A STUDY ON INITIAL PUBLIC OFFERING AS AN INVESTMENT

OPTION
Submitted in the partial fulfilment of the requirement for the award of the Degree of Bachelor
of Business Management of Christ University, Bangalore.

SUBMITTED BY:
Ankith Nagori (08D1045)

Under the guidance of

Mrs. Lakshmi Karthikeyan

DEPARTMENT OF MANAGEMENT STUDIES

CHRIST UNIVERSITY, BANGALORE
2008-2011

1
 TABLE OF CONTENTS

TOPIC PAGE
NUMBER

INTRODUCTION AND LITERATURE REVIEW 4

RESEARCH METHODOLOGLY 33

ANALYSIS AND INTERPRETATION 36

64
FINDINGS

67
CONCLUSION

69
BIBLIOGRAPHY

2
TABLE/CHART PAGE NUMBER DETAILS

Table no.1 37 Age of the respondents

Table no.2 38 Experience of respondents

Table no.3 39 Avg. yearly investment of respondents

Table no.4 40 Primary area of investment

Table no.5 41 Purpose of investment

Table no.6 42 Looking Into Financials Of The Company

Table no.7 43 Looking into the business of the company

Table no.8 44 Looking at the suppliers of the company

Table no.9 45 The Reputation of the Promoters Doesn’t Effect the Decision

Table no.10 46 Looking at the past growth of the industry

Table no.11 47 Looking at the future prospects of the industry

Table no.12 48 Objective of the Issue Very Important

Table no.13 49 Price band is an important consideration

Table no.14 50 Issue Size is an Important Factor

Table no.15 51 Consider the Underwriter of the Issuing Company

Table no.16 52 Inflation is an important consideration

Table no.17 53 Tend to Invest More In IPOs When Interest Rates in Other Investments Are

Lower

Table no.18 54 Duration for Which the Company has Been in Business Does Not Affect

Purchase Decision of IPOs

Table no. 19 55 Recent IPO Performances Does Not Affect my Decision of Investing in an

IPO

Table no. 20 56 Influenced by Top Fund Managers’ Opinions of an IPO

Table no. 21 57 Follow the Ratings Provided by a Research Analyst Before Investing in IPO

Table no. 22 58 Listing in Well Known Stock Exchanges (like BSE, NSE) Influences My Decision

in Investing for an IPO

Table no. 23 59 The Performance of IPOs in the Market in Recent Past is a Good Indicator of

Future

Table no. 24 60 Purchases are Greatly Affected by Media Advertisements

Table no. 25 61 Market Volatility is Not an Important Factor to Me to Make My Purchase

Decision of IPOs

CONTENTS OF TABLES AND CHARTS

Chapter 1

3
 INTRODUCTION AND
LITERATURE REVIEW

4
 INTRODUCTION

As we all know IPO – INITIAL PUBLIC OFFERING is the hottest topic in

the current industry, mainly because of India being a developing country and lot of growth in
various sectors which leads a country to ultimate success. And when we talk about country’s
growth which is dependent on the kind of work and how much importance to which sector is
given. And when we say or talk about industries growth which leads the economy of country
has to be balanced and given proper finance so as to reach the levels to fulfill the needs of the
society. And industries which have massive outflow of work and a big portfolio then its very
difficult for any company to work with limited finance and this is where IPO plays an
important role.

This report talks about how IPO helps in raising fund for the companies going
public, what are its pros and cons, and also it gives us detailed idea why companies go public.
How and what are the steps taken by the companies before going for any IPO and also the
role of (SEBI) Securities and Exchange Board of India the BSE and NSE , what are primary
and secondary markets and also the important terms related to IPO. It gives us idea of how
IPO is driven in the market and what are various factors taken into consideration before going
for an IPO. And it also tells us how we can more or less judge a good IPO. Then we all know
that scams have always been a part of any sector you go in for which are covered in it and
also few recommendations are given for the same. It also gives us some idea about what are
the expenses that a company undertakes during an IPO.

IPO has been one of the most important generators of funds for the small
companies making them big and given a new vision in past and it is still continuing its work
and also for many coming years.

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 IPO stands for Initial Public Offering and means the new offer of shares
from a company which was previously unlisted. This is done by offering those shares to the
public, which were held by the promoters or the private investors prior to the IPO. In the case
when other investors or Promoter held the shares the stake holding comes down to the extent
their shares are offered to the public. In other cases new shares are issued to the public and
the shares, which are with the promoters stay with them. In both cases the share of the
promoters in the total capital comes down.

For example say there are 100 shares in a company and 50 of these are offered
to the public in an IPO then in such a case the promoter’s stake in the company comes down
from 100% to 50%. In another case the company issues 50 additional shares to the public and
the stake of the promoter comes down from 100% to 67%.

Normally in an IPO the shares are issued at a discount to what is considered

their intrinsic value and that’s why investors keenly await IPOs and make money on most of
them. IPO are generally priced at a discount, which means that if the intrinsic value of a share
is perceived to be Rs.100 the shares will be offered at a price, which is lesser than Rs.100 say
Rs.80 during the IPO. When the stock actually lists in the market it will list closer to Rs.100.
The difference between the two prices is known as Listing Gains, which an investor makes
when investing in IPO and making money at the listing of the IPO. A Bullish Market gives
IPO investors a clear opportunity to achieve long term targets in a short term phase.

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 WHAT IS AN IPO

An IPO is the first sale of stock by a company to the public. A company can
raise money by issuing either debt or equity. If the company has never issued equity to the
public, it's known as an IPO.

Companies fall into two broad categories: private and public.

A privately held company has fewer shareholders and its owners don't have to disclose much
information about the company. Anybody can go out and incorporate a company: just put in
some money, file the right legal documents and follow the reporting rules of your
jurisdiction. Most small businesses are privately held. But large companies can be private too.
Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held?

It usually isn't possible to buy shares in a private company. You can approach
the owners about investing, but they're not obligated to sell you anything. Public companies,
on the other hand, have sold at least a portion of themselves to the public and trade on a stock
exchange. This is why doing an IPO is also referred to as "going public."

Public companies have thousands of shareholders and are subject to strict rules
and regulations. They must have a board of directors and they must report financial
information every quarter. In the United States, public companies report to the Securities and
Exchange Commission (SEC). In other countries, public companies are overseen by
governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing
about a public company is that the stock is traded in the open market, like any other
commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's
nothing he or she could do to stop you from buying stock.

The first sale of stock by a private company to the public, IPO’s are
often issued by smaller, younger 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
obtains 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. IPO’s can
be a risky investment. For the individual investor, it is tough to predict what the stock will do

7
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 IPO’s are of companies going through a transitory
growth period, and they are therefore subject to additional uncertainty regarding their future
value.

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 PRIMARY AND SECONDARY MARKETS
In the primary market securities are issued to the public and the proceeds go to
the issuing company. Secondary market is term used for stock exchanges, where stocks are
bought and sold after they are issued to the public.

PRIMARY MARKET

The first time that a company’s shares are issued to the public, it is by a
process called the initial public offering (IPO). In an IPO the company offloads a certain
percentage of its total shares to the public at a certain price.

Most IPO’S these days do not have a fixed offer price. Instead they follow a
method called BOOK BUILDIN PROCESS, where the offer price is placed in a band or a
range with the highest and the lowest value (refer to the newspaper clipping on the page). The
public can bid for the shares at any price in the band specified. Once the bids come in, the
company evaluates all the bids and decides on an offer price in that range. After the offer
price is fixed, the company allots its shares to the people who had applied for its shares or
returns them their money.

