Report

On A STUDY OF THE INVESTOR PERCEPTION AND FACTORS AFFECTING PRICING OF IPO in Partial Fulfilment of Awar of !a"#elor of !u$ine$$ A mini$tration

Su%mitte To&
(e"t) *iran+it *aur (e"t) in ,ana-ement

Su%mitte !'&
Raman eep *aur Roll No) ../ !!A 0n 'ear 12t# $em3

CORDIA CO((EGE SANGHO(

DEC(ARATION

I, R,ANDEEP *AUR, student of Bachelor of Business Administration from Cordia College Sanghol , Punjabi University hereby declare that I have completed Report on 4study of investor s perception and factors affecting pricing of Initial Public !fferings5 as part of the course re"uirement#

I further declare that the information presented in this project is true and original to the best of my $no%ledge#

Date& &'()*(''

Name & RA+A,-..P /AUR

Pla"e& /0A,,A

Roll) No & 11) Pro-ram & BBA

AC*NO6(EDGE,ENTS

Ac$no%ledgement is not only a ritual, but also an e2pression of indebtedness to all those %ho have helped in the completion process of the project# !ne of the most pleasant aspects in collecting the necessary and vital information and compiling it is the opportunity to than$ all those %ho have actively contributed to it#

I e2press my deepest and sincerest gratitude and than$s to my guide Prof) *iran+it *aur 1A$$t) Prof) ,ana-ement3 of Cordia Institute of Business +anagement for the invaluable guidance and constant encouragement %hich he e2tended to me throughout my research project#

I %ould also li$e to e2press my sincere than$s to the authors %hose %or$s I have had the privilege to consult and "uote in my research project and to the Dire"tor R)*)S#arma of Cordia College Sanghol for their constant support#

RA,ANDEEP *AUR

ii

E7ECUTIVE SU,,ARY
.mpirical evidence suggests the e2istence of 3hot4issue mar$ets for initial public

offerings5 in certain periods and in certain industries, ne% issues are under priced and rationing occurs# In certain circumstances, firms %ith the most favourable prospects find it optimal to signal their type by under pricing their initial issue of shares, and investors $no% that only the best can recoup the cost of this signal from subse"uent issues# Issues %ith high ris$ and(or smaller offer prices are more under priced6 and that returns are strongly correlated %ith subscription levels#

7he present study %as underta$en to analy8e the investor s perception of Initial Public !fferings and the factors affecting the pricing of these offerings that come out in the primary mar$et# 7his main objective %as achieved by splitting it into t%o parts, the first dealing %ith the perception of investors about the IP! and the other %ith the factors affecting the pricing# 9or the first objective, a "uestionnaire %as administered to investors in -elhi(,CR *) respondents gave their perception about the IP! issue# 7he data collected from the survey %as subse"uently analy8ed using SPSS '1 statistical analysis soft%are# Based on the study and the analysis, five major parameters %ere selected %hich have the ma2imum impact on investor s decision to invest in an IP!# 9or the second part of the study, a sample si8e of '& companies %as selected, belonging to different sectors# 7he data thus collected %as analy8ed by applying various statistical tools to it# !n the basis of these tests it %as concluded that only one variable contribute significantly to issue price5 si8e measured by sales# 7his indicates that the investors should conduct a thorough research into the fundamentals of the company before investing into its IP! s#

7he first t%o chapters of the study deals %ith the introduction and research design and the ne2t t%o chapters consist of the analysis of the t%o objectives# 7he last chapter of the study deals %ith the findings# !n the basis of these findings, ade"uate managerial recommendations %ere provided#

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Table of Contents
Introduction################################################################################################################################' Research -esign#######################################################################################################################') A,A:;SIS A,- I,7.RPR.7A7I!, :.<.: I#################################################################&)

List of Tables
7able ' -ifference bet%een boo$ building and 9i2ed Issues####################################################= 7able & -emographics5 >ender 7able######################################################################################&' 7able = -emographics5 Age 7able###########################################################################################&' 7able ? -emographics5 Profession 7able################################################################################&& 7able @ -emographics5 .ducation 7able#################################################################################&= 7able 1 Average Annual Investment %ith Corporate Image####################################################=A iv

List of Figures
9igure ' Corporate Image###########################################################################################################1 9igure & Corprorate Image#######################################################################################################&1 9igure = +embers####################################################################################################################&* 9igure ? Present +ar$et Conditions#########################################################################################&A 9igure @ Performance of previous IP!#####################################################################################&B 9igure 1 Si8e#############################################################################################################################=) 9igure * IP! versus Secondary +ar$et###################################################################################=' 9igure A !bjective####################################################################################################################=& 9igure B Price###########################################################################################################################== 9igure ') Average Annual Investment %ith Age####################################=? 9igure '' Average Annual Investment %ith Profession#################################=@ 9igure '& Average Annual Investment %ith .ducation###################################=1 9igure '= Average Annual Investment %ith >ender#######################################=*

INTRODUCTION
1.1 INTRODUCTION

7he Indian capital mar$et is an Cemerging stoc$ mar$et# 7his implies that mar$et is in the process of transformation, gro%ing in si8e and sophistication# Several liberali8ation measures announced by the Indian government and securities mar$et %atchdog, S.BI, over the last fe% years have created freer environment# 7he capital mar$et today is sophisticated and s%ift to discount the micro and macroeconomic changes# In the last t%o decades, the pace of gro%th in capital mar$et has almost been unparalleled in the history of any nation# 7hese t%o decades have truly been the age of shares and bonds for the middle class investors in India, %here millions of them have their first e2perienced of investing in securities# 7he capital mar$et is further of t%o types 54 A) PRI,ARY ,AR*ET It is also referred to as the ne% issue mar$et since it deals %ith ne% securities i#e# %hich have not been previously traded and are offered to the public for the first time# 7he mar$et therefore derives its name from the fact that it ma$es available ne% bloc$ of securities for the public subscription# 7he stoc$ of the company that is issued to the public for the first time is called initial public offerings in the capital mar$et parlance# 7he securities issued in ne% issue mar$et D,I+E are then traded in secondary mar$et# 7here are three %ays by %hich securities can be issued in a primary mar$et5 4 initial public offer, rights issue Dfor e2isting companiesE and preferential issue# !) SECONDARY ,AR*ET It is also referred to as the stoc$ mar$et# Indian stoc$ mar$et stands among the top three stoc$ mar$ets of the %orld %ith respect to number of listed companies, mar$et capitali8ation and magnitude of participating investors# 7he level of activities in stoc$

