MINOR PROJECT REPORT ON

INITIAL PUBLIC OFFER & ANALYSIS

Submitted in the month of May, 2018
BY
N.DEEPAK
M.B.A (1ST YEAR)
Reg. No: 17P35H0255

GEMS B SCHOOL
(GREAT EASTREN MANAGEMENT SCHOOL)
MYSORE MAHARAJA INSTITUTE OF HIGHER EDUCATION
RECOGNISED BY UGC
AFFILATED TO BHARTHIAR UNIVERSITY
BANGALORE-560052

1
 Annexure-1

SuperviSor’S certificate

This is to be certify that NOOTHALAPATI DEEPAK a Student of

M.B.A in Specialization of FINANCIAL MANAGEMENT

Of GEMS B SCHOOL under the BHARATHIAR UNIVERSITY has

worked under my supervision and guidance for his project and
prepared a project report with the title of

INITIAL PUBLIC OFFER & ANALYSIS

The project report, which he is submitting, is his genuine and

original work to the Best of my knowledge.

PLACE: BANGALORE N. Harindra

DATE: [B.E (MECH-NIT), M.B.A]

Dept. of Management

GEMS B SCHOOL

BANGALORE.

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 ANNEXURE-2

STUDENT DECLARATION

I hereby declared that the project work with the title of

“INITIAL PUBLIC OFFER & ANALYSIS” submitted by me for the
partial fulfilment of the M.B.A (Honours) in FINANCIAL
MANAGEMENT under the BHARATHIAR UNIVERSITY is my
own original work and has not been submitted earlier to any
other university for the fulfilment of the requirement for any
other degree.
I do hereby also declare that no chapter of this
manuscripts in whole or in part has been incorporated in this
Report from any earlier books or work done by other or by
me. However extract of any literature which has been used
for this Report has been duly acknowledged providing detail
of such literature in this reference.

PLACE: BANGALORE N. DEEPAK

DATE: M.B.A [FINANCIALMANAGEMENT]

1ST YEAR

REG. NO: 17P35H0255

BANGALORE

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 ANNEXURE-3

ACKNOWLEDGEMENT

While conducting this Project, innumerable people have given me various

suggestions and opinions. I have tried to incorporate all those suggestions
which are really relevant in preparing my final report. I think it is essential to
thank all those who have contributed and helped me throughout the duration
of the project.
I pay my immense gratitude to Prof. “N.HARINDRA”, Faculty of “GEMS B
SCHOOL”, BANGALORE for his continuous and deliberate discussion on the
topic and indeterminable burden taken by him in helping me throughout
conducting the project.
I would also like to thank my friends who rendered their wholehearted co-
operation in the successful completion of the project work.
Finally, I am thankful to all the people who willingly responded to the
questionnaire and their contribution has been invaluable. This project
would not have been completed without their participation.
I am pleased to state that the whole report is just the presentation of the
facts that have been found during the project through different sources
and its each sentence is an exact representation of the information
obtained and the analysis thereof. I hope that I have manifested my
sincere attempts to represent all the information and other things to the
best of my ability.

N. DEEPAK
M.B.A (2017-2019)

REG. NO: 17P35H0255

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5
 INITIAL PUBLIC OFFER & ANALYSIS

ABSTRACT

Initial Public Offer (IPO) is one of the ways of raising capital for the Companies
which proposes to expand their operations or if they want to start a new venture. This
is the effective way of getting funds from public for the first time for every company.
Those companies which wants to go public has to follow a certain set of guidelines
which we call as Disclosure and Investor Protection (DIP) which are framed by
Securities and Exchange Board of India (SEBI). And the process of coming to IPO
has been very important for the company.

This project has been describing about the issue procedure of IPO along with the
advantages and disadvantages for coming to an IPO. Various aspects such as SEBI
guidelines regarding eligibility norms, IPO grading and valuation, post issue
obligations, buyback and role of various intermediaries etc., are clearly analysed. For
the better understanding of how the companies have to raise funds, the analysis of
some companies which came for IPO and the success of their IPO has been clearly
explained.

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 INDEX
Serial Particulars Page
No. No.
CHAPTER 1
INTRODUCTION
1.1 INTRODUCTION 10

1.2 SEBI GUIDELINES 12

1.3 PROCEDURE OF IPO 13
1.4 BUY BACK OF SHARES 21
1.5 ROLE OF VARIOUS INTERMEDIARIES IN IPO 23

1.6 IPO GRADING 25

CHAPTER 2
LITERATURE REVIEW
2.1 BACKGROUND OF THE TOPIC 28

2.2 RATIONAL OF THE STUDY 31

2.3 REVIEW OF EXISTING LITERATURE 32

2.4 OBJECTIVES OF THE STUDY 34

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 CHAPTER 3
RESEARCH
3.1 RESEARCH METHODOLOGY 36
3.2 DATA COLLECTION METHOD 37
3.3 HYPOTHESIS TESTING 38
3.4 LIMITATIONS OF THE STUDY 39

3.5 FUTURE SCOPE OF THE STUDY 40

CHAPTER 4
ANALYSIS AND INTREPRETATION
4.1 FUTURE CAPITAL HOLDINGS LTD 42
4.2 RELIANCE POWER 47
CHAPTER 5
CONCLUSION
5.1 FINDINGS AND SUGGESTIONS 50
5.2 CONCLUSION 52

5.3 BIBLIOGRAPHY 53

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 CHAPTER – 1
INTRODUCTION

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 1.1 INTRODUCTION

A company can raise capital through issue of shares or debentures. The various types of
issues are: Public Issue, Rights Issue, Bonus Issue, Private Placement and Bought out
Deal.