SECONDRY MARKET

Once the offer price is fixed and the shares are issued to the people, stock
exchanges facilitate the trading of shares for the general public. Once a stock is listed on an
exchange, people can start trading in its shares. In a stock exchange the existing shareholders
sell their shares to anyone who is willing to buy them at a price agreeable to both parties.
Individuals cannot buy or sell shares in a stock exchange directly; they have to execute their
transaction through authorized members of the stock exchange who are also called STOCK
BROKERS.

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 WHY GO PUBLIC?

Basically, going public (or participating in an "initial public offering" or IPO)

is the process in which a business owned by one or several individuals is converted into a
business owned by many. It involves the offering of part ownership of the company to the
public through the sale of debt or more commonly, equity securities (stock).

Going public raises cash and usually a lot of it. Being publicly traded also
opens many financial doors:

 Because of the increased scrutiny, public companies can usually get better rates when
they issue debt.

 As long as there is market demand, a public company can always issue more stock.
Thus, mergers and acquisitions are easier to do because stock can be issued as part of
the deal.

 Trading in the open markets means liquidity. This makes it possible to implement
things like employee stock ownership plans, which help to attract top talent.

Being on a major stock exchange carries a considerable amount of prestige. In

the past, only private companies with strong fundamentals could qualify for an IPO and it
wasn't easy to get listed.

The internet boom changed all this. Firms no longer needed strong financials
and a solid history to go public. Instead, IPOs were done by smaller startups seeking to
expand their businesses. There's nothing wrong with wanting to expand, but most of these
firms had never made a profit and didn't plan on being profitable any time soon. Founded on
venture capital funding, they spent like Texans trying to generate enough excitement to make
it to the market before burning through all their cash. In cases like this, companies might be
suspected of doing an IPO just to make the founders rich. This is known as an exit strategy,
implying that there's no desire to stick around and create value for shareholders. The IPO
then becomes the end of the road rather than the beginning.
How can this happen? Remember: an IPO is just selling stock. It's all about the
sales job. If you can convince people to buy stock in your company, you can raise a lot of
money.

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 BENEFITS OF GOING PUBLIC

• Access to Capital: The principal motivation for going public is to have access to larger
capital. A company that does not tap the public financial market may find it difficult to grow
beyond a certain point for want of capital.

• Stockholder Diversification: As a company grows and becomes more valuable, its

founders often have most of its wealth tied up in the company. By selling some of their stock
in a public offering, the founders can diversify their holdings and thereby reduce somewhat
the risk of their personal portfolios.

• Easier to raise new capital: If a privately held company wants to raise capital a sale of a new
stock, it must either go to its existing shareholders or shop around for other investors. This
can often be a difficult and sometimes impossible process. By going public it becomes easier
to find new investors for the business.

• Enhances liquidity: The stock of a closely held firm is not liquid. If one of the holders
wants to sell some of his shares, it is hard to find potential buyers- especially if the sum
involved is large. Even if a buyer is located there is no establishes price at which to complete
the transaction. These problems are easily overcome in a publicly owned company.

•Establishes value for the firm: This can be very useful in attracting key employees with
stock options because the underlying stock have a market value and a market for them to be
traded that allows for liquidity for them.

•Image: The reputation and visibility of the company increases. It helps to increase company
and personal prestige.

•Signals from the Market: Stock prices represent useful information to the managers.
Everyday, investors render judgment about the prospects of the firm. Although the market
may not be perfect, it provides a useful reality check.

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 PARAMETERS TO JUDGE AN IPO

Good investing principles demand that you study the minutes of details prior to
investing in an IPO. Here are some parameters you should evaluate :-

Promoters

Is the company a family run business or is it professionally owned? Even with a family
run business what are the credibility and professional qualifications of those managing the
company? Do the top level managers have enough experience (of at least 5 years) in
the specific type of business?

Industry Outlook

The products or services of the company should have a good demand and scope for
profit.

Business Plans

Check the progress made in terms of land acquisition, clearances from various
departments, purchase of machinery, letter of credits etc. A higher initial investment from the
promoters will lead to a higher faith in the organization.

Financials

Why does the company require the money? Is the company floating more equity than
required? What is the debt component? Keep a track on the profits, growth and margins
of the previous years. A steady growth rate is the quality of a fundamentally sound
company. Check the assumptions the promoters are making and whether these
assumptions or expectations sound feasible.

Risk Factors

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The offer documents will list our specific risk factors such as the company’s
liabilities, court cases or other litigations. Examine how these factors will affect the
operations of the company.

Key Names

Every IPO will have lead managers and merchant bankers. You can figure out the track
record of the merchant banker through the SEBI website.

Pricing

Compare the company’s PER with that of similar companies. With this you can find
out the P/E Growth ratio and examine whether its earning projections seem viable.

Listing

You should have access to the brokers of the stock exchanges where the company will
be listing itself.

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 IPO – ADVANTAGES AND DISADVANTAGES

The decision to take a company public in the form of an initial public offering
(IPO) should not be considered lightly. There are several advantages and disadvantages to
being a public company, which should thoroughly be considered. This memorandum will
discuss the advantages and disadvantages of conducting an IPO and will briefly discuss the
steps to be taken to register an offering for sale to the public. The purpose of this
memorandum is to provide a thumbnail sketch of the process. The reader should understand
that the process is very time consuming and complicated and companies should undertake
this process only after serious consideration of the advantages and disadvantages and
discussions with qualified advisors.

Advantages of going public

 Increased Capital

A public offering will allow a company to raise capital to use for various corporate
purposes such as working capital, acquisitions, research and development, marketing,
and expanding plant and equipment.

 Liquidity

Once shares of a company are traded on a public exchange, those shares have a
market value and can be resold. This allows a company to attract and retain
employees by offering stock incentive packages to those employees. Moreover, it also
provides investors in the company the option to trade their shares thus enhancing
investor confidence.

 Increased Prestige

Public companies often are better known and more visible than private companies,
this enables them to obtain a larger market for their goods or services. Public

14
 companies are able to have access to larger pools of capital as well as different types
of capital.

 Valuation

Public trading of a company's shares sets a value for the company that is set by the
public market and not through more subjective standards set by a private valuator.
This is helpful for a company that is looking for a merger or acquisition. It also allows
the shareholders to know the value of the shares.

 Increased wealth

The founders of the company often have the sense of increased wealth as a result of
the IPO. Prior to the IPO these shares were illiquid and had a more subjective price.
These shares now have an ascertainable price and after any lockup period these shares
may be sold to the public, subject to limitations of federal and state securities laws.

Disadvantages of going Public

 Time and Expense

Conducting an IPO is time consuming and expensive. A successful IPO can take up to
a year or more to complete and a company can expect to spend several hundreds of
thousands of dollars on attorneys, accountants, and printers. In addition, the
underwriter's fees can range from 3% to 10% of the value of the offering. Due to the
time and expense of preparation of the IPO, many companies simply cannot afford the
time or spare the expense of preparing the IPO.

 Disclosure

The SEC disclosure rules are very extensive. Once a company is a reporting company
it must provide information regarding compensation of senior management,
transactions with parties related to the company, conflicts of interest, competitive
positions, how the company intends to develop future products, material contracts,
and lawsuits. In addition, once the offering statement is effective, a company will be

15
 required to make financial disclosures required by the Securities and Exchange Act of
1934. The 1934 Act requires public companies to file quarterly statements containing
unaudited financial statements and audited financial statements annually. These
statements must also contain updated information regarding nonfinancial matters
similar to information provided in the initial registration statement. This usually
entails retaining lawyers and auditors to prepare these quarterly and annual
statements. In addition, a company must report certain material events as they arise.
This information is available to investors, employees, and competitors.

