The Analysis of the Initial and Post Issue Performance of Initial Public Offerings (IPOs) in Indian Stock Market ar nh,ukfyfll vkwiq nh bfuf'k;y,.m ikslv b';q ijiqksjesal vkwiq bfuf'k;y ifcyd vkwiqfjaxl (vkbz-ih-vks-) bu bf.m;u LVkWd ekdszv el THESIS Submitted to Kumaun University, Nainital Es t For the award of the Degree of DOCTOR OF PHILOSOPHY (Ph.D.) In Commerce Under the supervision of: Research Scholar: Dr. B.D. Kavidayal Ajay Kumar Chauhan Professor Department of Commerce DSB Campus, Kumaun University Nainital, Uttrakhand
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PREFACE Indian capital market has witnessed a drastic development as a result of economic liberalisation in the country since 1991. This includes abolishing the regulated regime under the Controller of Capital Issues (CCI) and establishing the Securities and Exchange Board of India (SEBI) as the market monitor in 1992. The technological advancements in the stock market, improved trading process, strict regulatory controls, enlarged investor base has brought a new environment of stock investment in India, likely to develop in the future also. Investors perceive Indian capital market, whether local or global, as a new investment opportunity to earn high returns. The research statistics have proven that in the Indian financial markets, equity instruments provide higher returns in long period as compared to other traditional forms of investments such as fixed deposits and gold etc. Thus there has been a continuous increase in the tendency of investors to make investments in equity by taking more risk in order to earn superior returns from the stock market. Capital market is considered as the best opportunity to fulfill the dreams of retail investors. As the Indian economy is considered as one of the highest developing economy in the world, the investors expect the good returns in view of that. The funds from different class of investors including Foreign Institutional Investors, qualified institutional investors and retail investors is expected to increase in the future in the Indian stock market. Along with the developments in the secondary market, the primary market has also shown the tremendous improvement in recent years. Initial public offering (IPO), also referred to simply as a "public offering", going public or "flotation" is when a company issues equity shares to the public for the first time. They 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. For the individual investor, although it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company, yet they are very popular among the investors. In last few years a large number of IPOs have come in the market and have been successful in attracting the investor s attention and funds. The history of IPO under pricing in Indian stock market made IPO investment at the time of issue relatively safer for the investors also the companies perceive it as a reasonably reliable source of raising of [4]
funds in a scenario of highly volatile interest rates in the economy. At the end, the both entities are seems to be in the win-win position. This study is an effort to analyze the initial returns provided by Initial Public Offerings (IPO s) over and above the benchmark index S & P CNX Nifty after the issue on the listing day as well as the performance of IPO s in terms of the long term returns up to the period of one to five years after the listing of the issue using event study methodology and to identify the different factors that explains the return behavior of IPOs in different time periods of the emerging Indian economy. The study includes the IPO of the companies, which offer public issue as the Initial Public Offerings (IPOs) during the period Jan 2000 to Dec 2010 through National stock exchange (NSE). The data used for the study is secondary in nature and collected from the CMIE database PROWESS and the official website of National stock exchange. The analysis is done using the software SPSS and MS Excel. It is found that the frequency of IPOs is high in bullish period i.e. most of the companies prefer to come with IPOs when the market sentiments are good. The average age of the firm issuing IPOs is found to be 15 years. The most of the IPOs are from the private companies which belong to the manufacturing and services industries. The average return provided by the IPOs on the listing day is 21.54 percent and the cumulative average abnormal return (CAAR) of the IPOs is found to be 28.01 percent. It is also found that the returns on the listing day as well as abnormal returns on the application funds are positive and are 2.07 percent and 4.20 percent respectively. The weighted average return on the invested capital (application money) on the listing day is found to be the 4.46 percent. The results in the study support the anomalies of underpricing of IPOs in short run in Indian stock market. Applying the multiple regressions model it is found that the returns of the IPO on the listing are highly influenced by the subscription and the behavior of the Index during the same period and are not influenced by the factors such as promoter s holding, age, issue size and the time delay. The results of the long term performance (without adjusting the market returns) indicate that the IPOs gives negative returns in the next four years after the listing. If an investor buys the stocks on the listing day he/she has to hold for many years (at least five) to make good returns. Abnormal returns are calculated after adjusting the market returns in the returns provided by the IPOs after the listing. The results indicates that the abnormal returns provided by 259 IPOs after [5]
one year from listing are -32.71 percent, abnormal returns provided by 226 IPOs after two year from listing are -46.43 percent, abnormal returns provided by 210 IPOs after three year from listing are -54.64 percent, abnormal returns provided by 129 IPOs after four year from listing are -78.91 percent and after five years the abnormal returns increases to -96.22 percent. This poor performance of Indian IPOs in long term indicates the fundamental anomaly of underperformance of IPOs in long term. This anomaly is not only exists in India but also found to be present in almost all stock markets. For the first time in the world, the Indian stock market regulator, Securities and Exchange Board of India (SEBI), introduced the system of IPO grading and made it mandatory for the companies going public since May 2007. This is done in order to decrease the information asymmetry between the retail investors and qualified institutional buyers (QIBs) and to protect the wealth of retail investors from the investments in low quality Initial Public Offerings (IPOs). IPO grades, which are based on the fundamentals of the companies and are supposed to indicate quality signals about the future prospects of the company s performance and hence ensure better returns from the investments in quality IPOs. This is done to help the majority of investors so that they can make wise investments. The effort is also made in the study to investigate the relevance of IPO grading on the under pricing, long term returns, liquidity and the P/E ratio of the companies. For the purpose of the study, 83 IPOs are selected, which came after May 2007 through National Stock Exchange (NSE) and possess IPO grades at the time of issue. The IPO s of different IPO grades have been analyzed in terms of underpricing, liquidity, P/E ratio and long term returns using t-test and regression analysis. The results indicate that the QIBs consider IPO grading significantly and hence also affects the overall subscription of the IPO. The listing day liquidity of higher graded IPOs is low but commands better liquidity in the long term. Long term performance of the higher graded IPO is better than lower graded IPO s. However, the IPO Grading in not relevant in explaining the Listing Day returns. Also the IPO grading has no impact on the subscription behavior of retail investors. [6]
ACKNOWLEDGEMENTS This work of mine would not seen the light of the day had the blessings, cooperation, encouragement, guidance, precious time and views of good many not have been there with me all along in bringing out it and therefore my heart knows no bounds in acknowledging so indispensable. At first I would thank providential powers who bestowed on me the incessant inspiration and sustained strength in the form of life blood to carry out this project. I am heartily thankful from the heart s bottom to my supervisor, Dr. B D Kavidayal, Professor, Department of Commerce, DSB Campus, Kumaun University, Nainital whose able guidance, high standard commitments, rigorous approach, stimulating support and encouragement, beyond repayment, from the initial to the final level enabled and motivated me to complete the thesis and develop an understanding of the