THE INDIAN INSTITUTE OF PLANNING &

MANAGEMENT, PUNE

THESIS REPORT
ON
ROLE OF COUNSELING IN HANDLING PEOPLE-
RELATED ISSUES IN “IT COMPANIES”

DONE BY

NAME: ABHILASHA MISHRA

BATCH: PGP/FW/07-09
ALUMNI ID: IIPM/FW/07-09/PUN/HR/051
NAME OF INTERNAL GUIDE: ASHISH SURI
NAME OF EXTERNAL GUIDE: SANDEEP SINHA
APPROVAL LETTER FROM EXTERNAL GUIDE
Prof. VIVEK DIVEKAR
 APPROVAL LETTER FROM INTERNAL GUIDE
Prof. JAYANTA CHAKRABORTI

From: jayanta.chakraborti (jayanta.chakraborti@iipm.edu)

Sent: 22 July 2008 17:20PM
To: 'ankit agarwal' (agarwal2710@hotmail.com)

Dear Ankit Agarwal,

You can go ahead with your thesis topic " Performance of the IPOs: Evidence from the
stocks listed on NSE ". Your external guide shall be Prof Vivek Divekar.
You have to send me at least 6 Thesis Response Sheet before submitting the Final Thesis.
The Response Sheet should contain the following details:

1) Your Name
2) Your ID Number
3) The Topic of the Study
4) Questionnaire which you have made to collect Primary Data (in the first or the second
Response sheet)
5) Date when the Guide was consulted.
6) The outcome of the discussion
7) The Progress of the Thesis

You can collect the ID number from IIPM Pune by showing a copy of my approval letter.

Please get back to me for further clarifications. Wishing you all the best in your life and
career.

Regards

Jayanta Chakraborti
------------------------------------------------------------
Dean (Academics)
The Indian Institute of Planning & Management
Level 1, IIPM Tower
893/4 Bhandarkar Road, Pune - 04 , India
Phone: +91-20-66420477 (Direct); +91-9860084440 (Mobile)
Fax: +91-20-66420422; Email: jayanta.chakraborti@iipm.edu
Website: www.iipm.edu

REQUEST FOR APPROVAL OF THESIS TOPIC

From: ankit agarwal [mailto:agarwal2710@hotmail.com]

Sent: Friday, July 18, 2008 10:37 AM
To: jayanta.chakraborti@iipm.edu; ankit.agarwal@iipm.edu
Subject: REQUEST FOR THE APPROVAL OF THESIS TOPIC (ANKIT AGARWAL)
Respected Sir,
Here by I request you to approve my thesis topic “Performance of the IPOs: Evidence
from the stocks listed on NSE” and find the attached document of synopsis for the same.

My external guide would be 'Prof VIVEK DIVEKAR'. He has already given me his
consent to go ahead with the thesis.
I have got the consent letter signed from him.

I request you for your guidance to complete this project successfully.

THANKS & REGARDS,

ANKIT AGARWAL
PGP/FW/Fin/2006-08

SYNOPSIS

NAME - ANKIT AGARWAL

BATCH - PGP/FW/06-08
SPECIALIZATION - Marketing & Finance

TITLE
“Performance of the IPOs: Evidence from the stocks listed on NSE”

PROBLEM DEFINITION

The decision to go public through an IPO is a critical decision for firms. The pricing of
IPO and the correct valuation of IPO is always debatable amongst investors. The IPO
price can be interpreted as underprice or overprice by the market. Therefore, the analysis
of IPO performance in the secondary market can be useful from an investor’s point of
view. The study will provide a valuable insight into the performance of IPO on the first
day of listing and one year after that and thereby helps one understand the IPOs issue
performance.
Objectives of the Study
The objectives of the study are,
• To explore the performance of the IPOs and its acceptance in terms of the
subscription and the price band offered.
• To evaluated the stock return on the day of listing and the performance of the
stock one year after listing on NSE.
• To analyze the market reaction and the performance of stock on the day the FPO
was opened for subscription, on the date of the allotment and a month after the
allotment date.