 Decisions based upon Stock Price

Management's decisions may be effected by the market price of the shares and the
feeling that they must get market recognition for the company's stock.

 Regulatory Review

The Company will be open to review by the SEC to ensure that the company is
making the appropriate filings with all relevant disclosures.

 Falling Stock Price

If the shares of the company's stock fall, the company may lose market confidence,
decreased valuation of the company may effect lines of credits, secondary offering
pricing, the company's ability to maintain employees, and the personal wealth of
insiders and investors.

 Vulnerability

If a large portion of the company's shares are sold to the public, the company may
become a target for a takeover, causing insiders to lose control. A takeover bid may
be the result of shareholders being upset with management or corporate raiders
looking for an opportunity. Defending a hostile bid can be both expensive and time
consuming. Once a company has weighed the advantages and disadvantages of being
a public company, if it decides that it would like to conduct an IPO it will have to
retain a lead

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 PARAMETERS TO JUDGE AN IPO

Good investing principles demand that you study the minutes of details prior
to investing in an IPO. Here are some parameters you should evaluate:-

 Promoters

Is the company a family run business or is it professionally owned? Even with

a family run business what are the credibility and professional qualifications of those
managing the company? Do the top level managers have enough experience (of at least 5
years) in the specific type of business?

 Industry Outlook

The products or services of the company should have a good demand and
scope for profit.

 Business Plans

Check the progress made in terms of land acquisition, clearances from various
departments, purchase of machinery, letter of credits etc. A higher initial investment from the
promoters will lead to a higher faith in the organization.

 Financials

Why does the company require the money? Is the company floating more
equity than required? What is the debt component? Keep a track on the profits, growth and
margins of the previous years. A steady growth rate is the quality of a fundamentally sound
company. Check the assumptions the promoters are making and whether these assumptions
or expectations sound feasible.

17
  Risk Factors

The offer documents will list our specific risk factors such as the company’s
liabilities, court cases or other litigations. Examine how these factors will affect the
operations of the company.

 Key Names

Every IPO will have lead managers and merchant bankers. You can figure out
the track record of the merchant banker through the SEBI website.

 Pricing

Compare the company’s PER with that of similar companies. With this you
can find out the P/E Growth ratio and examine whether its earning projections seem viable.

 Listing

You should have access to the brokers of the stock exchanges where the
company will be listing itself.

UNDERSTANDING THE ROLE OF INTERMEDIARIES

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  Who are the intermediaries in an issue?

Merchant Bankers to the issue or Book Running Lead Managers (BRLM),

syndicate members, Registrars to the issue, Bankers to the issue, Auditors of the company,
Underwriters to the issue, Solicitors, etc. are the intermediaries to an issue. The issuer
discloses the addresses, telephone/fax numbers and email addresses of these intermediaries.
In addition to this, the issuer also discloses the details of the compliance officer appointed by
the company for the purpose of the issue.

 Who is eligible to be a BRLM?

A Merchant banker possessing a valid SEBI registration in accordance with

the SEBI (Merchant Bankers) Regulations, 1992 is eligible to act as a Book Running Lead
Manager to an issue.

 What is the role of a Lead Manager? (pre and post issue)

In the pre-issue process, the Lead Manager (LM) takes up the due diligence of
company’s operations/ management/ business plans/ legal etc. Other activities of the LM
include drafting and design of Offer documents, Prospectus, statutory advertisements and
memorandum containing salient features of the Prospectus. The BRLMs shall ensure
compliance with stipulated requirements and completion of prescribed formalities with the
Stock Exchanges, RoC and SEBI including finalization of Prospectus and RoC filing.
Appointment of other intermediaries viz., Registrar(s), Printers, Advertising Agency and
Bankers to the Offer is also included in the pre-issue processes. The LM also draws up the
various marketing strategies for the issue.
The post issue activities including management of escrow accounts, co-
ordinate non-institutional allocation, intimation of allocation and dispatch of refunds to
bidders etc are performed by the LM. The post Offer activities for the Offer will involve
essential follow-up steps, which include the finalization of trading and dealing of instruments
and dispatch of certificates and demat of delivery of shares, with the various agencies
connected with the work such as the Registrar(s) to the Offer and Bankers to the Offer and
the bank handling refund business. The merchant banker shall be responsible for ensuring
that these agencies fulfill their functions and enable it to discharge this responsibility through
19
suitable agreements with the Company.

 What is the role of a registrar?

The Registrar finalizes the list of eligible allottees after deleting the invalid
applications and ensures that the corporate action for crediting of shares to the demat
accounts of the applicants is done and the dispatch of refund orders to those applicable are
sent. The Lead manager co-ordinates with the Registrar to ensure follow up so that that the
flow of applications from collecting bank branches, processing of the applications and other
matters till the basis of allotment is finalized, dispatch security certificates and refund orders
completed and securities listed.

 What is the role of bankers to the issue?

Bankers to the issue, as the name suggests, carries out all the activities of
ensuring that the funds are collected and transferred to the Escrow accounts. The Lead
Merchant Banker shall ensure that Bankers to the Issue are appointed in all the mandatory
collection centers as specified in DIP Guidelines. The LM also ensures follow-up with
bankers to the issue to get quick estimates of collection and advising the issuer about closure
of the issue, based on the correct figures.

 Question on Due diligence

The Lead Managers state that they have examined various documents
including those relating to litigation like commercial disputes, patent disputes, disputes with
collaborators etc. and other materials in connection with the finalization of the offer
document pertaining to the said issue; and on the basis of such examination and the
discussions with the Company, its Directors and other officers, other agencies, independent
verification of the statements concerning the objects of the issue, projected profitability, price
justification, etc., they state that they have ensured that they are in compliance with SEBI, the
Government and any other competent authority in this behalf.

IPO SCAMS

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  YES BANK Ltd. CASE

The modus operandi adopted in manipulating the YES Bank Ltd (YBL)'s
initial public offering (IPO) allotment involved opening of over 7,500 benami dematerialised
accounts.

These accounts were with the National Securities Depository Ltd (NSDL)
through Karvy Stockbroking Ltd (Karvy-DP). Of the 13 erring entities, the chief culprits
identified by SEBI were Ms Roopalben Panchal and Sugandh Estates and Investments Pvt
Ltd.

While Ms Panchal opened 6,315 benami DP accounts, another entity Sugandh

opened 1,315 benami accounts. Each of these accounts applications were made for 1,050
shares, paying application money of Rs 47,250 each. By applying for small lots (1,050 shares
through each accounts), they misused the retail allotment quota stipulated for IPOs. The
shares allotted in IPO to the benamis of Ms Panchal and Sugandh would have otherwise gone
to genuine retail applicants.

The IPO of YBL opened on June 15, 2005 and its shares were listed on the
BSE and the NSE on July 12, 2005.

It was observed that Ms Panchal had transferred 9,31,600 shares to various

entities in seven off-market transactions on July 11 - a day prior to the listing and
commencement of trading on the stock exchanges. In order to get an allotment of 9,31,600
shares, Ms Panchal would have had to apply for crores of shares involving many crores of
rupees in application money.

However, Ms Panchal's name did not appear in the list of top 100 public issue
allottees. Thus, it was suspected that Ms Panchal must have made multiple applications or
that other applicants were acting as a front for her.