subject. I am also thankful to Prof. B. D Awasthi, Head, Department of Commerce and other members of Commerce department for having given me the opportunity to pursue Doctoral Programme at the Department and for the support during the period of research. My heartfelt thanks, gratitude and regards are due to Dr. Keval Badhani, Associate Professor, Department of Commerce who has obliged me by readily extending scholastic hand, unflinching co-operation and motivation whenever required. I am also indebted to the officials of National Stock exchange, SEBI, and other institutions for providing the valuable information in their official website that helps in conducting the research work. I am indebted to my mother and father, who have been the lifelong source of inspiration in my endeavors and other family members. I would be remiss if I failed to thank my gracious wife Vartika Chauhan who extended exceptional support and encouragement. I would like to thank all the librarians, respondents and individuals whose contribution directly or indirectly resulted in this thesis being materialized as the thesis sought assistance from analysis of experts, academic works and reports etc. Place: (Ajay Kumar Chauhan) [7]
CONTENTS Chapteriszation Topic Name Page No. Certificate Preface Acknowledgements CHAPTER-1: Initial Public Offerings (IPOs) In Indian Stock Market 1 1.1 Capital Market 2 1.2 Primary market in India 2 1.3 Initial Public Offerings (IPOs) 5 1.4 Different kinds of issues 9 1.5. Offer Documents (ODs) 11 1.6. Issue Requirements 12 1.7. Pricing of an Issue (IPO) 17 1.8. Book Building Process 18 1.9. Categories of Investors 19 1.10. Intermediaries involved in the Issue Process 24 1.11. The Offer Document 26 1.12. SEBI s Role in an Issue 28 1.13. IPO Grading in India 32 1.14. New Provisions in Initial Public Offerings (IPO) 34 1.15. Basis of Allocation/Basis of Allotment 35 1.16. The Market Index (S&P CNX NIFTY) 36 1.17. Statement of the problem 39 Chapter-2: Review of the Literature, Objective and Research Methodology 42 2.1 Review of the literature 43 2.2 Research Methodology 60 2.2.1Rationale of the study 61 2.2.2 Statement of the problem 62 2.3 Objective of the study 62 2.4 Research design 62 2.4.1 Sampling 62 [8]
2.4.2 Description of the variables 63 2.4.3. Data Collection 64 2.5 Statistical tools to be used 65 2.6 Hypothesis to be tested 68 2.7 Software used 69 Chapter- 3: Performance of Initial Public Offerings (IPOs) in Short Run and in Long Term in Indian Stock Market 73 3.1 Frequency distribution of Initial Public Offerings (IPOs) 74 3.2 Age profile of the companies came with IPOs 78 3.3 Ownership group 82 3.4 Industry Profile of the companies came with IPOs 82 3.5 Returns of IPOs on the listing day 83 3.6 Categories wise returns 86 3.7 Abnormal Returns of IPOs on the listing day using Event study methodology 88 3.8 Returns on the application money 92 3.9 Long term performance of IPOs over the market 93 Chapter- 4: Factors Contributing IPO Performance 101 4.1 Correlation between the subscription, the return on the 102 listing day and the abnormal return. 4.2 Subscription and the returns 103 4.3 Factors influencing the short term return of IPOs on 104 the listing day 4.4 Significance of IPO Grading in Indian Stock Market 109 4.4.1 Frequency Distributions of the IPO 111 Grading of the Companies 4.5 IPO grading and category wise subscription 113 4.6 IPO grading and the underpricing (short term returns of IPOs) 115 4.7 IPO grading and the long term performance of IPOs 116 4.8 IPO Grading and liquidity on the listing day 118 4.9 Impact of IPO grading on IPO performance 119 4.10 Criticism of IPO Grading 120 [9]
CHAPTER-5: Conclusions and Suggestions 123 Bibliography 135 Appendix 142 List of companies [10]
LIST OF TABLES Table No. Title of the Table Page No. Table 1.1 Industry wise classification of capital raised 8 Table 1.2 Table 1.3 Listing criteria for companies on the cash market segment of NSE Difference between Book building issue and fixed price issue Table 3.1(a) Number of IPOs in different years 75 Table 3.1(b) Frequency of IPOs indifferent scenarios 77 Table 3.2 Table 3.3 Table 3.4 Frequencies of the companies issuing IPOs with respect to different age group Frequency of companies that belongs to the different ownership groups Frequency of companies that belongs to different industries Table 3.5.1 Descriptive statistics of the return on the listing day 84 Table 3.5.2 Independent Sample T test 86 Table 3.6(a) Age group and returns 87 Table 3.6(b) Issue size and returns 87 Table 3.6(c) Ownership groups and returns 87 Table 3.6(d) Promoter s holding after the issue and returns 88 Table 3.7.1 Abnormal returns 89 Table 3.7.2 Independent sample t test between fixed issue and book building issue 15 19 80 82 83 92 Table 3.8 Descriptive statistics of returns on the application money on the listing day 93 Table 3.9(a) Long term performance of IPOs 95 Table 3.9(b) Long term market adjusted performance of IPOs. 96 Table 3.9(c) Independent sample T test 100 [11]
