Descertation Report

Issue Size & Listing Price

(Thus size of new issue matters on Listing?Evidence From IPO Market In India)

Submitted By,

Name:Md Monirullah Reg. No.:049805 of 2001-2002 Roll :107/MBA No.:095012(MBA/09) Progrrame:MBA(E) Session :2007-2010

Indian Institute Of Social Welfare & Business Management

I Md Monirullah hereby declare that this dissertation on Issue Size and listing priceis original study conducted under internal guidance of Dr.Amit Kr Bhandari ,the Professor of Indian Institute of Social Welfare and Business Management. This has not been submitted earlier for the award of any degree.

Date ..................... Place Monirullah)

(Md

I would like to express my gratitude to Prof.Amit Kr. Bhandari ,faculty member of Indian Institute of Social Welfare & Business Managementfor his immeasurable valuable contribution which made me put lot of effort and bring out this dissertation paper to this extent. I would like to thank Indian Institute of Social Welfare & Business Managementfor providing such an opportunity to do this dissertation paper. Last but not last I wish to express my deep sense of gratitude to all whose names might have been missed out.

Sl. No Page No 1. 1 2. 9 3. 13 4. 16 5. 17 6. 18 7. 20 8. 21

Contents INTRODUCTION REGULATOR of THE NEW ISSUE MARKET INDIAS IPO MARKET OVERVIEW RECENT IPO LAUNCHED IPO ISSUE SIZE GROWTH FACTORS
OF

IPO MARKET WHICH THE LISTING PRICE DEPENDS THE STUDY

ON

OBJECTIVE

OF

9. 22 10. 24 11. 25 12. 26

METHODOLOGY DATA SOURCE CALCULATION CONCLUSION

The first step in commencing business for a company is to raise the capital by the issue of shares.When a company is organised,the Memorandum of Association

states the number of shares the company is authorised to issue.Generally,more number of shares are authorised than it is intended to be issued immediately.The shares of a company can be issued in three ways: a)by private placement of shares, b)by rights issue of shares,and c)by public issue of shares.

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Private Placement of Shares

Private placement is the issue of securities of a company direct to one investor or a small group of investors without resulting to underwriting.Generally,the investors are the financial institutions or other existing companies.A Public Limited Company can raise its capital by placing the shares privately and without inviting the public for subscription of its shares.In a private placement ,no prospectus is issued.In this type of issue a broker finds investors who wish to buy

the shares.He acts as an agent and his function is simply to procure buyer of the shares,i.e.,to place them.

In a private placement,the elaborate procedure required in the case of public issue is avoided.Therefore ,the cost of issue is minimal.The process of raising fund is also simple.

Rights Issue
Rights Issue means an issue of capital under Section 81(1) of the Companies Act 1956,to be offered to the existing shareholders of the company through a Letter of Offer. In the right issue of shares the existing shareholders have a pre-emptive right to subscribe for the new shares.A right issue is cheap way of raising fund.

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Public Issue of Shares

Public issue of shares means selling of shares to public by issue of prospectus.In 1991,one of the significant steps taken by the government was the abolition of the Capital Issue(Control)Act,1947.In consequence

thereof ,issue of capital and pricing of issue by companies has been freed from the requirements of prior approval from the Controller of Capital Issues.Henceforth ,the Companies are free to issue capital to the public without any prior approval,but they are required to frame their proposals and carry out the other formalities relating to their proposals in conformity with the guidelines issued by SEBI(Securities and Exchange Board Of India) to ensure disclosure and investor protection. An unlisted company may make initial public offering(IPO) of equity shares or any other security which may be converted into or exchanged with equity share at a later date. Initial Public Offer presents good opportunities for netting high returns on investments in a relatively short period of time - if we invest early. Investors who would otherwise restrict themselves from trading in secondary markets because of the volatility and risk - rewards attached with it, the IPO market has now become an avenue to such investors to invest in equities and reap benefits out of it.