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mar$et is measured through stoc$ indices, major ones being BS. S.,S.F and ,I97; in India#

1.1.1

INITIAL PUBLIC OFFERING

An initial public offering is a specific case of public issue6 it is the first e"uity offering by a company to the public at large# 7he shares are then listed on the stoc$ e2change to facilitate trading in them# 7hus IP! is basically company s first sale of stoc$ to the public# 7ypically an IP! involves stoc$s from young and often times, little $no%n companies# But occasionally %ell established and %ell $no%n firms do go public# 7he various reasons for a firm to go public are5 Increasing company s financial base .nhancing li"uidity Setting right the capital structure of the company Regulatory compulsions

1.1.

!ALUATION OF PUBLIC I""UE"

Investment analysts say that IP! valuation process is as much art as science# <alues are based on several factors5 issuers historical and projected financial results5 valuation of comparable companies and investment ban$er s assessment of mar$et conditions and investor s demand for ne% issues# 7here are various concepts regarding pricing of public issues5 Issue Price G it is the price at %hich e"uity shares are offered to the public# It can be priced at par, premium or discount# :ist Price G it is the mar$et price on the first day of trading after listing on stoc$ e2change#

&

9air value G it is the price %hich reflects the intrinsic value or true %orth of a share#

1.1.#

IPO PRICING $EC%ANI"$

7here are t%o methods for ma$ing initial public issue54 9i2ed Pricing +ethod 4 %here the company fi2es a price at %hich the shares %ill be offered to the public# Boo$ Building method 4 %here the company stipulates a floor price or a price band and leaves it to mar$et forces to determine the final price#

Ta%le 8 Differen"e %etween %oo9 %uil in- an Fi:e I$$ue$ Feature$ Pricing Fi:e Pri"e Pro"e$$ Price at %hich the securities are offered( allotted is $no%n in advance to the investor# -emand -emand for the securities offered is $no%n only after the closure of the issue Payment Payment if made at the time of subscription %herein refund is given after allocation# !oo9 !uil in- Pro"e$$ Price at %hich securities %ill be offered( allotted is not $no%n in advance to the investor# !nly an indicative price range is $no%n# -emand for the securities offered can be $no%n everyday as the boo$ is built# Payment only after allocation#

1.1.&

T%E PROCE"" OF BOO' BUILDING(

7he Issuer %ho is planning an IP! nominates a lead merchant ban$er as a Hboo$ runnerH#

7he Issuer specifies the number of securities to be issued and the price band for orders#

7he Issuer also appoints syndicate members %ith %hom orders can be placed by the investors#

Investors place their order %ith a syndicate member %ho inputs the orders into the .lectronic boo$H# 7his process is called HbiddingH and is similar to open auction# A Boo$ should remain open for a minimum of @ days# Bids cannot be entered less than the floor price# Bids can be revised by the bidder before the issue closes# !n the close of the boo$ building period the Hboo$ runner evaluates the bids on the basis of the evaluation criteria %hich may include 4 o Price Aggression o Investor "uality o .arliness of bids, etc#

7he boo$ runner and the company conclude the final price at %hich it is %illing to issue the stoc$ and allocation of securities#

>enerally, the number of shares is fi2ed6 the issue si8e gets fro8en based on the price per share discovered through the boo$ building process#

Allocation of securities is made to the successful bidders# Boo$ Building is a good concept and represents a capital mar$et %hich is in the process of maturing#

In case the issuer chooses to issue securities through the boo$ building route then as per S.BI >uidelines, an issuer company can issue securities in the follo%ing manner5 aE '))I of the net offer to the public through the boo$ building route# bE *@I of the net offer to the public through the boo$ building process and &@I through the fi2ed price portion# cE Under the B)I scheme, this percentage %ould be B) and ') respectively#

1.1.)

T*PE" OF IN!E"TOR"

7here are three $inds of investors in a boo$4building issue# 7he retail individual investor DRIIE, the non4institutional investor D,IIE and the Jualified Institutional Buyers DJIBsE# RII is an investor %ho applies for stoc$s for a value of not more than Rs ')),)))# Any bid e2ceeding this amount is considered in the ,II category# ,IIs are commonly referred to as high net4%orth individuals# !n the other hand JIBs are institutional investors %ho posses the e2pertise and the financial muscle to invest in the securities mar$et#

Fi-ure 8 Corporate Ima-e

1.1.+

"EBI GUIDELINE"

7he primary authority for regulating IP!Hs is the S.BI DSecurities and .2change Board of IndiaE# It issues guidelines for regulating the procedures and activities of ne% public #issues# 7hese guidelines are $no%n as -isclosure and Investor Protection D-IPE >uidelines# Under this, S.BI has laid do%n follo%ing eligibility norms for entities accessing the primary mar$et through public issues54 A company can ma$e an IP! if it meets the follo%ing re"uirements4

It has net tangible assets of at least Rs# = crores in each of the preceding = full years, of %hich not more than @)I should be in monetary assets#

It has distributable profits in at least three years as per the terms of the Companies Act#

It has a net %orth of at least Rs#' crore in three years# 7he net %orth is the aggregate value of paid4up e"uity capital and free reserves e2cluding the aggregate value of accumulated losses and deferred e2penditure not %ritten off#

In case of change of its name %ithin the last one year, at least @)I of the revenue for preceding ' year is earned by the company from the activity suggested by the ne% name#

7he issue si8e does not e2ceed @ times the pre4issue net %orth#

1.1.,

IPO GRADING

IP! grading is the grade assigned by a Credit Rating Agency registered %ith S.BI, to the initial public offering DIP!E of e"uity shares or any other security %hich may be converted into or e2changed %ith e"uity shares at a later date# 7he grade represents a relative assessment of the fundamentals of that issue in relation to the other listed e"uity securities in India# Such grading is generally assigned on a five4point point scale %ith a higher score indicating stronger fundamentals and vice versa as belo%# IP! grade '5 Poor fundamentals IP! grade &5 Belo%4average fundamentals IP! grade =5 Average fundamentals IP! grade ?5 Above4average fundamentals IP! grade @5 Strong fundamentals

