project cost. Typically a new company has to compulsorily issue shares at par,
while for companies with a track record the shares can be issued at a premium.
Before the advent of SEBI the prices of shares were valued as per the
Controller of Capital Issues (CCI).

4. Rights Issue

The rights issue involves selling of securities to the existing shareholders in

proportion to their current holding. When a company issues additional equity capital it
has to be offered in the first instance to the existing shareholders on a pro-rata basis as
per Section 81 of the Companies Act, 1956. The shareholders may by a special
resolution forfeit this right, partially or fully by a special resolution to enable the
company to issue additional capital to the public or alternatively by passing a simple
resolution and taking the permission of the Central Government.

5. Private Placement

A private placement results from the sale of securities by the company to one or few
investors. The distinctive features of private placement is that:

• There is no need for a formal prospectus as well as underwriting arrangement

• The terms of the issue are negotiated between the company and the investors

The issuers are normally the listed public limited companies or closely held public or
private limited companies which cannot access the primary market. The securities are
placed normally with the Institutional investors, Mutual funds or other Financial
Institutional.
 Chap-3

SEBI Guidelines for IPO's

1. Allotment has to be made within 30 days of the closure of the Public Issue and
42 days in case of a Rights issue.
2. Net Offer to the General Public has to be at least 25% of the Total Issue Size
for listing on a Stock exchange. For listing an IPO on the NSE firstly, firstly,
Paid up capital should be Rs. 20 Crores, secondly the issuer or the promoting
company should have a track record of profitability and thirdly the project
should be appraised by a financial Institution, banks or Category I merchant
bank. For knowledge based companies like IT the paid up capital should be
Rs. 5 Crores, but the market capitalization should be at least Rs. 50 Crores. It
is mandatory for a company to get its shares listed at the regional stock
exchange where the registered office of the issuer is located.
3. A Venture Capital Fund shall not be entitled to get its securities listed on any
stock exchange till the expiry of 3 years from the date of issuance of
securities.
4. In an issue of more than Rs. 100 crores the issuer is allowed to place the whole
issue by book building.
5. Minimum of 50% of the Net offer to the Public has to be reserved for
Investors applying for less than 1000 shares.
6. All the listing formalities for a public Issue has to be completed within 70 days
from the date of closure of the subscription list.
7. There should be at-least 5 investors for every 1 lakh of equity offered.
8. Quoting of permanent Account number or GIR No. in application for
allotment of securities is compulsory where monetary value of Investment is
Rs.50,000/- or above.
9. Firm Allotment to permanent and regular employees of the issuer is subject to
a ceiling of 10% of the issue amount.
10. Indian development financial institutions ad Mutual Fund can be allotted
securities upto 75% of the Issue Amount.
11. Allotment to categories of FIP's and NRI's/OCB's is upto ? Maximum of 24%
which can be further extended to 30% by an application to the RBI - supported
by a resolution passed in the General Meeting.
12. 10% individual ceiling for each category a) Permanent employees' b)
Shareholding of the promoting companies.
13. Securities issued to the promoter, his group companies by way of firm
allotment and reservation have a lock-in period of 3 years. However shares
allotted to FII's and certain Indian and multilateral development financial
institutions and Indian Mutual Funds are not subject to Lock-in periods.
14. The minimum period for which a public issue has to be kept open is 10
working days. The minimum period for a rights issue is 15 working days and
the maximum 60 working days.
15. A public issue is effected if the issue is able to procure 90% of the Total issue
size within 60 days from the date of earliest closure of the Public Issue. In case
of over - subscription the company may have the right to retain the excess
application money and allot shares more than the proposed issue which is
referred to as the 'green-shoe' option.
16. A rights issue has to procure 90% subscription in 60 days of the opening of the
issue:
17. 20% of the total issued capital, if the company is an unlisted one with a three
year track record of consistent profitability Else in all cases the following slab
rate apply: Size of Capital issued (Including Premium) Contribution %
18. Refund orders have to be dispatched within 30 days of the closure of the
Public Issue.
19. Refunds of excess application money i.e. for un-allotted shares have to be
made within 30 days of the closure of the Public Issue.
Reasons for Listing

When a company lists its shares on a public exchange, it will almost invariably look
to issue additional new shares in order at the same time. The money paid by investors
for the newly-issued shares goes directly to the company (in contrast to a later trade of
shares on the exchange, where the money passes between investors). An IPO,
therefore, allows a company to tap a wide pool of stock market investors to provide it
with large volumes of capital for future growth. The company is never required to
repay the capital, but instead the new shareholders have a right to future profits
distributed by the company and the right to a capital distribution in case of a
dissolution.

The existing shareholders will see their shareholdings diluted as a proportion of the
company's shares. However, they hope that the capital investment will make their
shareholdings more valuable in absolute terms.

In addition, once a company is listed, it will be able to issue further shares via a rights
issue, thereby again providing itself with capital for expansion without incurring any
debt. This regular ability to raise large amounts of capital from the general market,
rather than having to seek and negotiate with individual investors, is a key incentive
for many companies seeking to list.

There are several benefits to being a public company, namely:

• Bolstering and diversifying equity base

• Enabling cheaper access to capital
• Exposure and prestige
• Attracting and retaining the best management and employees
• Facilitating acquisitions
• Creating multiple financing opportunities: equity, convertible debt, cheaper
bank loans, etc.
• Increased liquidity for equity holder
 Chap-4

Current position of Indian IPO Market

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

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

• On January 15, 2008, Reliance Power attracted $27.5 billion of bids on the first day
of its IPO, equivalent to 10.5 times the stock on offer, thereby, creating India's IPO
record. Its upper cut off price was Rs. 450. The proposed IPO was to fund the
development of its six power projects across the country.