Ms Panchal had applied for only 1,050 shares in the YES Bank IPO, paying
the application money of Rs 47,250. And she did not receive any allotment in the IPO. On
July 6, Ms Panchal received 150 shares each from 6,315 allottees through off-market
transactions aggregating 9,47,250 YBL shares.

21
 Curiously, as per the dematerialised account data furnished by NSDL, of the
above 6,315 entities as many as 6,221 entities have a same address in Ahmedabad. There are
three more addresses of locations in Ahmedabad, which have been linked to Ms Panchal. All
the 6,315 entities have their bank accounts with Bharat Overseas Bank and demat accounts
with Karvy-DP.

By applying for the maximum possible number of shares per applicant while
being categorised as retail applicant and by putting in large number of applications in the lot
of 1,050 shares, Ms Panchal and her associates (real or fictitious) have attempted to corner
the maximum possible number of shares in the IPO allotment.

This tantamounts to an abuse of IPO allotment process, the SEBI order said.

A similar modus operandi was adopted by Sugandh, which received 150

shares each from 1,315 dematerialised accounts aggregating 1,97,250 shares in off market
transactions.

According to SEBI findings, Ms Panchal and others booked profits to the tune
of about Rs 1.70 crore on the day of the listing of YES Bank shares.

SALIENT FEATURES OF IPO SCAM

Modus operandi
22
  Current account opened in the name of multiple companies on the same date in the
same branch of a bank

 Sole person authorized to operate all these accounts who was also a Director in all the
companies

 Identity disguised by using different spelling for the same name in different
companies

 Multiple accounts opened in different banks by the same group of joint account
holders

 Huge funds transferred from companies accounts to the individual’s account which
was invested in IPO’s

 Loans/ overdrafts got sanctioned in multiple names to bypass limit imposed by RBI

 Loans sanctioned to brokers violating guidelines

 Multiple DP accounts opened to facilitate investment in IPO

 Large number of cheques for the same value issued from a single account on the same
day

 Multiple large value credits received by way of transfer from other banks

 Several accounts opened for funding the IPO on the request of brokers, some were in
fictitious names

 Refunds received got credited in brokers a/cs

 Margin money provided by brokers through single cheque

 Nexus between merchant banker, brokers and banks suspected

OPERATIONAL DEFICIENCIES

Factors that facilitated the scam

 Photographs not obtained

23
 Proper introductions not obtained

 Signatures not taken in the presence of bank official

 Failure to independently verify the identity and address of all joint account holders

 Directors identity/ address not verified

 Customer Due Diligence done by a subsidiary

 Objective of large number of jt. account holders opening account not ascertained

 Purpose of relationship not clearly established

 Customer profiling based on risk classification not done

 Poor monitoring and reporting system due to inadequate appreciation of ML issues

 Absence of investigation about use and sources of funds

 Unsatisfactory training of personnel

 No system of fixing accountability of bank officials responsible for opening of

accounts and complying with KYC procedures

 Ineffective monitoring and control

24
 MEASURES TO PREVENT SCAMS

 An analysis of IPO scam clearly brings out the laxity on the part of banks to
scrupulously implement the KYC/AML guidelines issued from time to time. It also
raises serious concerns about the integrity of the systems & systemic risks.

 While scams may still happen despite best of preventive measures, it should not
undermine the efforts being made to insulate the financial sector from money
laundering. It is going to be a long fight with constant need to improve and innovate
new strategies.

 It is important to understand that the risks banks run as a result of non-compliance

with regulatory and statutory guidelines can cause severe reputational and financial
damage to individual banks and the Indian banking system as a whole

 Need for comprehensive operational framework implementing important aspects of

KYC instructions e.g.

 Documentation procedure for opening of all types of customer accounts;

 Clarity in understanding of risk classification of accounts and proper customer

profiling

 Ongoing monitoring of medium and high risk accounts

 Enhanced due diligence in respect of accounts with beneficial ownership, non-face to

face transactions, group companies, high risk businesses and wire transfers etc.

 Prompt reporting of cash and suspicious transactions to Principal Officer by branches

 An effective audit machinery

 Good understanding of regulatory and statutory prescriptions in letter and spirit

 Clear demarcation of duties and responsibilities

 Violations to be dealt with sternly

25
 LITERATURE REVIEW

Contents of the article -

In the article above mentioned, the authors have discussed a new emerging
issue of ‘Initial public offer grading”, of which many people or investors are not aware of and
does not possess detailed information about the whole grading process and how it can help
them in finding a suitable IPO for a safe investment. As per the author the Indian markets
have seen a tremendous growth in the formation of new companies, which resulted in floating
of new IPOs in the share market. The need for the IPO grading is discussed as it can help the
prospective investor to make a right investment decision, Moreover accruing a good grade for
an issuing company gives it command a better premium on their offer and issuers having
underlying strength can also protect themselves in a better way to their prospective investors.
The authors has out lined the true concept of grading which involves an independent agency
that is free from bias and with available tools for assessing the investment attractiveness of an
equity security. This has caused India to be amongst one of the most transparent and effective
capital markets in the world. The idea is that IPO grading will help the investors to better
appreciate the meaning of the disclosure in the issue documents, collapsing all of the complex
information into one single digit. The authors have explained the whole procedure of
grading in detail with the name and work done by these grading agencies. There are mainly
four credit rating agencies in India viz:-
1. CRISIL ( Credit Rating Information Services of India Limited)

2. CARE ( Credit analysis and research limited )

3. ICRA ( Investment information & credit rating agency of India limited )
4. FITCH India rating agency.
The grades given by such agencies do not have any ongoing validity. The steps taken by a
company to get itself rated by such agencies are:-
Step 1
The company needs to first contact one of the grading agencies and mandate it for the
grading exercise.
Step 2.
The CAR would then follow the process to seek information required for grading from the
issuing company. Then such information and reports collected are sent to the concerned
committee which discusses all relevant issues and assign a grade. It takes 3 – 4 weeks ideally

26
to complete the process. Credit rating agencies have to forward the names and details of the
IPOs graded by them on the monthly basis to SEBI/stock exchanges for uploading on their
web sites for the public information. A company which has opted for IPO grading, does not
have a choice in accepting or rejecting the grade, however they can further go in for a new
grade with the grading given to them previously in their prospectus.
The ‘grading’ is given in an overall assessment of fundamentals on five point scale from
grade 5 to grade 1.

These grades are explained as:-

IPO grade 1: poor performance.
IPO grade 2 : Below average fundamentals.
IPO grade 3 : Average Fundamentals.
IPO grade 4 : Above strong fundamentals.
IPO grade 5: strong fundamentals.

These amendments are summaries up as:-

• Pre-issue obligation in case of IPO grading – An unlimited company making an IPO of any
security which may later be converted into equity shares may opt to obtain grading.
• Contents of the prospectus – the company opted for grading must show all its grades
obtained in its prospectus even if it’s unaccepted once.

Review of the article -

Grading of IPOs in terms of their fundamental quality will be enable investors steer clear of
unsound offers. Grading of IPOs of shares by the companies was something necessity for the
Indian market. Thus, it was made mandatory by SEBI for every issuing company to opt for
grading process. What has always ailed the IPO market in India in the predominance of poor
quality IPO’s and their mixing of with bad ones. Hence, if the good quality can be segregated
from the bad once then it would be a real help for the investors. The subscribers to IPOs have
suffered huge losses in those cases where they UN knowingly purchased poor quality, bogus
or even fraudulent issues. There was no determined punishment to the fraudsters, given our
weak legal system. The IPO grading system tackles these problems.
The article above give is a very brief introduction about the IPOs and its grading process. The
author has focused in covering up all the complex information about the IPO grading concept
through this article. However, there are some important information and points of argument
27
which are neglected in this article. In my review, I have tried to cover up all the loopholes of
this article. The author has given a very good introduction about the IPO grading and its
needs with its procedure and process. But one of the points of argument is :- The IPO grades
given are from 1 to 5.if the investor wants to invest in a two companies and both the
companies gives the same return, he is confused and he takes the help of IPO grading to find
out that both the companies are having a same grade (e.g. IPO grade 5). Then how will the
investor decide on which neither IPO to invest for, nor the grading can help him in making is
mind. So the IPO grading may sometimes fail to convince the investor and it is the investor’s
final call on decision to choose between the two investments. This condition is an exception
to IPOS grading.