1.1.-

BENEFIT" OF IPO

7a$ing a company public through an Initial Public !ffer DIP!E is a major tas$ for any entrepreneur# 7he benefits of going public through IP! are54 It allo%s companies to have greater access to the most substantial source of corporate funding# 7he companies can also return to the mar$et for additional e"uity through secondary e"uity offerings# It helps the company to institute stoc$ options for its employees and to attract more talent to their organi8ation# It attracts media attention and helps in mar$eting the products of the company# It helps to e2pand business relationships of the companies %ith their partners, suppliers, debtors as %ell as customers# It facilitates the mergers and ac"uisitions activities of the companies and provide them %ith the greater fle2ibility in raising finances# 9or many entrepreneurs and top managers of companies, the process and event of going public mar$ the culmination of years of hard %or$, public recognition of success and long4 delayed financial re%ards# >oing public gives an opportunity for their business gro%th, brand e"uity as %ell as brings some legal responsibilities for them# It involves sharing of o%nership of the company, business opportunities as %ell as the control over the companyHs future#

RESEARCH DESIGN
7he Indian capital mar$et has made significant progress in spreading e"uity culture and broad basing the financial mar$ets# ;et the capital mar$et in India has not been the subject of investment research to the e2tent of its counterpart in advanced nations# In order to have a proper insight into different aspects of the problem under study, it is desirable to revie% the studies conducted in the past#

1.
1. .1 IPO $ar/et

LITREATURE RE!IE.

Initial Public !ffering DIP!E is the first sale of stoc$ by a private company to the public 1S#antaraman 0//;E# Initial Public !ffering DIP!E in India means the selling of the shares of a company, for the first time, to the public in the countryHs capital mar$ets# 7his is done by giving to the public, shares that are either o%ned by the promoters of the company or by issuing ne% shares# 7here are mainly t%o reasons %hy a company comes out %ith an IP!5 either it can do so in the mar$et because it is in a good position or it is doing so because it needs to raise funds from the mar$et# 7he IP! provides a fresh source of capital that is critical to the gro%th of the firm and provides the founder and other shareholders such as venture capitalists a l i " u i d m a r $ e t for t h e i r shares# 9rom a n i n s t i t u t i o n a l i n v e s t o r s perspective, the IP! provides an opportunity to share in the re%ards of the gro%th of the firm 1<ana9iramanan= 0//>3# 7hus it is important to understand the objectives of the firms decision so that an investor is able to ma$e the right choice# DRo#ine$#= 0//.3) Ritter 18??@3= in his article CInitial Public !fferingsK surveys the mar$et for Initial Public !fferings# It discusses the process of going public, valuation of IP!s, boo$ building, price stabili8ation and costs and benefits of going public# It concludes that companies going public, especially young companies face a mar$et %hich is subject to sharp s%ings in valuations# Pricing deals can be difficult, even in stable mar$et conditions, because insiders presumably have more information than the potential outside investors#

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!reale' 18?;03 in his boo$ titled CSecurity Prices in Competitive +ar$etK evaluated the effect of dividend, P(. multiple, retained earnings, debt, splits and stoc$ dividends, mergers and ac"uisitions and listings on stoc$ price movements# It concluded that though dividend, P(. and retained earnings all have positive effect on share prices# Studies revealed that dividend are valued four times as highly as retained earnings# Regarding debt, it says reasonable amount of corporate borro%ings have been sho%n to increase the value of common stoc$ at least to the e2tent of reduction in corporate ta2 payments# It further says that events li$e splits and stoc$ dividends, mergers and ac"uisitions and listing cannot bring about a permanent and %orth%hile improvement in share price# C#an ra 18?;>3 in his boo$ named C<aluation of ."uity Shares in IndiaK conducted a study to assess the effect of certain economic factors on share prices# In e2amining the determinants of share prices, he assumed five independent variables i#e# Return, >ro%th, Ris$, :everage and Si8e# Share price %as measured as arithmetic average of the high and lo% prices over the financial year of the company# Chandra found significant relationship bet%een share price and independent variables li$e dividend and si8e# >ro%th has positive but %ea$ influence %hereas ris$ and leverage have negligible influence on share prices#

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1. .

IPO Pri0ing

-iscovery of price in an IP! is both a science and an art DShailaja, Singh &))AE#7here are t%o methods for ma$ing initial public issue5 9i2ed Pricing +ethod 4 %here the company fi2es a price at %hich the shares %ill be offered to the public and the Boo$ Building method 4 It is a mechanism %here, during the period for %hich the boo$ for the IP! is open, bids are collected from investors at various prices, %hich are above or e"ual to the floor price 1!ala= 0//A3) Boo$ building is a comparatively ne% concept for the Indian investors as compared to their peers in the US or the U/, %here it is a very common practice &)))# !nce the issue period is over and the boo$ has been built, the BR:+ along %ith the issuer arrives at a cut4off price# 7he cut4off price is the price discovered by the mar$et# It is the price at %hich the shares are issued to the investors# 7he most apparent reason for using boo$ building process could be the price discovery mechanism, %hich is inherent in this process# Since institutional and retail investors have the option to bid for the e"uity, at or above a particular floor price, decided by the company in consultation %ith the merchant ban$ers, it helps the company reali8e the true value for its e"uity# It also gives the company an insight into its credibility factor amongst the investors# In its recent amendments, S.BI has reduced the allocation of e"uity to Jualified Institutional Buyers DJIBsE, %hich includes financial Institutions, ban$s and the ne%ly added insurance companies, and increased the share of retail investors# Another positive step ta$en by S.BI is the setting up of a price band, %hich %ill assist the retail participants in placing their bids# Also change made by S.BI in the rules governing primary mar$et issues is that institutional bidders cannot %ithdra% their bids## Ritter 18??@3, in his article CInitial Public !fferingsK surveys the mar$et for Initial Public !fferings# It discusses the process of going public, valuation of IP!s, boo$ building, price stabili8ation and costs and benefits of going public# It concludes that companies going public, especially young companies face a mar$et %hich is subject to sharp s%ings in valuations# Pricing deals can be difficult, even in stable mar$et conditions, because insiders presumably have more information than the potential outside investors#