• Emaar MGF’s IPO, at $1.6 billion is estimated to be the second largest IPO in the
world so far this year, behind Reliance Power's $3 billion IPO.

• Thomson Financial data reveals that India accounts for 49.1% of global IPO
proceeds at the moment, compared to just 3.7% same time last year. Significant, given
that global IPOs declined 36.1% over the last one year.

• The Indian capital market has performed quite well in 2007. It raised US$8.3 billion
through 95 Initial Public Offers (IPOs). According to the Ernst & Young report,
"Globalisation - Global IPO Trend Report 2007" India was the fifth largest market in
the world in terms of the number of IPOs and the seventh largest in terms of the
proceeds for the year
• It was the real estate sector which took the maximum advantage of the bullish stock
market trends in 2007. According to the industry body Assocham, real estate players
raised the maximum amount of funds from the capital market through IPOs last year.
Realty firms picked up around 42.7% of the total funds generated through IPOs. Of
the Rs.34,119 crore raised in the primary market in the period starting from January
2007 to mid-December, about Rs.14,591 crore was raised by the realty firms.
Largest IPO in India

CIL's initial public offering, priced in the range of Rs 225 to Rs 245 per share, is the
biggest issue in the Corporate India's history so far.

The offering opens on 18 th October and closes on October 21. For qualified
institutional buyers, which include FIIs, insurance firms and mutual funds, the IPO
will close on October 20.

The CIL IPO has seen a broad endorsement from almost all the big as well as small
investment banking firms. The Centre, which will divest its 10 per cent stake through
the offering, is also bullish on the issue that will help the government to fulfill Rs
40,000 crore divestment target this fiscal.

At the upper end of price range, Coal India public issue is valued worth Rs 15,475
crore and at the lower end it would fetch about Rs 14,211.81 crore.

Anil Ambani Group company Reliance Power , which raised Rs 11,500 crore through
its mega IPO in January 2008, is India's biggest public issue till date.
 Chap-5

IPO Grading

IPO grading assesses the fundamentals of the Initial Public Offerings (IPOs) and is
reflected on a fivepoint point scale (15) with a higher score indicating stronger
fundamentals of the IPO issuing firm. SEBI (India’s capital market regulator)
introduced the IPO grading as a mandatory requirement for all IPOs, and the
requirement seems to have been borne by the fact that, in India, where institutions
are less developed and retail participation in IPOs is significant, quality signal
represented by an IPO grade yields discernible benefits to the market. We note that
while SEBI and the rating agencies advocate the benefit of the IPO grade, not
everyone in the industry and academia is convinced of the grade’s merits.

To analyze the efficacy of IPO grading, we conducted regression analysis study of a

total of 63 IPOs that have been graded. Through this study, we find that securities
with higher IPO grades tend to exhibit underpricing to a lesser extent. We also find
that, with higher IPO grades, the subscription rate of the IPOs improves across all
class of investors, including retail investors. We also find that IPO grades are
inversely related to the shortterm liquidity of the IPOs, i.e. at least in the short term,
higher graded IPOs don’t exhibit high turnover ratio. We further find that the IPO
grade fails to explain with any t market performance of the issues in terms of capital
gains

Introduction
As a first of its kind among securities market regulators in the world, the Securities & Exchan
ge Board of India (SEBI) after much deliberation introduced a new requirement effective May
1, 2007 that a firm planning to be listed in the stock exchange obtain a grading of its ipo
through is registered with SEBI.

Arriving at the decision was with a belief that the IPO grade represented a relative assessment
of the fundamentals of that ise in relation to the other listed equity securities in India. Further
more, SEBI believed that an IPO grade provided an additional input to investors, in arriving a
t an investment decision, based on independent and objective analysis. Hence, IPO grading c
an be seen as an endeavor to make additional information available to the investors in order to
facilitate their asessment of equity issues offered through an IPO

The decision to introduce the requirement recognized the specific needs of the Indian capital
market and was the result of preure from certain investor groups. However, the path to manda
tory grading of IPOs has been rocky, with opposition from companies, investment bankers,
fund managers, market experts and even the SEBI board members2. The parties that are in op
position want the grading to be an optional exercise. They argue that the mandatory grading
has increased the cost of raising funds and also has led to delay in the IPO process, which SE
BI was attempting to make faster and shorter with the help of grading. Given that the grading
expenses have been as high as one percent of the the total issue size.
IPO Grading and Criteria for Evaluation

SEBI’s guidelines suggest that the grading of IPOs is a service aimed at facilitating
asessment of equity issues offered to thepublic. The Grade assigned to any individual IPO
is an assessment of the “fundamentals” of the issuer concerned on a relative grading scale,
in relation to the other listed securities in India.

The grading is assigned on a five point basis:-

IPO grade 1 : Poor fundamentals

IPO grade 2: Below Avg fundamentals
IPO grade 3 : Average fundamentals
IPO grade 4 : Aboveaverage fundamentals
IPO grade 5: Strong fundamentals

The grading exercise emphasizes on evaluating the prospects of the industry in which the
company operates, and the company’s competitive strengths that would allow it to address the
risks inherent in the business(es). In case the IPO proceeds are planned to be used to set up
projects, either Greenfield or Brownfield, the grading evaluates the risks inherent in such proj
ects, the capacity of the company’s management to execute the same, and the likely benefits a
ccruing from the successful completion of the project in terms of profitability and return to
shareholders.

Accordingly, IPO Grading methodology examines the following key fundam

entals:

• Business and Competitive Position ‐The alignment between industry

opportunities the company’s strategy and objectives.