RESEARCH METHDOLOGY

The study will be done with the help of secondary research i.e. the data that will be
collected will pertain to the IPO details of the companies, the performance of the stock on
the day of listing, and the performance of the stock through out next year.
The performance of 62 IPOs listed on the NSE for the period January 2001 till December
2005 will be analyzed. This represents 100% of the IPOs listed during this period on the
NSE. All the 62 firms followed the book building method for pricing their IPOs.
Research Questions
• How successful have the IPOs been for the period from January 1st, 2001 to
March 31st, 2005?
• Are most IPOs underpriced in India? And do they underperform in the long-run?
 • Has the initial return or underpricing come down after the introduction of the
book building process in India?
• Does a relationship exist between various (the Level of Subscription. Age of the
company, issue Size, time lag and market volatility) and the level of
underpricing?
• Does the FPO affect the existing stock price?

RESPONSE SHEET 1

NAME : ANKIT AGARWAL

BATCH : PGP/FW/2006-08

NAME OF EXTERNAL GUIDE: Prof VIVEK DIVEKAR

TOPIC : Performance of the IPOs: Evidence from the

Stock Listed on NSE

ALUMNI ID No. : IIPM/FW/06-08/PUN/FIN/000

DATE : 22/11/2007

DISCUSSION
• Discussion on the TOPIC was done, keeping in mind the Challenges in the
working for the same.
• Objective for the study was discussed.
• Limitations of the study have been discussed.

Prof .VIVEK DIVEKAR

RESPONSE SHEET 2

NAME : ANKIT AGARWAL

BATCH : PGP/FW/2006-08

NAME OF EXTERNAL GUIDE: Prof VIVEK DIVEKAR

TOPIC : Performance of the IPOs: Evidence from the

Stock Listed on NSE

ALUMNI ID No. : IIPM/FW/06-08/PUN/FIN/000

DATE : 04/12/2007

DISCUSSION
• On structure of the thesis (chapters).
• On the scope & importance of the study.
• On the literature already available on the topic.

Prof .VIVEK DIVEKAR

RESPONSE SHEET 3

NAME : ANKIT AGARWAL

BATCH : PGP/FW/2006-08

NAME OF EXTERNAL GUIDE: Prof VIVEK DIVEKAR

TOPIC : Performance of the IPOs: Evidence from the

Stock Listed on NSE

ALUMNI ID No. : IIPM/FW/06-08/PUN/FIN/000

DATE : 18/04/2008

DISCUSSION
• On Sample chosen and data collected.
• On the method of research methodology.
• Variables to be used to get the desired result.
• Tools to be used for assessing short term & long term results, and their strengths
and drawbacks.

Prof .VIVEK DIVEKAR

RESPONSE SHEET 4

NAME : ANKIT AGARWAL

BATCH : PGP/FW/2006-08

NAME OF EXTERNAL GUIDE: Prof VIVEK DIVEKAR

TOPIC : Performance of the IPOs: Evidence from the

Stock Listed on NSE

ALUMNI ID No. : IIPM/FW/06-08/PUN/FIN/000

DATE : 28/05/2008

DISCUSSION
• On analysis of the data.
• Effect of different variables on the performance of IPOs, weather there is
correlation or not.
• Weather the results are consistent with prior findings and if there is any
deviation what is the factor responsible.

Prof .VIVEK DIVEKAR

RESPONSE SHEET 5

NAME : ANKIT AGARWAL

BATCH : PGP/FW/2006-08

NAME OF EXTERNAL GUIDE: Prof VIVEK DIVEKAR

TOPIC : Performance of the IPOs: Evidence from the

Stock Listed on NSE

ALUMNI ID No. : IIPM/FW/06-08/PUN/FIN/000

DATE : 12/06/2008

DISCUSSION
• Final review of the analysis, and recommendations for Investors and Companies.
• Implication of the study for further research.

Prof .VIVEK DIVEKAR

RESPONSE SHEET 6

NAME : ANKIT AGARWAL

BATCH : PGP/FW/2006-08

NAME OF EXTERNAL GUIDE: Prof VIVEK DIVEKAR

TOPIC : Performance of the IPOs: Evidence from the

Stock Listed on NSE

ALUMNI ID No. : IIPM/FW/06-08/PUN/FIN/000

DATE : 30/07/2008
DISCUSSION
• Final discussion and winding up of the thesis.
• Discussion regarding weather objectives of the research have been achieved or
not.