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!er-ulan

18??23 in his paper CPricing of IP! s5 A Simple +odelK presented a simple

model for pricing of IP!s in %hich pivotal agent in pricing decision is under%riter# In this paper, under%riter s decision problem is e2pressed in the form of simple loss function# 7he optimal offer price is determined by the penalty that under%riter is facing as a conse"uence of pricing mista$e# It says that the pricing error i#e# under pricing or over pricing, %ill al%ays be costly for under%riters in terms of loss of reputation and cost %ill depend on the si8e of pricing error# 9inally the results on corporate static analysis sho% that under pricing is e2pected to increase %ith an increasing si8e in offering, increase in uncertainty concerning demand, decrease in price elasticity of demand, and increase in e2pected cost due to overpricing or decrease in e2pected cost due to under pricing# !a"#mann 10//03 in his research CPricing of IP! s %hen IP! si8e and Investment choice are .ndogenousK said that cash constrained entrepreneur is faced %ith a dilemma of cutting bac$ on IP! si8e to retain a greater portion of the valuable e"uity or forego the profitable investment opportunities# 7hey had developed a model of IP! pricing %hich indigeni8es the si8e of IP! and analy8e the firm s investment decision jointly %ith IP! pricing decision# 7he model predicts that under pricing of IP! %ill be used as signal by the firms that go public to finance highly profitable investment# 7he model also proves that IP! firms that underpriced ."uity over debt invest in the activities for %hich R!I is highly dependent on firm s "uality and under invest in activities for %hich R!I is homogeneous across the firms# :astly, the model suggests that entrepreneur %ho issues the undervalued e"uity, commit proceeds from e"uity offering to particular investment strategy prior to the IP!# A perusal of revie% of literature brings home the fact that a good number of studies have been done on the behavior of share prices in secondary mar$et# But the same is not true for about the pricing of IP!s# In the light of the findings of the studies revie%ed, nothing can be said about pricing of shares in IP!s and the perception of investors about IP! s# 7hus there is a need to ma$e an effort to identify the various important factors that affect pricing of IP!s and ho% the investors perceive them# 7he present study is a step for%ard in this direction#

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1.#

NEED

FOR T%E "TUD*

7he follo%ing factors have led to the need for conducting this research5 7he investors normally hold financial assets for cash flo% that they generate in the future# 7he valuation of bonds and preference shares is straightfor%ard as the returns are constant and certain# But such is not the case %ith e"uity valuation# 7hus fi2ing of an issue price is an important tas$ %hich cannot be accomplished by mere guess%or$# 7he %orth of e"uity has to be "uantified by ta$ing into consideration various intangible factors pertaining to the company# After the abolition of CController of Capital IssuesK it has been the era of free pricing# But this has created some problems of undue overpricing by the companies# Against this bac$ground of faulty valuation of the IP! the present research needs to be underta$en to identify the various factors that go into IP! pricing# Primary mar$ets are more ris$y than secondary mar$ets as there is no previous mar$et, no stoc$ price benchmar$ and thus conse"uently more uncertainty In case of an IP!, %hat normally happens is that a company comes out %ith an IP!, it is heavily subscribed and %ithin a month or even fe% hours of listing, there are astonishing gains# Such a potential for plutocracy and penury ma$e capital mar$et highly re%arding, highly ris$y and thoroughly irresistible for investors# As most of the investors have no clue to the intricacies of primary mar$et, it is essential to identify and recommend various parameters for the guidance of the investor# In the present scenario, %ith the number of frauds and scams being committed such as falsification of accounting statements, it is essential for the investors to have some $no%ledge about the various aspects of IP! issue#

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. "TUD*

OB1ECTI!E OF T%E

7he research objective can be broadly divided into the follo%ing5 '# &# 7o e2amine the investors perception about IP! s 7o identify various determinants of issue price of ne% corporate securities#

1.&
1.&.1 $easure2ent of t3e !ariables

RE"EARC% $ET%ODOLOG*

In order to determine the relative influence there is al%ays a dependent variable and an independent variable# 8) DEPENDENT VARIA!(ES

Issue price 4 the price at %hich the shares are offered to the public# Issue price to par value 4 ratio of issue price and par value#

0)

INDEPENDENT VARIA!(ES

Weighted Average Earning Per Share G 7he e"uity o%ners are the sole claimants to the net earnings of the corporation after ma$ing payment of dividend to the preference shareholders# 7he .PS is one of the best measures of the profitability as it helps in projecting the value of security %hich depends upon the e2pected future benefits and ris$ associated %ith it# 0igher the magnitude of e2pected future benefits, higher %ill be the value of security# 7he %eighted average .PS of three years %ill be regressed %ith the issue price# 7he %eighted average of .PS is ta$en as it gives normal earning capacity of the firm ta$ing into consideration the boom and the recession periods# '@

Price Earning Multiple (P/E) G 7he P(. e2presses the relationship bet%een the mar$et price of the company s shares and its earning per share# 7he ratio is a conventional measure of the stoc$ values because it gives an indication of stoc$ price against the earning po%er of the stoc$# P(. ratio enables an investor to ma$e appro2imate calculation of time re"uired to cover its investment in company s share# 7herefore the companies %ith high P(. generally command high premium on issue price# It is ta$en for the year preceding the year of the IP!#

Net Asset Value (NAV) G ,A< is the ratio of net assets to the shares outstanding# ,A< per share sho%s the net investment per share made in business by its shareholders# 0igh ,A< depicts high profits and high retained earnings in the past# ,A< is directly related to issue price i#e# increased ,A< gives sound justification to charge high issue price# It is considered for the year t4' for the purpose of the study#

Weighted Average Return on Net worth (WAR NW) G Return on net %orth defines the relationship bet%een the net profits and proprietor s funds# It basically indicates ho% %ell the resources provided to the firm by its shareholders are being used# R!,L is e2pected to affect issue price in a positive %ay# It is calculated for three years preceding the year of issue#