• Financial Position and Prospects ‐ Forward looking assessment of ke

y financial
indicators such as RoE, ES, P/E, growth in profit, relevant or a eq
uity investor .

• Management Quality- An evaluation of ability of management to handle uncertainity

In terms of capitializing on future business opportunity and mitigating the impact of
Contingencies.

• Corporate Governance practices :An evaluation of the company’s go

vernance
architecture to determine if it is structured such that the risks and r
ewards of
 busess are equally available to all shareholders.

IPO grading is a one time assessment done prior to the IPO issue and relie
s significant
on the draft prospectus filed with SE. Normally, grading is done looking at
roughly a three year time horizon and would involve an in‐depth assessme
nt of the
various quantitative and qualitative parameters of the issuer. While growt
h
prospects of the industry and financial strength are some of the quantitati
ve parameters
qualitative parameters such as management capability also provide critica
l input in
determining a grade.

It is worth noting that IPO grading is NOT a recommendation to buy, sell or hold
the securities. Similarly, it is NOT a comment on the valuation or pricing of the IPO
nor is it an indication of the likely listing price of the securitis.

Is IPO grading Necessary?

Given that no other capital market in the world practices such a grading scheme, what is
unique about India’s capital market that calls for IPO grading? To assess the necessity, it
is prudent to first look at the views of the various stakeholders. The primary stakeholders
in this context are SEBI, the rating agencies,the firms aspiring to issue an IPO and the
investors.

SEBI’s View

An investor may find it challenging to appropriately assess, on the basis of the information
available on the prospectus, a firm’s business prospects and risks. SEBI’s belief is that an
IPO grade provides an additional input to investors, in arriving at an investment decision.
In recent times, with the stock market participation of new and foreign investors increasing
in India, SEBI contends that there is need for greater value‐added information on
companies tapping the capital market and their intrinsic quality. In this context, IPO grades,
being simple, objective indicators of the relative fundamental positions of the issuers
concerned, helps in both widening and deepening the market.

SEBI has further said that as the IPO grading does not take into consideration the pricing of
the security, it is not an investment recommendation. Rather it is only one of the inputs for
the investor to aid in the decision making process. To that effect, SEBI’s view is that all
other things remaining equal, a security with stronger fundamentals would command a higher
market price.
 SEBI believes that it has taken a pioneering role in safeguarding investors’ interest by increas
ing disclosure levels by entits seeking to access equity markets for funding. This has caused
India to be amongst one of the more transparent and efficient markets in the world. A majorit
of retail investors do not read the offer document (prospectus) and even when they do, they
may not fully disseminate or comprehend the implications of the disclosures made. Therefore
SEBI’s belief is that there is a vital need to rate equity offerings, helping investors separate
good floats from risky ones.

Grading Exercise optional to Mandatory

When first introduced in April 2006, SEBI kept the IPO grading as an option
al exercise. This meant that issuers were not required to get their IPO gra
ded, but in the event that
they obtain a grading, they were required to disclose it in the prospectus.
However, despite more than 40 IPOs expected to hit the market in the first
half of 2006‐07,
only four companies approached the agencies for their rating. Incidentally
, they did not accept the ratings awarded to them as the ratings did not m
atch up to their expectations
Additionally, there was no incentive for the companies to rate their IPOs.
A tricky situation prevailed where in a good company would not go for the
rating fearing that if it gets a bad rating, its issue might suffer despite stro
ng fundamentals. Similarly, a bad company too would not go for the ratin
g fearing that its cover ups might get exposed with a poor rating. Looking
at these uncertainties, SEBI decided to make IPO grading a mandatory exe
rcise effective as of May 1, 2007. SEBI chairman M. Damodaran explains t
he decision to make IPO grading a mandatory exercise: “When the
market started going up suddenly a lot of people [companies]
started coming to the market. It is not that only the best and the
brightest continue to come to the market, there are a lot of other
people [companies] who started entering the market. One of our concerns is whether
we are going to have another round of ‘vanishing companies’ which will raise
money and never spend it for the intended purpose. I firmly believe that [IPO]
grading, if made mandatory, will prevent vanishing companies in future.

Rating Agencies View

Until now, research has been available to equity investors only in the form
of investmentadvice (buy/sell/hold recommendations). Rating agencies co
ntend that an IPO grade
brings an independent, unbiased assessment of the fundamentals of the IP
O issuing firm.The fundamentals, as stated earlier, can be looked at in ter
ms of factors such as
competence of management, competitive edge, operating efficiency and p
rofile of promoters. Although there are some reservations regarding the de
gree of unbiased nature of
the IPO grade, which we shall look at later in the paper, the rating agencie
s believe that
the assessment is in no way influenced by the issuer and therefore brings
fresh
perspectives to the market.

Rating agencies further substantiate that the IPO grade summarizes the v
oluminous
data in the prospectus and its implications, which a lay investor may not b
e able to comprehend. In response to the fact that there isn’t a lot of clari
ty in the market as far as what an IPO grade indicates, the credit rating ag
encies point out that the investors should
not misconstrue an IPO grading to be an investment decision. Rather, it is
only one of
the inputs to the investor decision making process. It needs to be read to
gether with thedisclosures made in the prospectus as well as the price at
which the shares are offered. One of the rating agencies, CRISIL, believes t
hat grading helps if investors know where
exactly it belongs in their investment decision process process.

Investment decision making is three step process:-

The rating agencies compare the fundamentals of the IPO firm to those of other listed firms in
the primary and the secondaryarket. This is done with an understanding that if IPO grading
is to meet investors’ needs, the relative comparison set of potential IPO companies must
include all companies that are potential investment equity options for the investor.
Doing so benefits the issuer company by benchmarking itself with peers.