Prof .VIVEK DIVEKAR

TABLE OF CONTENTS
S.NO. CONTENTS PAGE(s)
List of Tables l 03
List of Figures 04
Glossary 05
Notes 08
Executive Summary 09
CHAPTER – 1 : INTRODUCTION 11
1.1 History of India IPOs 12
1.2 Background 13
1.3 IPO process in India 15
1.4 Importance of the Study 17
1.5 Objectives of the Study 17
1.6 Research Questions 17
1.7 Limitations of the Study 18
CHAPTER –II : LITERATURE REVIEW 19
2.1 Introduction 20
2.2 IPO Decision 20
2.3 Prior Researches on Indian IPOs 22
2.4 The international Evidence of Underpricing 26
2.5 Reasons for Initial Underpricing : A Theoretical Base 31
2.6 Aftermarket performance of IPOs 33
2.7 Contradiction in the Methods of Long-Run performance 35
Measurement
2.8 A Theoretical Explanation of Long-Run Performance 37
2.9 Effect of further public offerings 39
2.10 Summary of the chapter 40
CHAPTER-III: RESEARCH METHODOLOGY 42
3.1 Introduction 43
3.2 Data and Sample 43
3.3 Test of independent Variables 44
3.4 Performance Measure Methodology 46
3.5 Data Analysis Tools 50
CHAPTER – IV : ANALYSIS AND INTERPRETATION 52
OF DATA
4.1 Introduction 53
4.2 An Overview of Sample Size 53
4.3 An Analysis of the Level of Subscription and Price 55
Band Offered
4.4 An Analysis of initial return or Underpricing of IPOs 59
4.5 Performance of the Stock : A year After Listing 68
4.6 An Analysis of Further Public Offerings 74
CHAPTER – V: CONCLUSIONS, 77
RECOMMENDATIONS AND IMPLICATIONS FOR
FUTURE RESEARCH
5.1 Conclusions 78
5.2 Recommendations 83
5.3 Implications for Future Research 85
BIBLIOGRAPHY 87
APPENDICES 96
APENDIX -1 : Average Initial Returns for 33 Countries 97
APPENDIX-II: International Empirical Evidence on the 99
Aftermarket Performance of IPOs
APPENDIX –III : List of Sample Companies 101
APPENDIX –IV: First Day Returns of Initial 108
Underpricing of Indian IPOs
APPENDIX –V : Initial Returns Under Industry 111
Classification
APPENDIX – VI : List of Various Variables 112
APPENDIX –VII : Pearson Correlation Matrix 115
APPENDIX – VIII : Predictors of IPOs Initial Returns 116
APPENDIX – IX : Statistical Description of Variables 117
 LIST OF TABLES
S.NO. CONTENTS PAGE(s)
CHAPTER -1
1.1 Table – 1 : Capital Raised Through Public And Rights 13
Issues
CHAPTER – II
2.1 Table-2 : Employees’ Subscription for Issue and Stock 25
Performance
2.2 Table-3 : Determinants of Initial Return of IPOs 29
CHAPTER – III
3.1 Table- 4 Distribution of Sample by Year 43
CHAPTER – IV
4.1 Table- 5 Statistical description of Initial Returns of IPOs 59
4.2 Table-6: RIR, MAIR and MLOT Under Year 61
Classification
4.3 Table-7: Distribution of IPOs by Age of the Company 65
4.4 Table-8 : Distribution of IPOs by Their Level of 66
Subscription
4.5 Table-9 : Raw Returns, Average Abnormal Returns 69
(ARt) and Cumulative Average Abnormal Returns
(CARit)
4.6 Table-10: Statistical Description of Buy-and-Hold 71
Abnormal Returns of IPOs
4.7 Table-11: Wealth Relatives Ratios For Each Month 73
After Listing
4.8 Table-12: Market reaction to Further Public Offerings 74
 LIST OF FIGURES
S.NO. FIGURES PAGE(s)
CHAPTER –IV
4.1 Figure-1: Distribution of the Sample by Year, Both in 54
terms of the Number of Offers and the Gross Proceeds
4.2 Figure -2: Market Returns (Nifty) During the Period 54
2001-2005
4.3 Figure – 3: Issue Price of IPOs During the period – 56
2001-2005
4.4 Figure-4: Level of IPOs Subscription During the period 56
2001-2005
4.5 Figure-5: Average Oversubscription by year of Listing 57
4.6 Figure-6: Average Price Band and Level of Share 58
Subscription
4.7 Figure-7 : Distribution of Raw and Market Adjusted 60
Initial returns
4.8 Figure-8 : Initial Returns of IPOs and Market Returns 62
for the period of 2001-2005
4.9 Figure-9 : Market Adjusted Initial Return Under Industry 63
Classification
4.10 Figure-10: Age of Companies and Initial Underpricing 65
4.11 Figure-11: IPOs Subscription and Initial Underpricing 66
4.12 Figure-12: Issue Size and Initial Underpricing 67
4.13 Figure-13: The Long-Run Performance of IPOs 70
4.14 Figure-14: Mean Buy-and-Hold Abnormal Return for 72
the Period of Twelve Months After Listing
4.15 Figure-15: Effect of Further Public Offerings on Existing 75
Share Price
 GLOSSARY
• After Market Performance
After market performance means the performance of share one year after
its IPO- listing on the National Stock Exchange.