Sherman and Jagannathan

In their study Sherman and Jagannathan identify the underlying reason for the relative
unpopularity of auctions as a means of going public. This study appears to be the most
comprehensive endeavor in terms of attempting to holistically identify the reasons auctions
have not been as attractive as other means of going public. Their research studies
international trends in auctions use. Here, the evidence overwhelmingly indicates that
auctions have been tried in over 20 countries but are rarely used today. “In other words, out
of more than 45 countries, we have not been able to find even one country in which auctions
are currently the dominant method.” (Sherman and Jagannathan 2005, 14)

Sherman and Jagannathan delve into commonly used stereotypical explanations for why
auctions are not used. The two most common notions are (1) auctions are not used because
they are still experimental and unproven, and (2) issuers are pressured into book building due
to higher fees. Nonetheless, through international research, it was proven that even in markets
where auctions have been used for a long time, there was a decline in their use as soon as
book building or some other method became available. For the second issue, the authors
found that competition in the market would drive down prices of book building issues.
Additionally, other research has shown that fixed price offers lead to even lower spreads,
compared to auctions.

28
In their study Sherman and Jagannathan find that on a global scale initial returns are not the
most important aspect of the issue for the issuer. This was evident from data collected on
IPOs in Singapore, where both auctions and fixed price offers were available. In this case,
statistics revealed that the fixed price method was chosen as the dominant means of going
public, although auctions consistently provided lower underpricing.

Finally, the study also deemed whether any perceivable effect can be distinguished from
adding modern Internet technologies to enable bidding for the IPO auction. The results
illustrate that the median return for Open IPOs is 2%, which is excellent. However, the
research points out that there are significant outliers in the group. In conclusion, Sherman and
Jagannathan find that auctions have been tried and tested in many markets, but have lost
popularity due to poor control on the part of the issuer in terms of the price and effort that are
applied. They also identify that auctions provide lower underpricing. This would imply that
issuers are not only looking to optimize underpricing, but are moreover interested in other
attributes of the issue. “Without someway of screening out free-riders and the unsure
participation of serious investors, IPO auctions are too risky for both issuers and investors.”

Kaneko and Pettway

Kaneko and Pettway attempt to provide an answer to the question “Does book building
provide a better mechanism for issuing firms than auctions?” Similar to Kenji and Smith
(2004), the Japanese market is used to test the assumption. The Japanese auction process uses
price discriminating auctions, instead of a fixed price or market-clearing price as in the Open
IPO process.

The empirical research in Kaneko and Pettway (2003) is broken up into three parts.

Firstly the descriptive statistics are analyzed, which demonstrate that book building had
significantly higher initial returns than auction priced IPOs. In the following part, the
auctioned priced and book built IPOs are analyzed separately through regression analysis. In
this section seven independent variables17 are tested to uncover which variables have the
most impact on underpricing. In the test of auctioned IPOs, it was found that market volatility

29
of daily index returns one month prior to the issue is the most significant factor affecting
underpricing. When the same regressions were run on the book built IPOs, it was found that
market change three months prior to the IPO was the most significant factor affecting
underpricing.

In the third part of Kaneko’s and Pettway’s research, regression analysis was run on both sets
of data, however controlling for the different firm specific characteristics. There, it was also
found that book built IPOs are underpriced significantly more than auction priced IPOs.
When the book built and auctioned priced IPOs were analyzed for effects of hot and cold
markets, it was found that book built IPOs are still much more frequently underpriced.

In conclusion, Kaneko and Pettway found that under all conditions and while controlling firm
specific characteristics, book built IPOs were much more frequently underpriced in
comparison to auctioned IPOs.

Biasis and Faugeron-Crouzet

In their research, Biasis and Faugeron-Crouzet analyze different types of IPO auctions. They
study uniform price auctions, fixed price offerings, internet-based Open IPO mechanisms,
and auctions such as Mise en Vente in France. These were analyzed within a uniform
theoretical model. (Biasis and Faugeron-Crouzet 2002, 13-17). In fixed price offers, Biasis
and Faugeron- Crouzet found high initial returns. High returns were left both to institutional
investors as well as small-uninformed investors, because of a lack of adjustment for price and
demand. For uniform price auctions, underpricing was also evident, however with less
underpricing than with fixed price offers.

The Mise en Vente auction is an auction type IPO procedure that is commonly used in
France. This auction has a fixed market clearing price and pro rata allocation. The highest
market clearing bids do not set the market-clearing price, instead it is set by a Bourse official,
based on the function of demand. It is noted that an explicit algorithm that maps
demand into price does
not set the pricing in such cases.

The research found that for an optimal IPO auction, the IPO price must be set in a manner,
which reflects the information held by investors. If this is not done as in fixed price auctions,

30
underpricing is bound to be pervasive, whereas information gathering of the value of the
stock during the IPO process is bound to be insignificant. Biasis Faugeron-Crouzet viewed
the Open IPO process as a true Dutch auction when it in fact was not. An Open IPO process
is a so-called ´Dirty Dutch´ auction as coined by Sherman (1999). Much like the Mise en
Vente, the fixed market-clearing price is not set at the highest possible level, but instead it is
marked down and set by the issuing company and the underwriter based on their own
perception of the function of demand.

Their study moreover identifies the problem of translating, i.e., mapping demand into prices
and into explicit computerized rules, which occur in Mise en Vente and in Book building.
The authors also highlight the importance of established relationships between bidders and
underwriters. Finally, according to Biasis and Faugeron-Crouzet an established relationship
can enhance the ability to extract information from investors.

Wilhelm

Wilhelm’s research dwells into the issue of how the Internet has affected investment banking
that has relied on relationship based production technology to date. The methodology applied
in this study is based on previous research relating to investment banking. The author does
not conduct his own empirical study; instead, he identifies a list of anomalies that other
studies have found indicative of the phenomenon that investment banking, as we know it,
could be changing.

Indications of the change in traditional investment banking according to the author are that
there has been a decline in the size of underwriter syndicates and there are fewer or more
dominant intermediaries in the securities underwriting business (Pichler and Wilhelm 2001,
2256).

The second observation was made on the point of low-cost communication and data
processing, which might lead to a “direct marketing” business model. For example Wit
Capital, a subsidiary of Goldman Sachs, seeks to identify affinity groups through data mining
for a given firm’s offering.

In sum, the study forecasts that new technologies will complement traditional technologies,
rather

31
than replace them, as has been witnessed with Wit Capital and W.R.
Hambrecht’s Open IPO.

32
 SUMMARY OF RESEARCH

Below is a study summarizing the findings of the four key studies in the field.
Overview of Literature Review:

Study:
Sherman and
Jagannathan

Objective:

A study of the underlying reasons why auctions are relatively unpopular all over the world
for issuing equity, whereas they are extensively used for selling everything else.