Doing so benefits the issuer company by benchmarking itself with its peers. Additional benefi
t of the IPO grade, in the eyes of the rating agencies, is particularly significant for the smaller
firms. While the large and well‐known companies would not find it difficult to raise funds, th
e middle rung companies would like their equity to be graded such that they could access fun
ds without much track record about their performance. Rating will certainly facilitate which
are not very well known , to tap markets.

Other stake holders View

Along with SEBI and the rating agencies who are advocates of the IPO gra
ding system,
there are other stakeholders, some of whom believe in the merits of the IP
O grade, while others oppose it. Initially, SEBI sources had disclosed that t
he cost of the grading would be borne by the Investor Protection Funds ad
ministered by the stk exchanges, or by
Investor Education Protection Funds (IPF) administered by the Ministries of
Companies
Affairs. However, the onus of bearing the cost of obtaining the grade has
since been
transferred to the companies themselves. There does not seem to be any
justification
for having shifted the cost responsibilities from IPF to the companies. Due
to lack of justification on this, some in the finance industry have suggested
that the IPO grading has increased the cost of raising funds in the capital
market

Also, since payment would now be made by companies to rating agencies

, would some
level of biasness be involved in the equation? Would their be a conflict of i
nterest in the hands of the rating agencies in that they would want to
assign a high grade to company
In order to increase the likelihood of getting paid.

Some have argued that the term “IPO grade” is misleading, because if it were a true grading
exercise, it would take into account the price at which the shares are offered. Mridul Sagar,
chief economist, Kotak Securities says: “Pricing of shares is the most critical factor in
evaluating IPOs and by not taking the pricing into consideration, the usefulness of
grading is diminished.”

From an investment standpoint, a good company with an issue that is priced high can be a
bad investment, regardless of the fundamentals.

The other argument is that given the details of the company’s projections in terms of target
growth, Price to Earning (P/E) ratio, already available in the prospectus, which is subject to
SEBI’s approval, the need for an IPO grade is not justified. Moreover, if a good company is
given poor rating, the company’s IPO plans might get shelved. Contrary to the rating
agencies’ view that small companies benefit from the IPO grade, some argue that vulnerable
are the
mall and medium enterprises (SMEs) as most rating agencies are known to
treat
SMEs with little respect, and thus could assign them poor grades. Even tho
ugh the IPO
grading process is to be carried out in parallel along with other pre‐issue a
ctivities,
there is belief that one more layer of deliverable has led to the delay in th
e overall IPO
process.The IPO grading is required to be completed and disclosed in the fi
nal prospectutherefore until the grading is complete, the filing of the final
offer document to the
registrar of companies (RoC) remains pending. However, not all in the indu
stry are pessimistic. Siddhartha Sankar Saha, lecturer of Accounting & Fin
ance at St. Xavier’s College,
in his article on ‐‐The Chartered Accountant‐‐, argues that at certain times,
a company may not know the extent of its own performance, and a gradin
g by an independent rating agency would be useful. He suggests that IPO
grading is particularly useful for companies with no track record of prior m
arket performance. He suggests that IPO grading serves as an investment
assistance device to enable more realistic pricing of shares.
To that effect, he suggests, a high grade could allow issuing companies to
demand a
better premium on their offer also argues that the IPO grade allows invest
ors to
understand the fundamentals of the company via a std set of disclosures,
rather then page through the voluminous prospects.

Saha also suggests that the grading can be an impediment for weak comp
anies. These
companies will find it difficult to create speculative demand among investo
rs. Therefore IPO grading behaves as a deterrent for weak companies pla
nning to come to the market to raise easy capital.

The process of obtaining a grade:-

The grading agencies that are approved by SEBI to carry out the grading
are
As follows:-

• Credit Analysis and Research Ltd(CARE)

• Credit rating Information services of India ltd.(CRISIL)
• FITCH Ratings
• ICRA Ltd

To initiate the process of obtaining an IPO grade, the company first contac
ts one of the
Grading
agencies. The steps involved in the grading process are as follows:

Step I:
The issuer shares the required information with the grading team of the ra
ting agency

Step II:
Rating agency follows up with detailed management meetings with the CE
O, CFO, and
thoard of directors, and further follows up with subsequent site visits

Step III
The grading team prepares a detailed note and grading committee assign
s the grade
Step IV:
Grading gency publishes a rationale outlining
the reasons for the assinged grade

Step V:
Grading agency sends the grading report to SEBI,Stock Exchanges and the
company.

The IPO grading Process:-

Rationale for Assigned Grades

In an effort to gauge what sort of firm characteristics the rating agencies look for before
arrivng at a particular grade, we look at the rating agencies’ justification for some of the grade
s assigned. We note again that the grades are assigned on a 5 point scale (1‐5). Out of the 63
graded IPOs that we have studied, the highest and the lowest grades assigned have been a 4 a
nd 1 respectively.

Rationale for Grade 4 (out of 5)

CARE’s justification in assigning a grade of 4 to a firm in the infrastructure
sector:
“The grading factors in the long experience, well entrenched position in
the construction industry.”
“The rating takes into account the improvement in the financial
position of the company.”
“The company is leveraging strategic relationships with global infrastructure
companies to enhance their project bidding and devlopment
capabilities.”
“Total income in FY06 has depicted a quantum jump.”
“Consolidation coupled with low operational expenditure contributed to
healthy PBILDT margins….”
“The company is currently enjoying a debt free status

CRISIL justification in assigning a grade 4 to a firm in telecom sector.