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Minimum Application Size and Minimum Application Money in Public Issue

The minimum application value shall be within the range of Rs5000 to Rs 7000.The issuer company,in consultation with merchant banker,shall stipulate the minimum application size(in terms of number of shares) falling within the aforesaid range of minimum application value and make upfront disclosure in this regard,in the offer document.Application can be made in multiple of the minimum size value so stipulated in the offer document by the issuer and merchant banker within the range of Rs5,000-7,000.

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New Share Issue Procedures:

Equity offerings by companies are offered to the investor in two forms: a)Fixed Price offer method b)Book-building Method These two procedure can be summarized in the following table:
ISSUE TYPE OFFER PRICE DEMAND PAYMENT RESERVATIONS

Fixed Price Issues

Price at which the securities are offered and would be allotted is made known in advance to the investors

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

100 % advance payment is required to be made by the investors at the time of application. 10 % advance payment is required to be made by the QIBs along with the application, while other categories of investors have to pay 100 % advance along with the application.

50 % of the shares offered are reserved for applications below Rs. 1 lakh and the balance for higher amount applications

Book Building A 20 % price Issues band is offered by the issuer within which investors are allowed to bid and the final price is determined by the issuer only after closure of the bidding.

Demand for the securities offered , and at various prices, is available on a real time basis on the NSE website during the bidding period..

50 % of shares offered are reserved for QIBS, 35 % for small investors and the balance for all other investors.

Table:1

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Book Building is essentially a process used by

companies raising

capital through Public Offerings-both Initial Public Offers (IPOs) or

Follow-on Public Offers ( FPOs) to aid price and demand discovery

It is a mechanism where, during the period for which the book for the offer is open, the bids are collected from investors at various

prices,which are within the price band specified by the issuer. The

process is directed towards both the institutional as well as the re

investors.The issue price is determined after the bid closure base the demand generated in the process. The Process:

The Issuer who is planning an offer nominates lead merchant banker(s) as 'book runners'.

The Issuer specifies the number of securities to be issued and the price band for the bids.

The Issuer also appoints syndicate members with whom orde are to be placed by the investors.

The syndicate members input the orders into an 'electronic b

This process is called 'bidding' and is similar to open auctio

The book normally remains open for a period of 5 days. Bids have to be entered within the specified price band.
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Bids can be revised by the bidders before the book closes.

On the close of the book building period, the book runners

evaluate the bids on the basis of the demand at variou levels.

The book runners and the Issuer decide the final price at whic securities shall be issued.

Generally, the number of shares are fixed, the issue siz frozen based on the final price per share.

Allocation of securities is made to the successful bidders. The rest get refund orders.

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Guidelines for Book Building Rules governing Book building are covered in Chapter XI Securities

and Exchange Board of India (Disclosure and Investor Protection) Guidelines 2000.

Who decides the price of an issue? Indian primary market ushered in an era of free pricing in 1992. Following this, the guidelines have provided that the issuer in consultation with Merchant Banker shall decide the price. There is no price formula stipulated by SEBI. SEBI does not play any role in price fixation. The company and merchant banker are however required to give full disclosures of the parameters which they had considered while deciding the issue price.

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The new issue market is controlled and regulated by Securities and Exchange Board of India popularly known as SEBI.The SEBI was established in April 12,1992 with the objective to protect the interests of investors in securities and to promote the development of,and to regulate the securities market and for matters connected therewith. Any company or a listed company making a public issue or a rights issue of value of more than Rs 50 lakhs is required to file a draft offer document with SEBI for its observations. The company can proceed further only after getting approval from SEBI.Through public issues, SEBI has laid down eligibility norms for entities accessing the primary market. The entry norm is for those companies who wants to make a public issue(both IPO and FPO) and for not listed companies making a right issue.The entry norms are laid down by SEBI.