• Allotment
Allotment is the distribution of shares to the public

• Book Building is basically a capital issuance process used in initial public

offer which aids price and demand discovery. It is a process used for marketing a
public offer of equity shares of a company. It is a mechanism where, during the
period for which the book for the IPO is open, bids are collected from investors at
various prices, which are above or equal to the floor price. The process aims at
tapping, both, wholesale and retail investors. The offer/issue price is then
determined after the bid closing date, based on certain evaluation criteria.

• Circuit Filter
A circuit filter is an upper/lower limit imposed on the price movement of a
stock during a trading day. This is done to limit the erosion or appreciation
in value that an investor is likely to experience on a particular day. Once
the circuit limit is reached, trading in that stock stands frozen for the day.

• Controller of Capital Issue (CCI)

Up to 1992, the capital/primary market of India was controlled by the
Controller of Capital Issue (CCI) formed under the Capital Issues Control
Act. The CCI guidelines were abolished with the introduction of Securities
& Exchange Board of India (SEBI) formed under the SEBI Act, 1992 with
the prime objective of protecting the interests of investors in securities,
promoting the development of, and regulating, the securities market and
for matters connected therewith or incidental thereto.’ All public issues
 since January, 1992 are governed by the rules & regulations issued by
SEBI.

• Further Public Offering (FPO)

A Further public offering (FPO) is when an already listed company makes
a fresh issue of securities to the public.

• Initial Public Offering (IPO)

Initial Public Offer (IPO) is a source of collecting money from the public for
the first time in the market to fund for its projects. In return, the company
gives the share to the investors in the company.

• Initial Returns or Underpricing

Initial returns are the returns realized by an investor who acquires shares
at the offering price, and who sells them on the first trading days on the
stock market.

• Issue Price
The final price at which Equity Shares will be issued and allotted

• Listing
The process of making the securities of officially quoted on the notified
stock exchange for the trade.

• National Stock Exchange (NSE)

It is one of the largest and most advanced stock markets in the World. The
NSE is the world’s third largest stock exchange in terms of transactions. It
is located in Mumbai, the financial capital of India.

• Nifty
 The S&P CNX Nifty (Nicknamed Nifty 50 or simply Nifty) is the leading
index for large companies on the Nationa Stock Exchange of India. S&P
CNX nifty is a well diversified 50 stock index accounting for 22 sectors of
the economy. It is used for a variety of purposes such as benchmarking
fund portfolios, index based derivatives and index funds.

• Oversubscription
Any extra amount received by the company more than the proposed
issued capital.

• Price Band
The red herring prospectus may contain either the floor price for the
securities or a price band within which the investors can bid.

• Right issue
Right issue is when a listed company which proposes to issue fresh
securities to its existing shareholders as on a record date. The rights are
normally offered in a particular ratio to the number of securities held prior
to the issue.