Table 4.1(a) Correlation between the subscription, the returns on the listing day and the abnormal return 103 Table 4.2 Subscription wise returns 103 Table 4.3.1 Simple regression models 106 Table 4.3.2 Table 4.3.3 Table 4.4.1 Multiple regression model with abnormal return as a dependent variable Independent sample t test between IPOs and other similar company after one year of listing. Frequency distribution of the IPO grading of the companies 107 108 111 Table 4.4.2 IPO grades and the age of the companies 112 Table 4.5.1 IPO grading and subscription in different categories 113 Table 4.6 IPO grading and listing day returns 115 Table 4.7 IPO grading and long term returns 117 Table 4.8 IPO grades, liquidity and price to book value ratio on the 118 listing day Table 4.9 Impact of IPO grading on different output variables 120 [12]
LIST OF FIGURES Figure No. Title of the Figure Page No. Figure 1.1 Resources mobilized from the primary market (Rs. in Crores) Figure 1.2 Types of issues 10 Figure 1.3 Life cycle of an IPO 30 Figure 3.1(a) Number of IPOs in different years 75 Figure 3.1(b) The behavior of the market index (S & P CNX NIFTY) during the period Jan 2000 Dec 2010 Figure 3.1(c) Number of IPOs in different scenarios 78 Figure 3.2(a) Figure 3.2(b) Frequency distribution of the age of the companies came with IPOs Frequencies of the companies issuing IPOs according to the age group Figure 3.5 Frequency distribution of the returns on the listing day. 85 Figure 3.7 Frequency distribution of the abnormal returns on the listing day. Figure 3.9(a) Long term performance of the IPOs 97 Figure 3.9(b) Market adjusted returns of IPOs in long run 98 Figure 4.4.1 Figure 4.4.2 Frequency distribution of the IPO grading of the companies IPO grading and subscription in different categories of investors Figure 4.6 IPO grading and listing day returns 116 Figure 4.7 IPO grading and long term returns 117 7 76 80 81 90 112 114 Figure 4.8 IPO grading, list price to book value ratio and liquidity on the listing day 119 [13]
List of Abbreviations ASBA BHAR BRLM BSE CAAR CAR CC CCI CCIL CDSL CM CM CMIE CRAs CRISIL DIP DPs ECS NEFT EFT ELSS EPS ETFs FDI FDRs FDs FIBV FIIs FIs FPO GDP Applications supported by blocked amount Buy and Hold Abnormal Rate of Return Book Running Lead Manager The Stock Exchange, Mumbai Cumulative Average Abnormal Return Cumulative Abnormal Return Clearing Corporation Controller of Capital Issues Clearing Corporation of India Limited Central Depository Services (India) Limited Clearing Member Segment Capital Market Segment of NSE Centre for Monitoring Indian Economy Credit Rating Agencies Credit Rating Information Services of India Limited Disclosure and Investor Protection Depository Participants Electronic Clearing Service National Electronic Funds Transfer Electronic Fund Transfer Equity Linked Saving Schemes Earning Per Share Exchange Traded Funds Foreign Direct Investment Foreign Deposit Receipts Fixed Deposits International World Federation of Stock Exchanges Foreign Institutional Investors Financial Institutions Further Public Offer Gross Domestic Product [14]
IPO IRDA IISL IRDA MFs NIIs NSE OCBs OD PAN PSU PUEC QIB QIP RBI RI RIIs ROC RTGS S&P SAD SEBI SEO VC WR Initial Public Offer Insurance Regulatory and Development Authority India Index Services & Products Limited Insurance Regulatory and Development Authority Mutual Funds Non-Institutional Investors National Stock Exchange Overseas Corporate Bodies Offer Document Permanent Account Number Public Sector Unit Paid Up Equity Capital Qualified Institutional Buyers Qualified Institutional Placement Reserve Bank of India Right Issue Retail Individual Investor Registrar of Companies Real Time Gross Settlement Standard and Poor s Seasonal Affective Disorder Security and Exchange Board of India Seasoned Equity Offerings Venture Capitalist Wealth Relative [15]