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The entry norms are as follows Entry Norm I (EN I): The company shall meet the following requirements

Net Tangible Assets of at least Rs. 3 crores for 3 full years. Distributable profits in atleast three years. Net worth of at least Rs. 1 crore in three years. If change in name, atleast 50% revenue for preceding 1 year should be from the new activity. The issue size does not exceed 5 times the preissue net worth.

SEBI has provided two other alternative routes to company not satisfying any of the above conditions to provide sufficient flexibility and also to ensure that genuine companies do not suffer on account of rigidity of the parameters, for accessing the primary Market. They are Entry Norm II (EN II)

Issue shall be through book building route, with at least 50% to be mandatory allotted to the Qualified Institutional Buyers (QIBs). The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory marketmaking for at least 2 years.

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OR Entry Norm III (EN III)

The "project" is appraised and participated to the extent of 15% by Foreign Institution or Scheduled Commercial Banks of which at least 10% comes from the appraiser(s). The minimum post-issue face value capital shall be Rs. 10 crore or there shall be a compulsory marketmaking for at least 2 years. Note :- The company should also satisfy the criteria of having at least 1000 prospective allotees.

The following are exempted from the ENs

Private Sector Banks Public sector banks An infrastructure company whose project has been appraised by a PFI or IDFC or IL&FS or a bank which was earlier a PFI and not less than 5% of the project cost is financed by any of these institutions. Rights issue by a listed company

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How does one come to know about the issues on offer? And from where can I get copies of the draft offer document? SEBI issues press releases every week regarding the draft offer documents received and observations issued during the period. The draft offer documents are put up on the website under Reports/Documents section. The final offer documents that are filed with SEBI/ROC are also put up for information under the same section. Copies of the draft offer documents in hard copy form may be obtained from the office of SEBI: Plot No.C4-A,'G' Block,Bandra Kurla Complex,Bandra(East), Mumbai 400051 Tel : +91-22-26449000 / 40459000 Fax : +91-22-26449016-20 / 40459016-20 E-mail : sebi@sebi.gov.in

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Prior to the economic reforms of 1991, a government agency named the Controller of Capital Issues (CCI) had regulatory control over all capital issues in India.Before any public issue could take place, the offer price had to be cleared by the CCI. The CCI formula" was used to calculate a fair price" of equity in the light of accounting information. This often led to extreme underpricing,and heavy over subscription. Investors often applied for ten times as many shares as were put up for sale. This extent of underpricing deterred firms from going public: relatively few issues took place and debt played a major role in financing projects. Shortly after the scam, on 29 May 1992, the CCI was abolished, andfirms were free to price equity at whatever price they choose. There was a transitional phase after the abolition of the CCI in which extremely few issues took place. The newly created regulatory agency governing financial markets, the Securities and Exchanges Board of India (SEBI), then took up the role of vetting prospectuses for public offerings with an eye to ensuring truthful information disclosure in the prospectus. SEBI was functional in this role from late April,1992 onwards. We can think of new listings from the start of 1993 onwards as being the product of the new regulatory regime.With the abolition of the CCI, firms were now free to price issues as they pleased, subject to several caveats. The number of public issues

taking place per month has gone up sharply in the period following the abolition of the CCI, and the role of debt in financing projects has diminished. However,the post CCI period is also characterised by extremely high levels of under-pricing by world standards.Today, as in the entire post CCI period, the sequence of events in an IPO are as follows:

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The firm and the merchant banker choose an offer price, and prepare a prospectus. This takes place roughly five months before the issue date.The face value" of shares in India is typically Rs.10, and the difference between the offer price and the face value is called premium". By law,IPOs are prohibited from pricing equity with a positive premium" unless this condition is met: Either the issuing company, or any company promoted by the owners of the issuing company, should have made profits for atleast the most recent three years. For companies which are allowed to price shares above Rs.10 in the light of these criteria, there is no hurdle in choosing the offer price.There is also a regulatory control on the amount of equity which can be sold:the post issue ownership of the promoters should be greater than 25%.This prospectus is submitted to SEBI for approval.From 1 April 1995 onwards, SEBI no longer requires the offer price to be precisely chosen at the time the prospectus is submitted for vetting. If the company specifies an offer price of x at this time, then the actual offer price can be anything between x and 1:2 x. Another constraint on choosing a price early is the Registrar of Companies, which has to be told the offer price 21 days before the issue opens.After SEBI

approves of the information disclosures in the prospectus, a mass media advertising campaign targeted at the investor commences. This is roughly a month before the issue date. A consortium of underwriters is often put together. Each underwriter guarantees to bring forth application forms (either from investors, or failing that, from own funds) worth Rs. x, and is paid a fee which is typically 2.5%of x. The underwriting arrangements were mandatory before January 1995,and are now optional.The issue closes four to ten days before it opens. Investors apply for shares, and pay an amount which is often less than the full offer price.
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If there is over subscription, then there is a possibility that the money paid at the time of application may be returned some months hence. In this event, the investor has lost the time value of money for these months.Many banks offer stockinvest" schemes which help eliminate this. This allows the investor to create a special kind of savings account. When submitting the application for shares, the investor furnishes information about his stockinvest account. The offering firm only withdraws money from an investors stockinvest account to the tune necessitated by the allotment received by him. For issues where the issuer chose to not put together an underwriting consortium, if the subscriptions received fall below 90% of the shares offered, then the issuing company is required to refund all applications within 90 days. After the issue closes, the allotment itself takes place. For issues which are highly oversubscribed, many application forms may yield no allotment. For issues which are highly oversubscribed,

the allotment process is often delayed owing to the volume of paperwork. Once allotment takes place, the investors receive shares and/or refund cheques. The actual listing, and the date of first trading, takes place long after the issue itself opens - the modal listing delay is 11 weeks.Many features of this process are unique by world standards. The offer price is chosen by the firm months before the issue opens, and there is no feedback mechanism through which market demand can alter this offer price. Instead of IPOs being sold to institutional investors such as mutual funds, in India, IPOs are directly sold to relatively uninformed investors.The delay from issue date to listing date is enormous in India as compared with other countries. Each of these three factors is likely to generate high underpricing, by world standards.

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Who are the good performer?

I have taken the time horizon of 2005-2009.In this period 223 IPOs hit the market.During the recessation period of the Economic Cycle(2008-2009),there were many companies who withdrew their offerings due to

low subscription both by Instititional as well as retail clients.Among them Emaar MGF Land Ltd,Wochardt Hospitals Ltd ,SVEC Construction Ltd to mention among the few who could not launch their IPOs in first quarter of 2008.Recently Godrej Properties Ltd,Oil India Ltd,DB Corp Ltd are some of the IPOs which have performed well during listing.

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IPO issue size in Ascending Order

Name of the Issuer
NHPC Ltd Birla Cotsyn Ltd Powergrid Corporation of India Ltd JSW Energy Ltd

Issue Size(in Lacs)

16773.74015 10753.00 5739.32895 3818.72

Indiabulls Power Ltd Cairn India Ltd Adani Power Ltd Reliance Power
Table:2

3398.0 3287.99675 3016.5203 2280

Table 1 shows in ascending order the issue size of company .Again in my database the highest amount of capital raised was by Reliance Power Ltd owned by Mr.Anil Ambani.