Lhere shareholders investment M e"uity share capital N preference share capitalN reserves and surplus4 accumulated losses Dif anyE#

'1

Si!e G si8e of the firm plays an important role in investment criterion# :arge companies generally offer better investment opportunities than smaller ones# 7hese companies by virtue of larger production occupy stronger and dominant position in the stoc$ mar$ets and thus can command high premium# 7he si8e of the firm can be measured in many %ays vi8# turnover, paid up capital, capital employed, net sales, total assets etc# in the present study si8e is measured %ith the help of sales and total fi2ed assets# 7his is so because sales and boo$ value of fi2ed assets reflects the earning capacity of the firm to the investors# 7he log of average of three years %ill be considered for the purpose of the study#

%here SMaverage of sales of three years and %here A M average of assets of three years "rowth G :iterature on e"uity valuation confirms that gro%th is a pre4 re"uisite for long run survival of the firm in an uncertain and constantly changing environment# 7he gro%ing companies provide e2cellent opportunities to the investors# Specifically, in the case of young companies most of their value comes from gro%th opportunities# In a gro%ing company, an increase in profits leads to continuous rise in rate of dividend in future and fre"uent bonus issue to investors# 7hus an investor may prefer to subscribe to an IP! of a gro%ing concern# :i$e in most empirical studies, gro%th is measured %ith the help of sales and fi2ed assets#

Lhere

M sales in the year &))A4)B,

M sales in the year &))*4)A

Lhere

M assets in the year &))A4)B,

M assets in the year &))*4)A

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#everage (#) G 9inancial leverage is an important tool of financial planning because it magnifies the residual profits that accrue to the e"uity shareholders in the favorable situation# It refers to the mi2 of debt and e"uity funds used to finance the firm s activities# A mi2 of debt e"uity mi2 helps a company to charge a higher price# But if debt increases thereby adversely affecting issue price# 7hough different measures of leverage have been considered by the researchers, but in the present study it is measured as5

Lhere DL M deferred liabilities i#e# long term loans N debt, PC M preference share capital, Equity M ."uity capital N shareholders reserves# A) (IST PRICE

It is the mar$et price of the share on the first day of trading after getting listed# 2) FAIR VA(UE

0ere is no one set formula to calculate the fair value of a share# In the present study the follo%ing formula has been used5

1.&.

"a24le(

Sampling is an effective step in collection of primary data and has a great influence on a "uality of results# 7he sampling plan includes the population, sample si8e and sampling design %hich tell us about the various data collection methods# 9or the sa$e of simplicity and the type of sample %hich forms part of the study, convenient sampling method %ill be 'A

used for the collection procedure#

1.&.#

Data Colle0tion

(eBel I& Primar' Data& 7o gauge the investor s perception, a "uestionnaire %as administered to the investors %ho have invested in IP!s across -elhi(,CR# As mentioned previously the sampling for this study is based on convenience and judgmental techni"ues# 7he total sample si8e %as *)# 7he sample si8e calculation %as based on the number of investors %ho have invested in IP! s at any time in the past# -ue to the limited time available and the restriction regarding the type of investors, a relatively smaller sample si8e %as chosen. (eBel II& Se"on ar' Data& !nly secondary sources of data %ill be used to collect information# It refers to a data that is already available and does not need to be collected %ith the help of a "uestionnaire# It is collected through published data that is already available in boo$s, maga8ines, reports, publications# -ata % ould also be collected from prospectus(offer documents, annual published reports, interim financial reports, %ebsites of the companies under the study, ne%spapers, maga8ines, journals etc# 7he various companies are5 OSL .nergy :td#, >odrej Properties :td#, - B Corp :td#, Infinite Computer Solutions India :td#, Oubilant 9ood%or$s :td#, A"ua :ogistics :td#, 7hangamayil Oe%ellery :td#, Syncom 0ealthcare :td##,

1.&.&

Data Anal5sis $et3o6s

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7he data collected by means of the survey "uestionnaire %as coded and analy8ed#

ANALYSIS AND INTERPRETATION LEVEL I

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1.)

DE$OGRAP%IC PROFILE OF T%E RE"PONDENT"(

1.).1

GENDER(

7he respondents consisted of both males and females# !ut of the total of *) respondents, ?? %ere male that comprised of 1&#B percent of the total population and the rest &1 %ere females %hich %as =*#' percent of the total sample#
Ta%le 0 Demo-rap#i"$& Gen er Ta%le

Gen er +ale 9emale 7otal

FreCuen"' ?? &1 *)

Per"ent 1&#B =*#' '))

1.).

AGE(

7he Age %as grouped into three categories# 7he ma2imum respondents i#e# ?1 investors lie in the age group of '@ to =) years comprising of 1@#* percent of the total population# Besides that, '? people lei in the age group of =' to ?@ years and the rest ') lie in the age group of ?1 to 1) years forming '?#= percent of the total population#
Ta%le A Demo-rap#i"$& A-e Ta%le

A-e '@4 =)

FreCuen"' ?1 &'

Per"ent 1@#*

='4?@ ?141) 7otal

'? ') *)

&)#) '?#= '))

1.).# 1.).& PROFE""ION(

In terms of profession, the majority of the sample comprises of professionals %ho form =* percent of the total population# 7his is follo%ed by >overnment .mployees %ho form &?#= percent of the sample# 7he rest of the respondents are students and self employed personnel#
Ta%le 2 Demo-rap#i"$& Profe$$ion Ta%le

Profe$$ion Student >ovt# .mployee Professional Self employed 7otal

FreCuen"' '= '* &1 '? *)

Per"ent 'A#1 &?#= =*#' &) '))

&&

1.).)