• Securities and Exchange Board of India (SEBI)

The regulatory body for the investment market in India. The purpose of
this board is to maintain stable and efficient markets by creating and
enforcing regulations in the marketplace.
 NOTES
• Currently, the stock exchanges in India do not apply ‘circuit filter’ on first
day of listing of Initial Public Offerings (IPOs)

• The study takes the meaning of ‘Initial Public Offering’ and ‘Going Public’
as same.

• The study uses two words ‘Initial Return’ and ‘Underpricing’ alternatively.

• In the study, the work ‘Return’ means only appreciation of depreciation

(Capital gain/loss) in stock price. It does not include any dividend income.

• The stock prices have been adjusted for ‘Stock Split’ and ‘Bonus Issue’

• All stock prices are in Indian Rupees (Rs.)

• Conversion Table :

1 Lakh = 0.1 Million

2 Crore = 10 Million
 EXECUTIVE SUMMARY

A number of studies find that initial Public Offerings are associated with
high positive initial returns on the first day of listing and negative return in the
long-run. This paper attempts to identify the factor explaining underpricing of
Initial Public offering in an emerging economy like India, using 62 companies that
issued initial Public Offerings during January 2001 to December 2005 and got
listed on the National Stock exchange. Besides, it aims at looking into the impact
of Further Public Offerings on existing stock prices, using the sample of 10
further Public offering for the same period. Prior to this, the paper analyzes the
acceptance of initial public Offerings in terms of the subscription and the price
band offered. It is found that the majority of IPOs were issued at the top end of
the price band and almost all Initial Public Offering were highly oversubscribed.
An unprecedented positive market return played a vital role in such a high
oversubscription.
In line with earlier researches, Indian Initial Public Offerings are also found
to be underpriced. A stock issue is said to be underpriced if the closing price on
the first day of listing is higher than the IPO price. Although, the level of under
pricing has come down when compared to studies undertaken prior to the
introduction of book building in India. In other words, The Indian Initial Public
Offering through book building is found to be associated with lower initial returns.
This result supports previous studies that reported that book building route has
better pricing than the fixed price method. In order to explain the under pricing of
initial Public Offering, this paper has tested various variables using Multiple
Regressions. It is found that the younger firms had higher initial returns as
compared to the older firms, revealing that history prior to going public is a
substantial determinant for high initial returns. Furthermore, the returns on the
first trading day also indicated that the IPOs with high investors’ demand (Level
of subscription) are significantly underpriced, while initial Public Offerings with a
low level of Subscription are overpriced. Apart from this, a positive high
coefficient of Market Condition indicates that the pre market period progress of
the National Stock Exchange influences the valuation of the Initial Public Offering
by the investors. However, the initial performance of Indian Initial Public Offering
is not predictable when using the proxies of Time Lag and Issue Size.
There is no consensus as to the preferred method of long-run
performance of an initial Public offering. As result, this paper has used the widely
accepted methods Buy-and-Hold Abnormal Return and Cumulative Abnormal
Return to analyze a 12 month performance of Indian Initial Public Offerings. Both
these methods indicate that Indian Initial Public Offerings performed reasonably
well in the long-run. The result based on the Buy-and-Hold- Abnormal Return
method is higher than Cumulative Abnormal Return method. This could be due
the overestimation issue of the Buy-and-Hold-Abnormal Return method raised by
Brav et al. (2000). When this paper compares the initial returns with the long-run
performance then, an exceptional return on the first day trading seems to be
leading to the negative return in the long-run. In other words, the most of the high
excess initial returns on an average were wiped out in the first year after listing.
This result supports the impresario Hypothesis or the Fads Hypothesis,
which states that Initial Public Offerings are underpriced by investment bankers
to create the appearance of excess demand. This hypothesis predicts that
companies with the highest initial returns should have the lowest subsequent
returns.
Finally, it is found that the investor’s reaction was negative to further
Public Offerings, Even after a month of the allotment date, the market continued
to react negatively. The negative reaction could be on account of the fact that
when a company comes up with further Public Offering then, the number of
shares and shareholders increase. Consequently, the dividend per share and
earning per share get diluted and that affect share prices negatively. However,
returns from Further Public Offering may be better in the long-run when company
earns return from its raised capital.
In the end, the study gives some recommendations to both investors and
companies on the basis of findings and also lays down possible direction in
which further research could be carried out on this topic.