“The grading reflects the firm’s position as the largest player in the
mobile valueadded services (VAS) market in India….”
“The grading also reflects the firm’s ability to leverage on the unique
voice recognition capability…..and its ability to offer customer contact
products to companies by virtue of having a voice channel relationship
with almost al telecom operators.”
“The grading also factors in the management's strong understanding of
market dynamics, as reflected in the company’s consistent track record in
product innovation, and proactiveness in setting up a corporate governance
system…, as indicated by the appointment of independent directors.”
“The firm plans to reduce its dependence on the Indian market by
expanding into international markets. In the last one year the
company has made two acquisitions.

Rationale for Grade 1 (out of 5)

CRISIL’s justification in assigning a grade of 1 to a firm in the mining sector:

The grading reflects weak management capability of the firm and its
present uncertain business model….”
“The company's financial returns are also vulnerable to spot price
movements of the raw material...”
“The company management lacks depth since the key management
personnel have a limited understanding of the business.
“The limited management capability is also reflected in its significant
dependence on thirdparty consultants..”.
“The grading also reflects the firm’s belowaverage corporate
governance structure.

The concept of IPO grading being a unique one, it is worthwhile to note a f

ew underlying differences between IPO grading and credit rating.

• While credit rating is assigned based on past responsibilities of debt

payment along with future capabilities, IPO grade is assigned based
solely on fundamentals and on assessment of the future performanc
e.

• Companies that are likely to raise far more equity than they need in
an IPO and hence suffer a depressed return on equity (RoE) are likel
y to be assessed unfavorably in the IPO grading exercise; However,
they are likely to be assessed more
favorably in a credit rating exercise, as more equity lowers the deb
t to equity
(D/E) ratio and provides cushion to assume more debt.
 Chap-6

Book building Process

This is the process of price discovery. The company does not come out with a fixed
price for its shares; instead, it indicates a price band that mentions the lowest (referred
to as the floor) and the highest (the cap) prices at which a share can be sold. Bids are
then invited or 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.
Bids are then invited for the shares. Each investor states how many shares s/he wants
and what s/he is willing to pay for those shares (depending on the price band). The
actual price is then discovered based on these bids. As we continue with the series, we
will explain the process in detail. According to the book building process, four classes
of investors can bid for the shares.

1. Retail Individual Investor (RII):

In the retail individual investor category,investors cannot apply more than Rs one lakh
(Rs 1, 00,000) in an IPO. Retail Individual investors have an allocation of 35% of
shares of the total issue size in Book build IPOs. NRI’s who apply with less than Rs
100000/ are also considered as RII category. Retail Individual investor can bid for
more than Rs 100000 in an IPO by applying in NON institutional Investors Category.
There is no upper limit for bidding amount in ‘NON institutional Investors Category.

2.High Networth Individual (HNI):

If Retail Investor applies for more than Rs 100000 of shares in an IPO , they are
considered as HNI.

3. Non Institutional bidders :

Individual investors , NRI’s, Companies , trusts, etc. who bid for more than Rs 1 lakh
are known as Non Institutional bidders. Non- Institutional bidders have an allocation
of 15% of shares of the total issue size in Book build IPOs.
4.Qualified Institutional Bidders (QIBs):

Financial institutions , banks , FII’s and Mutual funds who are registered with SEBI
are called QIB’s. They usually apply in very high quantities. QIBs are mostly
representatives of small investors who invest through mutual funds, ULIP schemes of
insurance companies and pension schemes . QIB have an allocation of 50% of shares
of the total issue size in book build IPOs.

Allotment & Evaluation of IPO

This is the process whereby those who apply are given (allotted) shares. The bids are
first allotted to the different categories and the over-subscription (more shares applied
for than shares available) in each category is determined. Retail investors and high net
worth individuals get allotments on a proportional basis. For instance, if a retail
investor has applied for 200 shares in the issue, and the issue is over-subscribed five
times in the retail category, then the retail investor gets to get 40 shares (200
shares/5). Sometimes, the over-subscription is huge or the issue is priced so high that
retail investors cannot 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. Say, a retail
investor has applied for five shares in an issue, and the retail category has been over-
subscribed 10 times. The investor is entitled to half a share. Since that isn't possible, it
may then be decided that every 1 in 2 retail investors will get allotment. The investors
are then selected by lottery and the issue allotted on a proportional basis. That is why
there is no way we can be sure of getting an allotment.

Underpricing

Often the pricing of an initial public offering (IPO) is below its market value. When
the offer price is lower than the price of the first trade, the stock is considered to be
underpriced, as per the conventional notion of IPO pricing. A stock is usually only
underpriced temporarily because the laws of supply and demand will eventually drive
it toward its intrinsic value. It is believed that IPOs are often underpriced because of
concerns relating to liquidity and uncertainty about the level at which the stock will
trade.
The less liquid and less predictable the shares are, the more underpriced they will
have to be in order to compensate investors for the risk they are taking. The
conventional argument given for ‘underpricing’ is that an IPO's issuer tends to know
more about the value of the shares than the investor, and therefore, the company must
underprice its stock to encourage investors to participate in the IPO.

How to evaluate IPO

As we can see, the initial evaluation process we must perform when we are
purchasing an IPO is definitely the most important action we can take when we are
first investing into this realm the stock market. The first aspect we should look into as
we are investing into an IPO is the amount of assets the company has within its
balance sheet compared to the amount of debt the company owes.

The best situation we can find a company in is a situation where they have more
assets than debt. If we can find a company that is selling to the open market with
assets that are worth more than its debt, we can be certain that the company is at least
stable to a degree at the current moment. As we probably already know, we should
also investigate a variety of other factors that can be highly relevant to the value of an
IPO investment. One of the most important aspects of an IPO investment is the
amount of income the company is bringing in relative to the value of any expenses it
maintains. If we invest into a company that has me more expenses than income, the
company is in an unstable financial situation, which is certainly an investment we
should stay away from. If the company is making more than their current expenses are
charging their bank accounts, they are a profitable investment.