EDUCATION(

Investors are generally deemed to be %ell educated people# 7his holds true for the present study as %ell# 7he majority of the sample consists of respondents %ho hold a Post graduate degree# 7hey form 1?#= percent of the total population# 7his is follo%ed by >raduates %ho form &A#1 percent of the sample#
Ta%le > Demo-rap#i"$& E u"ation Ta%le

E u"ation +atriculation >raduation Post >raduation -iploma 7otal

FreCuen"' ? &) ?@ ' *)

Per"ent @#* &A#1 1?#= '#? '))

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1.+
1.+.1

DATA ANAL*"I"

FACTOR" AFFECTING IPO PERCEPTION

7he follo%ing eight 9igures depict the various fre"uencies for the eight factors that affect the consumer s perception of IP! s# 7he respondents %ere as$ed their perception about these factors %ith options ranging from strongly disagree to strongly agree# 7he follo%ing bar charts efficiently summari8e the outcome of the survey# It can be seen that the investors believe that only five out of these eight variables have a considerable impact on their decision of investing in an IP!# 7he other three factors do not have a major impact on the investment decision of the investor# 7he five factors that influence the investment decision of the investors are5

Corporate Image Present +ar$et Conditions Price &?

Performance of Previous IP!s Si8e

8) Corporate Ima-e&
7he follo%ing chart depicts the Investor s perception about the corporate image of the company# It can be seen that ?B out of *) respondents believe that the corporate image of the company is an important criteria %hen deciding over investing in a company s IP!#

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corporate image

8.6 17.1 15.7

strongly disagree disagree neither agree nor disagree agree strongly agree

31.4 27.1

Fi-ure 0 Corprorate Ima-e

0) ,em%er$
7he chart depicts the influence that the members of the company i#e# the Board of -irectors have on the decision of the investor to invest in that particular company# 7he chart sho%s that the members do not have much influence on the decision of the investor# 7he majority of the sample either disagrees or do not have any opinion about this factor#

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members of management

11.4

10

24. 3

24.3

strongly disagree disagree neither agree nor disagree agree strongly agree

30

Fi-ure A ,em%er$

A) Pre$ent ,ar9et Con ition$&

7he present mar$et conditions refer to the e2isting situation of the stoc$ mar$et and the economy as a %hole# 7he follo%ing chart sho%s that the sample agrees that the present mar$et conditions play an important role in the decision of the investor# Almost 1'#? percent of the sample agrees that present mar$et conditions are important %hen deciding over the investment in an IP!# &*

present market conditions

5.7 24.3

8.6

strongly disagree disagree neither agree nor disagree agree strongly agree 24.3

3 7.1

Fi-ure 2 Pre$ent ,ar9et Con ition$

2) Performan"e of PreBiou$ IPOD$&

7he performance of previous IP! s seem to have a considerable impact on the investor s decision# 7he follo%ing chart sho%s that a majority of the sample agrees that they $eep in mind the performance of previous IP!s that have come out in the recent past before investing in a ne% IP!# Almost @A#@ percent of the population agreed upon the importance of this factor# &A

performance of previous IPOs

17.1

5.7

8.6

strongly disagree disagree neither agree nor disagree agree strongly agree 27.1

41.4

Fi-ure > Performan"e of preBiou$ IPO

>) SiEe&
7he follo%ing chart sho%s the investor s vie% regarding the si8e of the IP! issue and its impact on their investment decision# It can be seen that a major portion of the population i#e# around @) out of the *) respondents agree that si8e does play a major role in IP! investment#

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issue size

8.6

12.9

15.7 42. 9 20

strongly disagree disagree neither agree nor disagree agree strongly agree

Fi-ure . SiEe

.) IPO B$ Se"on ar'&

In IP! versus the Secondary mar$et %e are trying to gauge the preference of the investor bet%een these t%o mar$ets# It can be seen that a majority of the respondents either do not have any preference or they mainly disagree# 7his means that they prefer to invest in secondary mar$ets rather than in IP! s#

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prefer to invest in IPO over secondary market

11.4

1.4 25.7

strongly disagree disagree neither agree nor disagree agree strongly agree

28.6

32.9

Fi-ure ; IPO Ber$u$ Se"on ar' ,ar9et

;) O%+e"tiBe&
In measuring the perception of the investor s on the objective of raising an IP! it can be clearly seen that the majority of the sample agrees that they do $eep this factor in mind# 7his means that the investor is interested in $no%ing the future plans of the company and ho% is it going to use the investor s money and generate returns# ='

objective of raising IPO

15.7

8.6 15.7

strongly disagree disagree neither agree nor disagree agree strongly agree

37.1

22.9

Fi-ure @ O%+e"tiBe

@) Pri"e&
7he follo%ing chart sho%s that the price of the IP! has a considerable impact on the decision of the investor# 1) percent of the sample agrees that the price of the public issue helps them determine %hether they %ant to invest in the public issue or not#

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price of IPO

12.9

10

15.7

strongly disagree disagree neither agree nor disagree agree strongly agree

47.1

14.3

Fi-ure ? Pri"e

1.+.

CO$PARITI!E RELATION"%IP ON T%E BA"I" OF DATA COLLECTION

==

7he follo%ing chart sho%s the relation$#ip of t#e aBera-e annual inBe$tment wit# t#e a-e) It can be clearly seen that the ma2imum number of investors lie in the category of '@4 =) years# 7his is because the youngsters have 8eal to earn more and they tend to be more speculative in investing# 0o%ever, since their disposable income is less and they generally have financial responsibilities they tend to invest in lesser investment brac$ets# Le also see that respondents lying in the age group of ?)41) years invest in higher investment brac$ets because most of them are reinvesting the investments they had made earlier or have higher disposable income at hand#

Fi-ure 8/ ABera-e Annual InBe$tment wit# A-e

7he follo%ing chart sho%s the relation$#ip of aBera-e annual inBe$tment wit# t#e profe$$ion of t#e re$pon ent$) It can be seen that ma2imum investment is made by professionals as they are generally more educated and have a limited salary %hich =?

motivates them for higher returns# Since they have a limited disposable income they generally invest in lo%er amounts# It can also be seen that the people %ho invest in higher amounts are businessmen or self employed people# 7his is because they have higher earnings and therefore more disposable income# Student investors are generally those %ho are ne% in the mar$et and %illing to try out their luc$# Since they do not have an income of their o%n they generally use their parents money and therefore can invest in lo%er investment brac$ets only# >overnment employees also include retired army personnel %ho have large ancient properties and have huge incomes from pension and other sources# 0ence, they are %illing to invest in larger amounts as sho%n by the chart#

