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Name : Alka Mallah




Historical overview of merchant banking is to be traced to Italy in late medieval times and France
during the seventeenth and eighteenth centuries. Merchant banking was started in the
merchandising techniques for state in the late eighteenth and mid nineteenth century when
exchange taking place was financed by bill of trade drawn by merchanting houses. At that time the
merchants were simply financing their own activities. As global trade grew and other lesser-known
names sought to import goods from abroad, the reputable merchants ‘lent their names’ to the
newcomers by approving to accept bills of exchange on their behalf. The acceptance houses would
charge a payment for this service and hence there grew up the business of accepting bills of finance
trade not only of themselves, but of others. Acceptance business thus became and to a certain
degree always has been hallmark of true merchant banks. The second historical role of merchant
banks was the raising of capital for overseas government (s). In many cases, the merchant banks
have been trading in the countries concerned and gained the confidence of governments and other
authorities in those countries. Thus the second foremost constituent of merchant banking is raise of
capital through the issue of stocks and bonds. Merchant banks can function as accepting houses or
issuing houses or both. Contemporary Merchant Banking started in the beginning of 20th century in
UK and USA. More recently, the services offered by merchant banks have entered into the other
areas of operations. Their role is wide ranging and they can now provide most of the financial
services required by a company, touching almost all aspects of establishing and running of industrial
units on sound financial footing

Merchant banking covers wide range of financial activities and in process include a number of
different financial institutions. Merchant banks are popularly called “Accepting and issuing houses”.
Because a merchant bank acts not only as an advisor and broker but also as a principal, a merchant
bank has a longer term approach than a typical investment bank and is highly concerned with the
viability of each investment opportunity and providing the right advice for a strong partnership with
each client company. In banking, a merchant bank is a traditional term for an Investment Bank. It can
also be used to describe the private equity activities of banking. Merchant banking is an important
service provided by a number of financial institutions that helps in the growth of the corporate
sector which ultimately reflects into the overall economic development of the country. Merchant
banks were expected to perform several functions like issue management, underwriting, portfolio
management, loan syndication, consultant, advisor and host of other activities. Merchant banking is
a combination of banking and consultancy services. Initial Public Offer (IPO) plays the vital role
for the expansion of any company. Initial Public Offering (IPO) in India means the selling of
the shares of a company, for the first time, to the public in the country’s capital markets. It
has the least risk and it is also diluted. The main function of the public offer is to facilities the
transfer of resources from the savers to users. This study concentrates on the decisions taken
by the investors while investing in initial public offer. Study also identifies the factors, which
are affecting primary market situation in India.


 To study the awareness level of IPO among


 To identify the difficulties faced by Investors while applying

For IPO.

 To know an overview of merchant banking in india.


(H01): Investors Are Not Aware About the Term IPO

(H11): Investors Are Aware About the Term IPO

(HO2): Investors Are Not Aware About the Long Term Benefits of
(H12): Investors Are Aware About the Long Term Benefits of IPO

(H03): Investors Must Know That There Is No Relationship

Between IPO Performance and IPO Grade
(H13): Investors Must Know That There Is Relationship between
IPO Performance and IPO Grade

(H04): Investors Are Not Aware about IPO and So They Face
Difficulties While Investing in IPO.
(H14): New Investors Are Aware about IPO and So They Don’t
Face difficulties While Investing in IPO.

(H05): Companies Don’t Need To Do Any Marketing for Their

(H15): Companies Need To Do Marketing for Their IPO

2. Baron and Holmstrom (1980) noted that it is observed that investment bankers
exploit their superior information regarding market conditions to under-priced new
issues, thereby allowing companies to spend less effort on marketing the issue and
gain the goodwill of potential clients. In 1980s and 1990s, there was an increasing
realization on the part of the policy planners in India that an efficient and well
developed IPO market is essential for sustained growth in an emerging economy like
India. Accordingly, extensive reforms have since been taken for the IPO segment of
Indian market, inter alia covering reforms in the legislative framework, trading
mechanisms, institutional support, etc. As a result, IPOs have emerged as one of the
major source of funds for Indian companies as well as an important avenue for
common investors to channelize their savings for higher return. An analysis of the
trends in the IPO market in India shown that although, there are fluctuating trends,
and this market will continue to remain an important source of funds in India.

3. Rock (1986) distinguishes between informed and uninformed investors. If the issues
are under-priced, the IPOs will be oversubscribed by informed investors as limited
number of shares would be available to uninformed investors. If the issues are
overpriced, the IPOs will be sold exclusively to uninformed investors who will earn
negative initial returns. Thus, uninformed investors will be winning the entire issue
but at an unfavourable price, creating a situation termed as the winner’s curse. In
order to keep uninformed investors in the IPO market, securities are offered at a
discount from their expected listing price. According to the winner’s curse theory, the
IPO under-pricing will decrease if the information asymmetry gap between informed
and uninformed investors is reduced.

4. 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 underperformance more than the rest.
5. 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 day1, not day 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.

6. 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 under-priced 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.

7. Pande and Vaidyanathan (2009) found average under-pricing of22% on the day of
listing which is disappeared within the next 30Days, in their study of 55 firms listed on
National Stock Exchange (Hereafter NSE), a leading stock exchange in India. IPO under
Pricing is an important event for all investors, issuers, and Investment bankers. Our
area of interest is to find out the factors which may influence the level of under-
pricing through studying Literature regarding the same.

8. Sherman and Titman (2002) stated that issuer’s area ways Interested to raise funds at
least at accurate price of issue if not More. The ability of underwriters to price issue
accurately leads to Maintain and acquire high quality clients. Almost all studies across
The countries and time found the evidences of IPO under-pricing.