One of the easiest ways to evaluate whether we should purchase an IPO is by

analyzing the type of company the IPO represents. If we can find sufficient evidence
supporting the fact that the business releasing the IPO is worth wer money, consider it
as an investment option. One of the easiest ways to understand the type of company
that is being represented by an IPO is by analyzing the products and services the
company is offering to the public.

There are other factors that occur behind the scenes that can be important to the value
of an IPO. We should look into who is releasing the IPO to the public, for what
reasons they selling the initial public offering to the public, and many other facts that
may affect the overall value of the investment in the long-run.
If we put all of these different factors into the forefront of wer thinking process as we
analyze IPO investments, we will certainly be able to discern whether or not the
investment we are considering is worth wer current capital. If we discover that any of
these factors do not provide sufficient evidence that the IPO is a valuable investment,
we should consider placing wer money elsewhere.

If, after we perform IPO valuation, we discover that the company being represented
by the IPO is a solid, stable, and growing company, consider it as a possible
investment for expanding portfolio.

The Syndicate

Just because the prospectus has been filed with SEBI, it doesn't mean it recommends
the issue or guarantees its contents. This responsibility rests with the lead managers to
the issue, who are supposed to do due diligence on the issue. In plain language, that
means lead managers have to ensure the company is following the rules laid down for
an IPO, that it has made available all the information a potential investor needs to
know and that the facts in the prospectus are correct.
They are also called merchant bankers and are in charge of the issue process. They act
as intermediaries between the company and the investors. They are also responsible
for drawing up the prospectus and marketing the issue. If it is a book building process,
the lead manager also helps determine the price band; in such cases, they are also
called Book Running Lead Managers. Post issue activities, like intimation of
allotments and refunds, are their responsibility as well.
The actual work of drawing up the list of allotees, crediting the shares to their demat
accounts and ensuring refunds, if not allotted the shares, is done by the Registrar to
the Issue. This is a financial institution appointed to keep a record of the issue and
ownership of company shares. In the case of complaints like non-receipts of shares or
refunds, investors must complain to the lead managers, who take up the matter with
the registrars.

The names of all the lead managers and the registrar to the issue, with their addresses,
phone numbers and e-mail addresses, are displayed prominently on the cover of every
prospectus.

An Underwriter to the issue could be a banker, broker, merchant banker or a financial

institution. They give a commitment to underwrite the issue. Underwriting means they
will subscribe to the balance shares if all the shares offered at the IPO are not picked
up. Suppose there is an issue is for Rs 100 crore (Rs 1 billion) and subscriptions are
received only for Rs 80 crore (Rs 800 million). It is then left to the underwriters to
pick up the balance Rs 20 crore (Rs 200 million). If underwriters don't pay up, SEBI
will cancel their licenses. IPOs are, are therefore, nothing but stocks, which are a risky
investment with no guarantees.
The lead manager may have certified that the facts, as disclosed in the prospectus, are
correct. Prominent financial institutions may agree to underwrite the issue. The issue
may even end up being oversubscribed. All this still does not mean that
IPOs are being offered and being priced by the IPO market at the right or ‘True
Price’. IPOs can be a risky investment. For the individual investor, it is tough to
predict what the stock will do on its initial day of trading and in the near future
because there is often little historical data with which to analyze the company. Also,
most IPOs are of companies going through a transitory growth period, which are
subject to additional uncertainty regarding their future values.

In an IPO is also referred to as a "public offering". The issuer obtains the assistance of
an underwriting firm, which helps it determine what type of security to issue
(common or preferred), the best offering price and the time to bring it to market. This
price is known as the ‘Issue Price’ or ‘Public Offering Price’ (PoP). When
underwriters determine the public offering price, they look at a number of factors.
Some of these include the company's financial statements (how profitable it is), public
trends, growth rates and even investor confidence.
 Chap-7

Some Terms in IPO Industry

1.Offer Document
Means Prospectus in case of a public issue or offer for sale and Letter of Offer in case
of a rights issue which is filed Registrar of Companies (ROC) and Stock Exchanges.
An offer document covers all the relevant information to help an investor to make
his/her investment decision.

2.Draft Offer Document

Means the offer document in draft stage. The draft offer documents are filed with
SEBI, atleast 21 days prior to the filing of the Offer Document with ROC/ SEs. SEBI
may specifies changes, if any, in the draft Offer Document and the issuer or the Lead
Merchant banker shall carry out such changes in the draft offer document before filing
the Offer Document with ROC/SEs. The Draft Offer document is available on the
SEBI website for public comments for a period of 21 days from the filing of the Draft
Offer Document with SEBI.

3.Red Herring Prospectus

It is a prospectus which does not have details of either price or number of shares being
offered or the amount of issue. This means that in case price is not disclosed, the
number of shares and the upper and lower price bands are disclosed. On the other
hand, an issuer can state the issue size and the number of shares are determined later.
An RHP for and FPO can be filed with the ROC without the price band and the issuer,
in such a case will notify the floor price or a price band by way of an advertisement
one day prior to the opening of the issue. In the case of book-built issues, it is a
process of price discovery and the price cannot be determined until the bidding
process is completed. Hence, such details are not shown in the Red Herring
prospectus filed with ROC in terms of the provisions of the Companies Act.
Only on completion of the bidding process, the details of the final price are included
in the offer document. The offer document filed thereafter with ROC is called a
prospectus

4.Abridged Prospectus

Means the memorandum as prescribed in Form 2A under sub-section (3) of section 56

of the Companies Act, 1956. It contains all the salient features of a prospectus. It
accompanies the application form of public issues

5.Letter of Offer

Means the offer document prepared by company for its rights issue and which is filed
with the Stock Exchanges. The letter of offer contains all the disclosures as required
in term of SEBI(DIP) guidelines and enable shareholder in making an informed
decision.