Conclusions:

Auctions run higher risk than book built IPOs, due to less control by the issuer of the
freerider problem, as well as less control over issue price.

Study:
Kaneko and Pettway

Objective:

Examine whether book built IPOs provide a better mechanism for issuing firms compare to
auctions.

Conclusions:
Under pricing was used as a proxy, and overwhelmingly auctions were found to be more
beneficial to issuers than book built IPOs.

33
Study:
Biasis and Faugeron-
Crouze

Objective:
Compared the performance of the various auction methods through a unified theoretical
model.

Conclusions:

Fixed price auctions underprice the most, market clearing auctions also underprice but not as
much as fixed price offers. An optimal solution is achieved by the Mise en Vente in France
that encompasses some characteristics of the book built offers.

Study:
Wilhelm

Objective:
Questions whether new communication technologies could impact traditional relationship
based production technology that has been used until now in investment banking.

Conclusions:

Results indicate that there is potential for the traditional relationship based production
technology to be enhanced by Internet technologies, especially in issuing IPOs

34
 Chapter 2
RESEARCH DESIGN

35
 1. Title of the study

“INITIAL PUBLIC OFFERING AS AN INVESTMENT OPTION”

2. Statement of problem

The study tries to identify various factors that affect investor’s choice of investing and also
analyzed as to which of these factors exert the greatest, moderate and relatively lower
influence as choice criteria.

3. Scope of study

 Time frame- 2 months

 Geographical area- The study is confined to the Indian investors.

4. Objectives

 To find out various factors that affect investors choice before investing
 To find out which factors exert greatest, moderate and least influence on investors
choice
 To understand investors segments and their needs
 To find out the effect of inflation on investmentment option
 To find out limitations involved in investment factors.

36
 5. Methodology

 Data sampling

A sample size of 25 respondents will be collected based on random sampling method which
will give equal opportunity of selection to each individual.

 Sampling details

The sample size will be classified into:

 Income level
 Experience
 Age wise

 Tools for data collection

Questionnaire will be used for data collection and interview of respondents will be taken
wherever possible to gain more information on the research topic.

 Tools for data analysis

The tools used for data analysis are

 Percentage method
 Cross tabulation
 Graphical method

6. Limitation of study

 The time frame provided to us is one limitation to the study conducted

 Non availability of respondents or refusal to respond
 Selection of a limited number of investors because of the vast matter of study and
shortage of time.

37
 Chapter 3
ANALYSIS AND
INTERPRETATION

38
 AGE

PARTICULARS AGE PERCENTAG

E
below 25 4 16%
25-35 10 40%
36-45 6 24%
46-55 5 20%
above 55 0 0%
total 25 100

Table no. 1

AGE

4
5

below 25
25-35
36-45
46-55
above 55

6
10

Graph no. 1

Interpretation

As shown by the graph there is more than 10 investors at the age of 25-35 years. And 6
between the age of 36-45 years which shows a clear picture of there being many people out
of the total sample having ample experience and knowledge.

INVESTORS EXPERIENCE

39
 Investors Percentage
0-2 yrs 2 8%
2-5 yrs 5 20%
5-10 yrs 8 32%
10+ yrs 10 40%
Total 25

Table no. 2

Investors Experience

2
5
10

0-2 yrs

2-5 yrs

5-10 yrs

10+ yrs

Graph no. 2

Interpretation

The graph above clearly mentions about my study having a heavy weight as the respondents
have a great experience of above 5 yrs out the 25 respondents 18 have above 5 yrs of
experience which shows that the respondents have shared a lot of professional knowledge
with me for my research.

AVERAGE YEARLY INVESTMENT

  Investors percentage
Upto 1 lakh 4 20%

40
 more than 1 lakh 16 80%

Table no. 3

Avg. yearly investment

upto 1 lakh
more than 1 lakh

Graph no. 3

Interpretation

The above graph mentions that the respondents are actively trading in the stock market with
an investment of more than 1 lakh rupees annually. This even indicates that they have
professional knowledge and learning data base of over years together.

PRIMARY AREA OF INVESTMENT

41
   Investors Percentage
Primary Market Table no. 4 5 25%
Secondary Market 15 75%

Primary area of investment

primary market
secondary market

Graph no. 4

Interpretation
The above graph clearly mentions that the respondents mainly depend on the primary market
when compared to the secondary market. This also shows that they do not depend on any
second hand data for their trading and use their professional knowledge while trading.

PURPOSE OF IPO INVESTMENT

42
   Investors Percentage
Listing Gains 14 70%
Long-Term Gains 6 30%

Table no. 5

Purpose of IPO investment

listing gains
long term gains

Graph no. 5

Interpretation
The above graph clearly shows that the respondents mostly invest for listing gains than for
long term gains and takes a lot of risks by trading this way. This shows that they are well
versed in the field of trading and prefer day-to-day trading.

II MAIN

VIEWS ON INVESTING IN AN IPO

43
 LOOKING INTO FINANCIALS OF THE COMPANY

  Investors Percentage
Strongly Agree 10 50%
Agree 4 20%
Neither Disagree 3 15%
Disagree 2 10%
Strongly disagree 1 5%

Table no. 6

looking into financials of the company

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 6

Interpretation
The above graph clearly shows that 50% of the respondents strongly agrees to look into the
financials of the company before investing but the other 50% of the respondents have a
mixed idea about looking into the company’s finance.

LOOKING AT THE BUSINESS OF THE COMPANY

  Investors Percentage

44
 Strongly Agree 9 45%
Agree 5 25%
Neither Disagree 5 25%
Disagree 0 0%
Strongly disagree 1 5%

Table no. 7

looking at the business of the company

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 7

Interpretation
The above data has a say of the most of the research of looking into the business of the
company before investing and equally into financials of the same. Their main criteria of
investing seem to look purely in their business.

LOOKING AT THE SUPPLIERS OF THE COMPANY

  Investors Percentage
Strongly Agree 4 20%
Agree 3 15%
Neither Disagree 8 40%
Disagree 3 15%

45
 Strongly disagree 2 10%

Table no. 8

looking at the suppliers of the company

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 8

Interpretation
The above graph clearly says that this reason is not one of the main criteria of investing into
IPOs of the same company.

THE REPUTATION OF THE PROMOTERS DOESN’T EFFECT THE DECISION

  Investors Percentage
Strongly Agree 0 0%
Agree 3 15%
Neither Disagree 6 30%
Disagree 3 15%
Strongly disagree 8 40%

46
 Table no. 9

The reputation of the promoters dosent effect the decision

5:-Stronly Agree
4:-Agree
3:-Neither Disagree nor Agree
2:-Disagree
1:-Stronly Disagree

Graph no. 9

Interpretation
The above graphs say that the reputation of the promoters is not showing any interest in the
investment of the investors for the company. It clearly says that this is not an important
criterion for investing in the IPO.

LOOKING AT THE PAST GROWTH OF THE INDUSTRY

  Investors Percentage
Strongly Agree 7 35%
Agree 7 35%
Neither Disagree 3 15%
Disagree 0 0%
Strongly disagree 3 15%

Table no. 10

47
 looking at the past growth of the industry

5:-Stronly Agree
4:-Agree
3:-Neither Disagree nor Agree
2:-Disagree
1:-Stronly Disagree

Graph no. 10

Interpretation
The graph clearly indicates that the investors look at the past growth of the industry before
investing for a better investment option. As more than 70% of the investors are interested in
the industry growth which indicates for a long term investment.