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Year 2005 2006 2007 2008 2009

Number of IPOs Launched 35 65 78 31 18

Table:3

The below figure shows the relative growth of IPO year wise:
80 70 60 50 40 30 20 10 0 2005 2006 2007 2008 2009 35 31 18 2005 2006 2007 2008 2009 65 78

Fig:1

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From the above figure we see that in the time span of 2005-2009 the maximum number of IPOs were launched in 2007.The intuition is clear.It was the period of BOOM of the Economic Cycle.In the year 2006 we see that the acceleration on launching IPOs has taken place. With the onset of recessation the number of IPOs hitting the market had fallen abruptly.The reason may be that the Companys knew that they will get few investor and so they have delayed their launching of IPOs.Now since the economy are in the recovery

phase of the Economic Cycle launching of IPOs.

we can expect more

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There are many factors which determines at what price the share is going to be listed on the bourse.Among them the notable factor are the Name of the company(more precisely Brand) Obviously if any subsidiary of Reliance goes for IPO then it will get good response from the investing public. In which phase of Economic Cycle the IPO is launched.If it is launched in the recessation phase of Economic Cycle then it may be assumed that there may be zero or even negative return. Speculation by investing public. Condition of the Economy- the gowth rate of the economy . Condition of the Market-is the market bearish or bullish.

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Thus Size Of The New Issue Matters On Listing Price? Evidence From IPO Market In India

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The basic objective study is to see if there is any relationship between the issue size and return on listing.For this purpose I have used Coefficient of Correlation to measure the nature of relationship.The nature and extent of correlation between two variables is measured by the correlation coefficient. In my study I have taken the Issue Price,the listing price and issue size.I am considering the difference between the Listing Price and the Issue Price as X which is noting but return on listing and the Issue Size as Y. Now if with the increase in the value of one variable (XorY) the value of the other variable(YorX) is also found to increase in general,or on the average,then the two variables(Xand Y) are said to be positively correlated. If, on the other hand ,with the increase in the value of one variable that of the other variable decreases on the average,then two variables are said to be negatively correlated. In short a positive value of correlation coefficient indicates positive correlation,a negative value indicates negative correlation and a zero value of correlation coefficient indicates zero correlation.

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We know that the Correlation Coefficient is given by

R= Var ( X ) . Var ( Y ) 1 n ( X i X ) ( Yi Y ) n i =1 = 1 n ( X iYi ) ( XY ) n i =1 Cov ( XY )

Where Cov ( X , Y ) =

is the Covariance between X and Y. The variance of X is given by

Var ( X ) = =
2 1 n ( Xi X ) n i =1

2 1 n 2 ( Xi ) ( X ) n i =1

And Var ( Y ) =

2 1 n 2 ( Yi ) ( Y ) n i =1

Now our simplifying formula becomes

R= n X iYi X i Yi
i =1 i =1 i =1 n n n

n n X i X i i =1 i =1
n 2

n n Yi Yi i =1 i =1
n 2

The intuition behind taking Coefficient of Correlation is that it is a pure number free of any unit.
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The relevant data have been collected from Secondary Source.The list of source are

www.nseindia.com www.vfmdirect.com http://india.dalalstreet.biz/ipo Trader Terminal of India Infoline Ltd Corporate Finance by Hanif Mukherjee

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Var(X)=
=

1 2288267.383 (10744.55) 2 223

Var(Y)= =

1 554922941 (93884.28828) 2 223

RXY =

223 1972537.832 10744.55 93884.28828 223 2288267.383 10744.552 223 554922941 93884.28828

= 0.844

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From the calculation we see that the correlation coefficient is -0.844.This shows that there exist high degree of negative correlation between issue size and listing price.That is to say as issue size increases the difference between issue price and listing price (i.e.,the profit on listing) tends to decrease and vice versa. We can infer that the company with small issue size has given a high return in comparison with the company which has come out with a large issue size. An perfect example is Reliance Power Ltd.Its issued capital was the highest.Though it got a good response from the investing public it didnt make up to the mark.There was a buzz that the script will list at

double the issue price.The ssue price was Rs450/-.It opened at Rs530 made a intraday high of Rs 530 and closed at Rs 372.3.So it is clearly proved that the name of the issuer did have some impact on listing and after that the share price has dwindled to support our findings. So to conclude we can say that we should invest on those IPOs whose issue size is small.At the same time the name of the issuing company is also a factor on which we should pay heed.

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