6. Abridged Offer of Letter

Means the abridged version of the letter of offer. Listed company is required to send
the abridged letter of offer to each and every shareholder who is eligible for
participating in the rights issue along with the application form. A company is also
required to send detailed letter of offer upon request by any Shareholder.

7. Placement Document

Means document prepared by Merchant Banker for the purpose of Qualified

Institutions placement and contains all the relevant and material disclosures to enable
QIBs to make an informed decision.

8. Lock- In

“Lock-in” indicates a freeze on the shares. SEBI (DIP) Guidelines have stipulated
lock-in requirements on shares of promoters mainly to ensure that the promoters or
main persons who are controlling the company, shall continue to hold some minimum
percentage in the company after the public issue. The requirements are detailed in
Chapter IV of DIP guidelines. There is lock-in on the shares held before IPO and also
on shares acquired through preferential allotment route. However there is no lock- in
on shares/ securities allotted through QIP route. The requirements are detailed in
Chapter IV, Chapter XIII and Chapter XIIIA of DIP guidelines.
9.Promoter

The promoter has been defined as a person or persons who are in over-all control of
the company, who are instrumental in the formulation of a plan or programme
pursuant to which the securities are offered to the public and those named in the
prospectus as promoters(s). It may be noted that a director / officer of the issuer
company or person, if they are acting as such merely in their professional capacity are
not be included in the definition of a promoter 'Promoter Group' includes the
promoter, an immediate relative of the promoter (i.e. any spouse of that person, or any
parent, brother, sister or child of the person or of the spouse).

In case promoter is a company, a subsidiary or holding company of that company; any

company in which the promoter holds 10% or more of the equity capital or which
holds 10% or more of the equity capital of the Promoter; any company in which a
group of individuals or companies or combinations thereof who holds 20% or more of
the equity capital in that company also holds 20% or more of the equity capital of the
issuer company. In case the promoter is an individual, any company in which 10% or
more of the share capital is held by the promoter or an immediate relative of the
promoter' or a firm or HUF in which the 'Promoter' or any one or more of his
immediate relative is a member; any company in whicha company specified in, holds
10% or more, of the share capital; any HUF or firm in which the aggregate share of
the promoter and his immediate relatives is equal to or more than 10% of the total,
and all persons whose shareholding is aggregated for the purpose of disclosing in the
prospectus "shareholding of the promoter group"

10.Green Shoe Option

A Green Shoe option means an option of allocating shares in excess of the shares
included in the public issue and operating a post-listing price stabilizing mechanism
for a period not exceeding 30 days in accordance with the provisions of Chapter
VIIIA of DIP Guidelines, which is granted to a company to be exercised through a
Stabilizing Agent. This is an arrangement wherein the issue would be over allotted to
the extent of a maximum of 15% of the issue size. From an investor’s perspective, an
issue with green shoe option provides more probability of getting shares and also that
post listing price may show relatively more stability as compared to market.

11. E-IPO

A company proposing to issue capital to public through the on-line system of the
stock exchange for offer of securities can do so if it complies with the requirements
under Chapter11A of DIP Guidelines. The appointment of various intermediaries by
the issuer includes a prerequisite that such members/registrars have the required
facilities to accommodate such an online issue process.

12. Safety Net

Any safety net scheme or buy-back arrangements of the shares proposed in any public
issue shall be finalized by an issuer company with the lead merchant banker in
advance and disclosed in the prospectus. Such buy back or safety net arrangements
shall be made available only to all original resident individual allottees limited up to a
maximum of 1000 shares per allottee and the offer is kept open for a period of 6
months from the last date of dispatch of securities. The details regarding Safety Net
are covered under Clause 8.18 of DIP Guidelines

13. Syndicate Member

The Book Runner(s) may appoint those intermediaries who are registered with the
Board and who are permitted to carry on activity as an ‘Underwriter’ as syndicate
members. The syndicate members are mainly appointed to collect and entre the bid
forms in a book built issue.

14 Flipping

Flipping is reselling a hot IPO stock in the first few days to earn a quick profit. This
isn't easy to do, and you'll be strongly discouraged by your brokerage. The reason
behind this is that companies want long-term investors who hold their stock, not
traders. There are no laws that prevent flipping, but your broker may blacklist you
from future offerings Institutional investors flip stocks all the time and make big
money. The double standard exists and there is nothing we can do about it because
they have the buying power. Because of flipping, it's a good rule not to buy shares of
an IPO if you don't get in on the initial offering.Many IPOs that have big gains on the
first day will come back to earth as the institutions take their profits.

15. Open /Close Book

Presently, in issues made through book building, Issuers and merchant bankers are
required to ensure online display of the demand and bids during the bidding period.
This is the Open book system of book building. Here, the investor can be guided by
the movements of the bids during the period in which the bid is kept open. Under
closed book building, the book is not made public and the bidders will have to take a
call on the price at which they intend to make a bid without having any information
on the bids submitted by other bidders

16. Hard Underwrting

Hard underwriting is when an underwriter agrees to buy his commitment at its earliest
stage. The underwriter guarantees a fixed amount to the issuer from the issue. Thus, in
case the shares are not subscribed by investors, the issue is devolved on underwriters
and they have to bring in the amount by subscribing to the shares. The underwriter
bears a risk which is much higher in soft underwriting.