LOOKING AT THE FUTURE PROSPECTUS OF THE INDUSTRY

  Investors Percentage
Strongly Agree 8 40%
Agree 7 35%
Neither Disagree 2 10%
Disagree 2 10%
Strongly disagree 1 5%

Table no. 11

48
 looking at the future prospectus of the industry

5:-Stronly Agree
4:-Agree
3:-Neither Disagree nor Agree
2:-Disagree
1:-Stronly Disagree

Graph no. 11

Interpretation
The graph clearly indicates that the IPO investment is for a long term gains as most of the
investors look at the future prospects as 75% of them holds good for this criteria of an IPO
investment.

OBJECTIVE OF THE ISSUE VERY IMPORTANT

  Investors Percentage
Strongly Agree 2 10%
Agree 2 10%
Neither Disagree 9 45%
Disagree 7 35%
Strongly disagree 0 0%

Table no. 12

49
 objective of the issue very important

5:-Stronly Agree
4:-Agree
3:-Neither Disagree nor Agree
2:-Disagree
1:-Stronly Disagree

Graph no. 12

Interpretation
The graph says that most of the investors do not look into the objective of the issue as
important criteria for the long term gain as the objective would be for a limited period of
time. As 70% of the investors are not interested in the objective of the issue.

PRICE BAND IS AN IMPORTANT CONSIDERATION

  Investors Percentage
Strongly Agree 13 65%
Agree 3 15%
Neither Disagree 4 20%
Disagree 0 0%
Strongly disagree 0 0%

Table no. 13

50
 price band is an important consideration

5:-Stronly Agree
4:-Agree
3:-Neither Disagree nor Agree
2:-Disagree
1:-Stronly Disagree

Graph no. 13

Interpretation
The graph clearly indicates that the price band is a very important factor for an investment
option as the investors rightly demand for the proper value of the company for investing in
the company and hence this indicates that the price band is one of the most important factor
for investing in a company.

ISSUE SIZE IS AN IMPORTANT FACTOR

  Investors Percentage
Strongly Agree 7 35%
Agree 4 20%
Neither Disagree 7 35%
Disagree 0 0%
Strongly disagree 0 0%

Table no. 14

51
 issue size is an important factor

5:-Stronly Agree
4:-Agree
3:-Neither Disagree nor Agree
2:-Disagree
1:-Stronly Disagree

Graph no. 14

Interpretation
The graph indicates that the issue size is important for the investors in investing in an IPO but
at the same time there are investors who don’t look in the size of the IPO for investing if
there is any good issue which does not consider the issue size.

CONSIDER THE UNDERWRITER OF THE ISSUING COMPANY

  Investors Percentage
Strongly Agree 2 10%
Agree 3 15%
Neither Disagree 8 40%
Disagree 4 20%
Strongly disagree 3 15%

Table no. 15

52
 consider the underwriter of the issuing company

5:-Stronly Agree
4:-Agree
3:-Neither Disagree nor Agree
2:-Disagree
1:-Stronly Disagree

Graph no. 15

Interpretation

According to this graph the underwriters importance does not play a major role for the
investors investing in the IPO’s which clearly says that this is not an important criteria.

INFLATION IS AN IMPORTANT CONSIDERATION

  Investors Percentage
Strongly Agree 1 5%
Agree 3 15%
Neither Disagree 5 25%
Disagree 5 25%
Strongly disagree 6 30%

Table no. 16

53
 Inflation is an important consideration

5:-Stronly Agree
4:-Agree
3:-Neither Disagree nor Agree
2:-Disagree
1:-Stronly Disagree

Graph no. 16

Interpretation
According to the graph more than 60% of the investors do not take inflation as a
consideration as inflation would not be making any difference while investing when the
inflation rate is high as long term investment is a good option for the same situation.

TEND TO INVEST MORE IN IPOS WHEN INTEREST RATES IN OTHER

INVESTMENTS ARE LOWER

  Investors Percentage
Strongly Agree 6 30%
Agree 7 35%
Neither Disagree 2 10%
Disagree 3 15%
Strongly disagree 2 10%

Table no. 17

54
 Tend to invest more in IPOs when interest rates in other
investments are lower

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor

Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 17

Interpretation
The graphs clearly indicates as investors invest in IPO’s when there is a very low interest rate
in other investment fields as investors try to increase their wealth and every given point of
time for a brighter life.

DURATION FOR WHICH THE COMPANY HAS BEEN IN BUSINESS DOES NOT
AFFECT PURCHASE DECISION OF IPOS

  Investors Percentage
Strongly Agree 3 15%
Agree 0 0%
Neither Disagree 4 20%
Disagree 9 45%
Strongly disagree 4 20%

Table no. 18

55
 Duration for which the company has been in business does
not affect purchase decision of IPOs

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor

Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 18

Interpretation
The statement of the graph clearly says that the investors really look into the experience in
the business and they truly go with the experience as the investors do really go with the
experience and then make their decision on their investments.

RECENT IPO PERFORMANCES DOES NOT AFFECT MY DECISION OF INVESTING

IN AN IPO

  Investors Percentage
Strongly Agree 1 5%
Agree 1 5%
Neither Disagree 4 20%
Disagree 4 20%
Strongly disagree 10 50%

Table no. 19

56
 Recent IPO performances does not affect my decision of
investing in an IPO

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 19

Interpretation
As the statement clearly indicates the decision of investors does not change with recent IPO
performances and a lot of investors decision does vary with recent IPO trends for a varied
investment option.

INFLUENCED BY TOP FUND MANAGERS’ OPINIONS OF AN IPO

  Investors Percentage
Strongly Agree 4 20%
Agree 1 5%
Neither Disagree 9 45%
Disagree 5 25%
Strongly disagree 1 5%

Table no. 20

57
 Influenced by Top Fund managers’ opinions of an IPO

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 20

Interpretation
They graph clearly indicates that there are mixed calls for the statements from the top fund
managers opinions as the investors rest on their own decision rather than listening to the top
fund managers for their opinions before their investments.

FOLLOW THE RATINGS PROVIDED BY A RESEARCH ANALYST BEFORE

INVESTING IN IPO

  Investors Percentage
Strongly Agree 3 15%
Agree 3 15%
Neither Disagree 10 50%
Disagree 4 20%
Strongly disagree 0 0%

Table no. 21

58
 Follow the ratings provided by a research analyst before
investing in IPO

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor

Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 21

Interpretation
As the graph says most of the investors don’t not really worry abt the ratings given by the
research analyst for a company’s IPO. This indicates that investors really have their own
criteria’s before investing in an IPO.

LISTING IN WELL KNOWN STOCK EXCHANGES (LIKE BSE, NSE) INFLUENCES

MY DECISION IN INVESTING FOR AN IPO

  Investors Percentage
Strongly Agree 10 50%
Agree 5 25%
Neither Disagree 2 10%
Disagree 2 10%
Strongly disagree 1 5%

Table no. 22

59
 Listing in well known Stock exchanges (like BSE, NSE)
influences my decision in investing for an IPO

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor

Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 22

Interpretation
The influence of IPO’s launch in well known stock exchanges also influence the investors’
decision on investing in an IPO. As my research clearly indicates that more than 75% of the
investors choose a bigger platform for their investments. And would like their investment to
be in a well known stock exchanges.

THE PERFORMANCE OF IPOS IN THE MARKET IN RECENT PAST IS A GOOD

INDICATOR OF FUTURE

  Investors Percentage
Strongly Agree 1 5%
Agree 2 10%
Neither Disagree 4 20%
Disagree 7 35%
Strongly disagree 6 30%

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 Table no. 23

The performance of IPOs in the market in recent past is a

good indicator of future

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor

Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 23

Interpretation
The investors really do not believe in the future of the market by the past performance as they
seem to believe in a strong base of the company and the other factors which holds good for a
company’s future.