9. Leland and Pyle (1977) were the first one to suggest that Information asymmetry can
be reduced by the introduction of financial intermediaries or by observing the post‐
IPO ownership of Issuers. In the literature the risk related with the information
Asymmetry is among the investors.

10. Chemmanur and Fulghieri (1994) also supported that the important role of
investment banker is producing more information Resulted decrease in information
asymmetry as issuers have more Information about the future prospects of the firm
compared to Investment banker.
11. Rock (1986) argued that firm and underwriter may be more Informed than individual
investor but all the investors in market Combined are more informed than them.
Although underwriter is Having expertise along with better information about IPO
market, Issuer, but some investors may have access to private information of
competitors that may affect the firm value.

12. Benveniste and Spindt (1989) suggested a model that the level of Under-pricing can
be reduced, if the differentiation is done prior to. The allocation of shares between
informed and uninformed Investors by the underwriter.

12.Barents Group LLC (1997) studied that India‟s household savings and foreign
investors are key sources of this capital and can and will be increasingly attracted to
more efficient, safe and transparent market. Retail investors in India are mostly short
term traders, and day trading is not uncommon. To the extent that buying publicly
traded equities is perceived as a risky and speculative short term activity, many
potential investors will simply avoid capital market instruments altogether in deciding
to allocate savings.

13.Makbul Rahim (2001)argued in his speech that the regulatory framework must provide
the right environment for the development and the growth of the market. High standards
of probity and professional conduct have to be maintained and reach world class
standards. Integrity is very important as well confidence. The development of a proper
free flow of information and disclosure helps investors to make informed investment

14. Prof. Peter McKenzie (2001) in his speech at seminar investors have a choice instead of
placing their money in only one company they can pick areas of growth and move their
money, buying and selling and placing it where it is going to be most profitable. The
individual investor does not have to make an individual decision where to place his savings.
These decisions are made by an expert fund manager, which would spread the risk by
spreading the investments across different sectors of the economy.
15. S. M. Imamual Haque and Khan Ashfaq Ahmad (2002) argued that the sluggish trends in
primary equity markets need to be reverse by restoring investors‟ confidence in market.
Savings for retirement essential seek long term growth and for that investment in equity is
desirable. It is a well-established fact that investments in equities give higher returns than
debt and it would, therefore, be in the interest of the banks to invest in equities

16. Mahesh Nayak, (2010) in his article, point out that, IPOs have grown in size and entered
their own brave new world. Further he states that raising money in India’s booming economy
cannot be a onetime affair; if a company does not maintain a good relationships with
investors and rewards them well it may not able to go back to them when it want to raise
money later .

17.Jagannadham Thunuguntla (2011) in his research ,pointed out that, the age old
philosophy of understanding the company and sticking to the basics should be given due
respect. Let the buyer be made aware that the investor has to put a price tag to his hard
earned money. There is a dire need for investor education and awareness and the
connections should be on a stable income than a becoming rich overnight.

18. Jignesh B. Shahet et al.(2013)in their research, concluded that, the recent IPO Scam
indicates that even a highly automated system swill not prevent malpractices. But steps
should be taken by SEBI to restrict such IPO Scam by applying know your customer (KYC) and
unique identification number to market players and investors.

Primary data consist of the Survey done by meeting investors. The data can be collected to
find out their needs. The sample size was taken by investors. It also includes analysis of
awareness about IPO among investors.

1. What is your age?

a. 25 years and below
b.25-40 years
c. 40-60 yea
d. Retired

2. Occupation/Profession

a. Salaried
b. professional
c. Business
d. Others

3. Number of companies in which investment is made

a. Less then 10
b. 10-20
c 20 & above

4. Qualification of investors
a. HSC
b. graduate
c. Post graduate
d. Others

5. Are you aware of IPO‟s?

a. YES
b. NO

6. Do you invest in IPO’S?

a. Yes
b .No
7. How much do you invest in IPO‟s?
a. Rs 1000- Rs10000
b. Rs 10000- Rs50000
c. Rs 50000- Rs500000
d .Rs 500000 and Above

8. What is your expectation on IPO returns on listing?

a. Up to 10 %
b.10% - 50 %
c.50% - 100%
d.100% and above

9. What are your assessments of IPO‟s that have hit the market in
a. Very good
b. Good
c. Average
d. Bad

11. Is it better to invest in IPO or pick the same stocks on listing?

a. Invest in IPO‟s
b. Pick the same Stock on listing
c. Partly invest in IPO and Pick the stock on listing
d. Wait sometime after listing

12. What do you see before investing in IPO‟s?

a. Promoters Background
b. Sector Performance
c. Performance of existing companies
d. Premium amount

13. Do you IPO is beneficial for long term?


13.what will be these derived rate of return?

a. Less than 12%

b. 12-14%
c. 24-36%

14.what expected rate of return (ROR) per annum?

a. Less than 12%

b. 12-14%
c. 24-36%

15. How much percentage have you gained on IPO listing?

a. Below 10%
b .Up to 10%
c.10% - 15%
d.15% & above

16. How do you come to know about the new IPO listings?
a. Through Stock Broker
b. Through Television
c. Through Friends
d. Through News papers

17. How do you feel about the procedure for applying for IPO’s?
a. Easy
b. Difficult
c. Complicated
d. Lengthy

18. Are you aware of the documents needed to apply for the IPO’s?
a. Yes
b. No
19. Do you read Disclaimer clause/ Red hearing prospectus before
a. YES
b. NO

20. Do you invest according to the grade of the IPO or according to the
a. IPO Grade
b. IPO Performance

21. Did IPO made any difference in your investment pattern?

a. Yes