17. Soft Underwriting

Soft underwriting is when an underwriter agrees to buy the shares at later stages as
soon as the pricing process is complete. He then, immediately places those shares
with institutional players. The risk faced by the underwriter as such is reduced to a
small window of time.

Also,the soft underwriter has the option to invoke a force Majeure (acts of God)
clause in case there are certain factors beyond the control that can affect the
underwriter’s ability to place the shares with the buyers

18. Cut Off Price

In Book building issue, the issuer is required to indicate either the price band or a
floor price in the red herring prospectus. The actual discovered issue price can be any
price in the price band or any price above the floor price. This issue price is called
“Cut off price”. This is decided by the issuer and LM after considering the book and
investors’ appetite for the stock SEBI (DIP) guidelines permit only retail individual
investors to have an option of applying at cut off price.

19.Differential Pricing

Pricing of an issue where one category is offered shares at a price different from the
other category is called differential pricing. In DIP Guidelines differential pricing is
allowed only if the securities to applicants in the firm allotment category is at a price
higher than the price at which the net offer to the public is made. The net offer to the
public means the offer made to the Indian public and does not include firm allotments
or reservations or promoters’ contributions.

20.Minority IPO

An initial public offering in which a parent company spins off one of its subsidiaries
or divisions, but retains a majority stake in the company after issuance. This means
that after the public offering, the parent company will still have a controlling stake of
the new public company. The parent company may retain this majority stake forever
or may slowly dissolve their ownership over time. This type of IPO allows the
company to raise funds, accessing the value of the subsidiary, to fund its own
operation or return value to shareholders.
21. Public Offering Price

The price at which new issues are offered to the public by an underwriter.
When underwriters determine the public offering price, they look at a number of
factors.Some of these include the company's financial statements (how profitable it
is), public trends,growth rates and even investor confidence.

22. UnderPricing

The pricing of an initial public offering (IPO) below its market value. When the offer
price is lower than the price of the first trade, the stock is considered to be
underpriced. A stock is usually only underpriced temporarily because the laws of
supply and demand will eventually drive it toward its intrinsic value.
It is believed that IPOs are often underpriced because of concerns relating to liquidity
and uncertainty about the level at which the stock will trade. The less liquid and less
predictable the shares are, the more underpriced they will have to be in order to
compensate investors for the risk they are taking. Because an IPO's issuer tends to
know more about the value of the shares than the investor, a company must
underprice its stock to encourage investors to participate in the IPO.

23. Direct Public offering

When a company raises capital by marketing its shares directly to its own customers,
employees, suppliers, distributors and friends in the community. DPOs are an
alternative to underwritten public offerings by securities broker-dealer firms where a
company's shares are sold to the broker's customers and prospects.Direct public
offerings are considerably less expensive than traditional underwritten offerings.
Additionally, they don't have the restrictions that are usually associated with bank and
venture capital financing. On the other hand, a DPO will typically raise much less
than a traditional offering.

24.Quiet Period

In terms of an IPO, the period where an issuer is subject to a SEC ban on promotional
publicity. The quiet period usually lasts either 40 or 90 days from the IPO. In other
words, If you take your company public, you can't talk about your stock to anybody
for 3 months. There are two time windows commonly referred to as "quiet periods"
during an IPO's history. The first and the one linked above is the period of time
following the filing of the company's registration statement, but before SEC staff
declare the registration statement effective. During this time, issuers, company
insiders, analysts, and other parties are legally restricted in their ability to discuss or
promote the upcoming IPO. The other "quiet period" refers to a period of 40 calendar
days following an IPO's first day of public trading. During this time, insiders and any
underwriters involved in the IPO, are restricted from issuing any earnings forecasts or
research reports for the company.

Regulatory changes enacted by the SEC as part of the Global Settlement, enlarged the
"quiet period" from 25 days to 40 days on July 9, 2002. When the quiet period is over,
generally the lead underwriters will initiate research coverage on the firm.

Further to this, the NASD and NYSE have approved a rule mandating a 10-day quiet
period after a secondary offering and a 15-day quiet period both before and after
expiration of a "lock-up agreement" for a securities offering.

25. Pricing

Historically, IPOs both globally and in the US have been underpriced. The effect of
initialunderpricing an IPO is to generate additional interest in the stock when it first
becomes publicly traded. This can lead to significant gains for investors who have
been allocated shares of the IPO at the offering price. However, underpricing an IPO
results in "money left on the table"—lost capital that could have been raised for the
company had the stock been offered at a higher price.

The danger of overpricing is also an important consideration. If a stock is offered to

the public at a higher price than the market will pay, the underwriters may have
trouble meeting their commitments to sell shares. Even if they sell all of the issued
shares, if the stock falls in value on the first day of trading, it may lose its
marketability and hence even more of its value

Investment banks, therefore, take many factors into consideration when pricing an
IPO, and attempt to reach an offering price that is low enough to stimulate interest in
the stock, but high enough to raise an adequate amount of capital for the company.
The process of determining an optimal price usually involves the underwriters
("syndicate") arranging share purchase commitments from lead institutional investors.

26. Issue Price

A company that is planning an IPO appoints lead managers to help it decide on an

appropriate price at which the shares should be issued. There are two ways in which
the price of an IPO can be determined:
· Either the company, with the help of its lead managers, fixes a price or
· The price is arrived at through the process of book building.

Note: Not all IPOs are eligible for delivery settlement through the DTC system,
which would then either require the physical delivery of the stock certificates to the
clearing agent bank's custodian, or a delivery versus payment ("DVP") arrangement
with the selling group brokerage firm. This information is not sufficient.

List of TOP ten IPO performers :-