PURCHASES ARE GREATLY AFFECTED BY MEDIA ADVERTISEMENTS

  Investors Percentage
Strongly Agree 1 5%
Agree 4 20%
Neither Disagree 2 10%
Disagree 8 40%
Strongly disagree 5 25%

Table no. 24

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 Purchases are greatly affected by media advertisements

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 24

Interpretation
The media advertisement effect over the IPO’s investment has a very less impact as my
research clearly shows that advertisement has no effect over the investors’ decision on their
investment in IPO’s.

MARKET VOLATILITY IS NOT AN IMPORTANT FACTOR TO ME TO MAKE MY

PURCHASE DECISION OF IPOS

  Investors Percentage
Strongly Agree 4 20%
Agree 2 10%
Neither Disagree 1 5%
Disagree 3 15%
Strongly disagree 10 50%

Table no. 25

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 Market volatility is not an important factor to me to make
my purchase decision of IPOs

5:-Stronly Agree

4:-Agree

3:-Neither Disagree nor

Agree

2:-Disagree

1:-Stronly Disagree

Graph no. 25

Interpretation
The graph clearly says that market volatility is an equally important factor for their
investment decision making as the trend has a lot of say in their decision. As the research
clearly indicates that more than 65% disagree to not consider market volatility as an
important factor.

CHAPTER 4

63
 FINDINGS

FINDINGS

 It can be seen that the age group of the respondents were all above the
age of 25 years. And about 14 respondents out of 25 were above the age
of 30 years.
 So we can consider that about 18 of the candidates have an experience of
more than 10 years. This could be a heavy weight for my project.

64
 We can even observe that most of my candidates have an avg. Annual
investment of over 1 lakh rupees. This can even consider a lot of
experience in investing.
 We can consider that the factors chosen by my candidates were all
favouring long term investment as their investment purpose was into the
financial of the company.
 As more than 60% of my respondents strongly agree for the financials of
the company to be strong before investing.
 As well the respondents have a firm say in their business before investing
as to know in what are they investing and is it good for their portfolio and
their investments.
 The respondent’s decision over investing in an IPO does not change over
a promoters comment over an IPO as they believe in their own call and
not others.
 Have even understood that my respondents who invest in the companies
IPO’s even have a thorough research over the company’s history and
their future prospects before investing.
 I have even learnt that the object of the issue is not an very important
factor for the investors to invest in the company as the objective could be
for a limited period of time and their objective in IPO investment is long
term gains and not short term.
 My research even shows me that price band is a very important factor as
the investors are very keen on investing only on the right value before
investing.
 I have even learnt that underwriters influence does not make a major
impact on the investor’s point of view. As I had earlier said that investors
take their own call before investing rather than listening to others.

65
 I have even understood that inflation does not play a very important role
before investors’ investing in a primary market as this kind of market
tends for long term investment.

 Company’s experience in the same industry also plays a very important

role before investments.
 I have even seen that around 50% of the investors have a say over the
ratings of the company before the investors have to invest in an IPO.
 Investors even consider the company listings in the stock exchanges.
Strong stock exchanges like BSE and NSE would improve the chances of
investment.
 The performance of the past IPO’s have strong indication over the
upcoming IPO’s if it’s any normal IPO. But in consideration of very good
IPO this factor may not affect the investment strategy.
 Media advertisement does not greatly affect the decision of investors to
invest in the IPO.
 I have even understood that market volatility is not any very important
factor for investors before investing.

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 Chapter 5
Conclusion

67
 CONCLUSION

From the above study and research it can be said however said and done, going public is
always advantageous for the company and is a step ahead as the company not only grows its
goodwill but also gets the investors to pump in money which can be used to expand or grow
in its nature of operations. An IPO also helps the company grow in public image.

When a company becomes public it is necessary to make its financials public by showing its
shareholders what good has the company been up to. Now a valid explanation is also needed
sometimes but this might also backfire against the company as a bad balance sheet would
make the investor not to invest in a company as his/her returns look very unlikely. As this is a
number game the goodwill becomes equally important.

Also important to know is that when a company plans to go public there are various
requirements needed for the company to even think of going public. All of this might sound
easy but its not as going public adds a big burden on a company who if anything goes wrong
becomes a defaulter in the eyes of the public, his whole company is under scrutiny and as
happened earlier an extra baggage on the company might reduce its lifetime.

Thus looking at both the advantages and disadvantages a likely comment would be the way
going forward that is “Going Public” is way a company should think as until you are ready to
risk in a business there is no use doing business.

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 BIBLIOGRAPHY

Web Based

 www.investopedia.com

 www.sebi.com

 www.vivro.net

 www.intimespectrum.com

 www.pratibhagroup.com

Book Based

 Share Market Book  By Tarun Shah

 IPO Decision  By Jason Draho

69
 ANNEXURE

Dear Sir / Madam ,

I am a student of Christ University, Department Of Management Studies, and Bangalore. As
part of our curriculum, I am conducting “A Study on IPO as an investing option” .We
assure you that all the information provided by you will be kept confident and used for
research purpose only.

QUESTIONNAIRE
PERSONAL DETAILS

Name:
Age Group: 18-25 Years 26-40 Years 40+ Years
Yearly Income: < Rs 2, 00,000 Rs. 2, 00,000 – Rs. 5, 00,000 > Rs. 5, 00,000

1. How long have you been active in the market (In terms of trade done in years)?
0-1 2-10 10+

2. Average Yearly Investment:

Up to Rs.1, 00,000 Rs.1, 00,000+

3. Primary Area of Interest

IPO Secondary Securities Others __________________

4. Purpose of IPO Investment:

70
 Listing gains Long Term gains

5. I have professional knowledge in Stock Markets:

Yes No

Please specify your views about investing in an IPO:

5:-Stronly Agree 4:-Agree 3:-Neither Disagree nor Agree 2:-Disagree
1:-Stronly Disagree

6. I look at the Financial statements of the company. 5 4 3 2 1

7. I look at the business of the company. 5 4 3 2 1

8. I look at the suppliers of the company. 5 4 3 2 1

9. The reputation of the promoters doesn’t affect my decision. 5 4 3 2 1

10. I look at the Past growth of the Industry. 5 4 3 2 1

11. I look at the Future Prospects of the Industry. 5 4 3 2 1

12. I consider the objective of the issue very important. 5 4 3 2 1

13. The price band is an important consideration for me. 5 4 3 2 1

14. I consider the issue size very important for IPO. 5 4 3 2 1

15. I consider the underwriter of the issuing company. 5 4 3 2 1

16. Inflation is an important consideration. 5 4 3 2 1

17. I tend to invest more in IPOs when interest rates in other

investments are lower. 5 4 3 2 1
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18. The duration for which the company has been in business
does not affect my purchase decision of IPOs. 5 4 3 2 1

19. I do not focus on the prevailing trend (uptrend/downtrend)

of the market before investing in an IPO. 5 4 3 2 1

20. Recent IPO performances does not affect my decision of

investing in an IPO. 5 4 3 2 1

21. I get influenced by Top Fund managers’ opinions of an IPO. 5 4 3 2 1

22. I follow the ratings provided by a research analyst

before investing in IPO. 5 4 3 2 1

23. Listing in well known Stock exchanges (like BSE, NSE)

influences my decision in investing for an IPO. 5 4 3 2 1

24. The performance of IPOs in the market in recent past

is a good indicator of future. 5 4 3 2 1

Thank you.

72