Fi-ure 88 ABera-e Annual InBe$tment wit# Profe$$ion

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7he follo%ing chart sho%s a comparative relation$#ip %etween t#e e u"ation an

t#e

aBera-e annual inBe$tment ma e %' t#e re$pon ent$) 7he chart sho%s that people %ho invest the most in all levels of investment brac$et are post graduates follo%ed by graduates# 7his can be attributed to the fact that since IP! issue is completely ne% in the mar$et so only %ell educated people %ho have $no%ledge about the company and its %or$ing plus the $no%ledge about the stoc$ mar$ets can invest in these# 7he rest of the investors %ho invest in stoc$ mar$ets generally do so on the basis of mar$et trends or their intuition#

Fi-ure 80 ABera-e Annual InBe$tment wit# E u"ation

=1

7he "omparatiBe relation$#ip of Gen er wit# aBera-e annual inBe$tment has been summari8ed in the follo%ing graph# It can be seen that males generally tend to invest in higher amounts as they are more speculative# Lomen, on the other hand, invest in moderate amounts# 7his can also be due to the fact that %omen generally are homema$ers or even if they earn do not have large amounts to spare# It can also be seen that a large number of men invest in lo%er investment brac$ets6 this is because they have a lot of financial responsibilities and can only spare a small amount for speculative purposes

Fi-ure 8A ABera-e Annual InBe$tment wit# Gen er

=*

7he follo%ing relation$#ip of t#e aBera-e annual inBe$tment wit# t#e "orporate ima-e sho%s that investors investing in the brac$et of ')))) to @)))) are the people %ho have the ma2imum impact of corporate image on their investment decision# && out of *) respondents believe that corporate image of a company is an important criteria for them# 7he people in the investment brac$et of @)))) to '))))) also agree to this#

Ta%le . ABera-e Annual InBe$tment wit# Corporate Ima-e

Avg annual Investment -isagree ,either disagree or agree '))))4@)))) @))))4'))))) '))))) P above 7otal 1 '@ ?) B *) ) @ ' A 1 ' && '' * 1 & ' =B &? ') Agree Strongly agree 7otal

=A

7he relation$#ip of pre$ent mar9et "on ition$ wit# t#e aBera-e inBe$tment sho%s that investors investing in the brac$et of ')))) to '))))) lay great emphasis on the present mar$et conditions %hile deciding on investing in a ne% public issue# 0o%ever, investors investing in large amounts do not pay much regard to this aspect %hile investing# Around 1& people agreed that they consider the present mar$et conditions before ma$ing an investment in a ne% public issue#

Avg annual Investment

-isagree

,either disagree or agree

Agree

Strongly agree

7otal

'))))4@)))) @))))4'))))) '))))) P above 7otal

' & )

= & )

&& '@ @

') @ @

=1 &? ')

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*)

=B

7he $iEe of an IPO w#en "ompare wit# t#e aBera-e annual inBe$tment made by the investors sho%s that all the respondents investing in all income brac$ets give a considerable importance to this aspect# ?? respondents in total agreed on the importance of si8e being a criterion of investment %hile '' people %ere indifferent about it# 7hus, it can be safely concluded that si8e does play an important role in influencing an investor#

Avg annual Investment

Strongly -isagree

-isagree

,either disagree or agree

Agree

Strongly agree

7otal

'))))4@)))) @))))4 '))))) '))))) P above 7otal

= '

= &

= A

&1 ''

' &

=1 &?

&

'

')

''

??

*)

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T#e relation$#ip of aBera-e annual inBe$tment wit# t#e performan"e of preBiou$ IPOD$ sho%s that a large number of people base their decision on the performance of previous public issues in the mar$et especially the ones that have come out in the recent past# Investors %ho do not have much $no%ledge about the company and the financial ratios generally consider such parameters %hile investing in the mar$et# It can be seen that around @* people agree that they see the performance of previous IP! s before investing in a ne% one#

Avg annual Investment

-isagree

,either disagree or agree

Agree

Strongly agree

7otal

'))))4@)))) @))))4'))))) '))))) P above

' ) &

= * )

&A '' ?

? 1 ?

=1 &? ')

?'

7otal

')

?=

'?

*)

7he follo%ing chart sho%s the Per"eption of t#e people w#ile mea$urin- t#e performan"e of t#e "ompan' coming out %ith a public issue# It sho%s a comparative relationship bet%een the investment made by the investors and their criteria for judging the performance of the company# It can be observed that the three categories of investors on the basis of investment amounts, give major emphasis on the gro%th of the firm# It needs to be noted that the investors investing the highest amounts of money usually base their decisions on the gro%th and profits, %hile those in the lo%est investment brac$et base their decisions on gro%th and do not give major emphasis on the number of years,, the company has been in business %ith, %hile it being a major parameter for middle investment brac$et#

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LI$ITATION" OF T%E "TUD*

Lhile conducting the study certain hurdles ( obstacles %ere encountered# 7hese %ere due to the limitations of the study %hich are as follo%s5 Since certain parameters had to be used to select the sample si8e from the desired population, it led to a selection of a very small sample %hich in turn %as not totally an accurate representative of the given population# Stoc$ mar$ets are highly volatile in nature and thus they get affected even by the minutest of happenings# 7herefore in the case of further studies it is "uite a possibility that outcome might not be the same as the original study# Lhile applying sampling techni"ue, convenience sampling %as used to select the sample from the given population# A major dra%bac$ of convenience sampling is ?=

that the results in this case are not generali8ed hence they cannot be duplicated in case the study is replicated in the future#

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CHAPTER

FINDINGS

AND

SUGGESTIONS
).1 FINDING"(7

After the findings %ere obtained, they %ere used to reach the conclusions of the study# 7he various conclusions are as follo%s5 In the correlation analysis only si8e measured by sales %as found to be the dominant variable both in the case of issue price and the ratio of issue price to par value# 7he companies that have been studied are relatively ne% and thus do not possess any concrete profitability trac$ record and neither do they have bul$ of assets# 7hus the net asset value does not contribute to the issue price and only si8e of the sales is the primary determinant of an initial public offering# Lhen investing in IP!s companies generally consider five main factors i#e the corporate image, si8e, performance of previous IP!s, price and present mar$et conditions# +ales generally have a tendency to invest in smaller amounts %hereas females are li$ely to me more speculative# People in the age group of belo% =) invest in small and medium amounts Dbelo% ')))))E and people above the age of ?@ tend to invest in higher amounts# It can be observed that the three categories of investors on the basis of investment amounts, give major emphasis on the gro%th of the firm# It needs to be noted that the investors investing the highest amounts of money usually base their decisions on the gro%th and profits, %hile those in the lo%est investment brac$et base their decisions on gro%th and do not give major emphasis on the number of years, the company has been in business %ith, %hile it being a major parameter for middle investment brac$et# It can also be concluded that most of the investments is done by investors having either graduate or post graduate "ualifications# ?@

).

$ANAGERIAL RECCO$ENDATION"(

0istory of Indian capital mar$et is replete %ith incidents of frauds committed by unscrupulous issuers and fly by night operators# 7hese issuers play %ith the sentiments of investors and raise substantial sums of money %ithout justifiable investment proposals# 7hese issuers, %hen unable to fulfil promises made to investors elope in oblivion, leaving investors high and dry# Investors in this %orld must ta$e care of their o%n interests# 9or the guidance of the investors some of the suggestions %hich emerge from the study are5 7he investors should loo$ into the variables %hich ma$e a company fundamentally strong before ta$ing any concrete decisions# It %as also observed during the course of the study that merchant ban$ers and accountants possess an art and tendency of manipulating accounting figures and present inflated results# Investors should be cautious and should see that these ratios are calculated on the basis of correct data# 7he investors are advised not to ta$e figures at full value# !ften the companies paint a rosy picture of their future earnings at the time of ma$ing public issues# 7he investors should not be s%ayed a%ay by these forecasts# A degree of reservation and conservatism is al%ays good at the time of investment in IP! s especially of ne% companies# An investor should not have herd mentality and should invest into IP! only %hen he is satisfied %ith %or$ing and financial strength of the company# 0e should also loo$ into "ualitative factors li$e promoters strength, future prospects of the company, ris$ factors and industry outloo$ before subscribing to an IP!# 7he companies coming out %ith a public issue should strive to achieve a good corporate image for their company as it is one of the important criteria for an investor %hile deciding on investing in an IP!# 7he present mar$et conditions also have considerable impact on investors so the timing of coming out %ith a public issue should also be evaluated carefully# 7he gro%th of the company is one of the most important judging criteria for a company s performance6 therefore the company should ma$e sure it projects a good gro%th rate before coming out %ith a public issue#

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).#
India#

"COPE FOR FURT%ER RE"EARC%(7

7he present study concentrated on internal factors affecting valuation of e"uity issues in

9actors e2ternal to the company %ere $ept out of the purvie% of the study# 9urther research can be conducted on e2ternal and "ualitative factors affecting the issue price#

-etailed study is also re"uired %hich should loo$ into reasons of under pricing of IP! s in India#

Present study %as focused on short term performance i#e# listing performance# Another Study is needed to gauge long term performance of IP! s in India#

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BIBILOGRAPHY
'# Adhi$ari, Anand# D&))1E C7he pre4 IP! pricing partyK Oournal of Ban$ing and 9inance, B, ,o# &, pp# &B*G='@ &# Berguland D'BB?E CPricing of IP!s5 A Simple +odelK Research Paper, Indra >andhi Institute of -evelopment ResearchDI>-IRE Bombay =# Bhagat Sanjai , Rangan Srinivasan D&))?EK-eterminants !f IP! <aluationK Oournal of 9inance, @@ ?# http5((%%%#sebi#gov#in

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APPENDIX
-ear Respondent, As a part of a Research Project being carried at Cordia College Sanghol concerned %ith the Investor Perception on IP! s, I %ould li$e to re"uest you to contribute by ta$ing a fe% minutes to ans%er the follo%ing "uestions in the manner described# ;our valuable inputs %ould be appreciated# I than$ you for cooperating.

Please ans%er the follo%ing "uestions by tic$ing on the appropriate option# '# >ender aE +ale bE 9emale &# Age aE '@4=) yrs bE ='4?@ yrs cE ?141) yrs dE 1) and above

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=# Oob( Profession aE Student bE >ovt# .mployee cE Professional dE Business( Self .mployed ?# .ducation aE +atriculation bE >raduation cE Post4 >raduation dE Professional -iploma

@# 0o% much on an average do you invest in shares annuallyQ aE Rs#'))))4Rs#@)))) bE Rs#@))))4Rs#'))))) cE Above Rs#'))))) 1# 0o% do you chec$ the performance of the companyQ aE ;ears in business bE Si8e cE >ro%th rate dE +ar$et share eE Profits *# Lhat $ind of industry(sector %ould you li$e to invest inQ aE !il( .nergy Sector bE 9+C> cE 7elecom dE I7 eE !thers

@)

A# 7he corporate image of the company has an impact on your investment decision aE Strongly -isagree bE -isagree cE ,either agree nor disagree dE Agree eE Strongly Agree B# 7he si8e of the issue has an impact on your investment decision aE Strongly -isagree bE -isagree cE ,either agree nor disagree dE Agree eE Stronly Agree

')# 7he members of the +anagement have an impact on your investment decision aE Strongly -isagree bE cE dE -isagree ,either -isagree nor Agree Agree

eE Stronly Agree ''# 7he price of the IP! has an impact on your investment decision aE Strongly -isagree bE -isagree cE ,either -isagree nor Agree dE Agree eE Strongly Agree

'&# 7he objective of raising the IP! has an impact on your investment decision aE bE Strongly -isagree -isagree @'

cE dE eE

,either agree nnor disagree Agree Strongly Agree

'=# ;ou prefer to invest in IP! s over secondary mar$et aE bE cE dE eE Strongly -isagree -isagree ,either agree nor disagree Agree Strongly Agree

'?# 7he present mar$et conditions have an impact on your investment decision aE Strongly -isagree bE -isagree cE ,either agree nor disagree dE Agree eE Strongly Agree '@# 7he performance of previous IP!s has an impact on your investment decision aE Strongly -isagree bE -isagree cE ,either agree nor disagree dE Agree eE Strongly Agree

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