There can be two kinds of public issues, namely:

Initial Public Offer (IPO)

Further Public Offer (FPO)

Classification of Issues:

IPO:

An Initial Public Offer (IPO) is the selling of securities to the public in the primary market.
It is when an unlisted company makes either a fresh issue of securities or an offer for sale
of its existing securities or both for the first time to the public. This paves way for listing
and trading of issuer‘s securities. The sale of securities can be through book building or
normal public issue.

FPO:

Further Public Offers are issued by companies or corporate bodies whose shares are already
being traded in the capital market and they are issuing fresh shares either to fund the
expansion of their existing business or to invest into other business activities.

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ADVANTAGES OF IPO:

 Enlarging and diversifying equity base.

 Enabling cheaper access to capital.
 Increasing exposure, prestige, and public image.
 Attracting and retaining better management and employees through liquid
equity participation.
 Facilitating acquisitions (potentially in return for shares of stock).
 Creating multiple financing opportunities: equity, convertible debt, cheaper
bank loans, etc.
 Facilitates future funding by means of subsequent public offerings.
 Enables valuation of company.
 Enables the company to offer its shares as purchase consideration.

DISADVANTAGES OF IPO:

 Significant legal, accounting, marketing and other costs to be incurred.

 Requirement to disclose financial and business information.
 Meaningful time, effort and attention of management is required.
 Risk that required funding will not be raised.
 Public dissemination of information which may be useful to competitors,
suppliers and customers.
 Loss of control and stronger agency problems due to new shareholders.
 Dilution of stake makes it vulnerable to future takeovers.

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 1.2 SEBI GUIDELINES ON IPO

No unlisted company shall make an IPO of equity shares or any other security which may be
converted into or exchanged with equity shares at a later date, unless the following conditions
are satisfied as on the date of filing of Prospectus (in case of fixed price issue) or Red Herring
Prospectus (in case of book built issue) with ROC:

The unlisted company has obtained grading for the IPO from at least one
credit rating agency;

Disclosures of all the grades obtained, along with the rationale/description

furnished by the credit rating agencies for each of the grades obtained, have
been made in the Prospectus (in case of fixed price issue) or Red Herring
Prospectus (in case of book built issue); and

The expenses incurred for grading IPO have been borne by the unlisted
company obtaining grading for IPO.

Most of the market analysts have welcomed this move of SEBI as it will help the investors
in a volatile market to know whether the merchant banker has carried the exercise in
determining the price of an issue in a proper manner or not. It will also help the investors
in knowing whether the price of the issue is justified or not. They even said that
management of a good company will never get afraid of getting graded of their IPOs if they
are good. The only demerit of this step by the SEBI as said by many experts is that there
will be a slowdown in the number of IPOs coming out as grading will be a bit lengthy
process and there will be a cost-factor attached to it also.

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 1.3 PROCEDURE FOR IPO

Fixed Pricing versus True Pricing (Book- Building):

The traditional method of doing IPOs is the fixed price offering. Here, the issuer and the
merchant banker agree on an issue price. Then the investor has a choice of filling in an
application form at this price and subscribing to the issue. Extensive research has revealed
that the fixed price offering is a poor way of doing IPOs. Fixed price offerings, all over the
world, suffer from `IPO under-pricing'. In India, on average, the fixed-price seems to be
around 50% below the price at first listing; i.e. the issuer obtains 50% lower issue proceeds
as compared to what might have been the case. This average masks a steady stream of
dubious IPOs who get an issue price which is much higher than the price at first listing.
Hence fixed price offerings are weak in two directions:

 Dubious issues get overpriced and

 Good issues get under-priced.

Book building:
A mechanism period for which the IPO is open, bids is collected from investors at various
prices which are above or equal to the floor price (the minimum price). The final price of
the share is determined after the bid closing date, based on certain evaluation criteria.

The SEBI (Disclosure and Investor Protection) Guidelines, 2000, define the term `book-
building' in a rather complex language as "a process undertaken by which a demand for the
securities proposed to be issued by a body corporate is elicited and built-up and the price
for such securities is assessed for determination of the quantum of such securities to be
issued by means of a notice, circular, advertisement, document or information
memorandum or offer document.''

Book building process is a common practice used in most developed countries for
marketing a public offer of equity shares of a company. However, Book building acts as
scientific as well as flexible price discovery method through which a consensus price of
IPO‘s may be determined by the issuer company along with the Book Running Lead
Manager (i.e. merchant banker) on the basis of feedback received from individual investors

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as well as most informed investors (who are institutional and corporate investors like, UTI,
LICI, GICI, FIIs, and SFCI etc.). The method helps to make a correct evaluation of a
company‘s potential and the price of its shares.

In simple terms, book-building is a mechanism by which the issue price is discovered on

the basis of bids received from syndicate members/brokers and not by the issuers/merchant
bankers.

An Issuer Company can issue capital through book building in following two ways:

75% Book Building process:

Under this type of public offer, the issue of securities has to be categorized into:
1. Placement portion category
2. Net offer to the public

The option of 75% Book Building is available to all body corporate that are otherwise
eligible to make an issue of capital to the public. The securities issued through the book
building process are indicated as 'placement portion category' and securities available to
public are identified as 'net offer to public'. In this option, underwriting is mandatory to the
extent of the net offer to the public. The issue price for the placement portion and offers to
public are required to be same

100% of the net offer to the public through Book Building process:
In the 100% of the net offer to the public, entire issue is made through Book Building
process. However, there can be a reservation or firm allotment to a maximum of 5% of the
issue size for the permanent employees, shareholders of the company or group companies,
persons who, on the date of filing of the draft offer document with the Board, have business
association, as depositors, bondholders and subscribers to services, with the issuer making
an initial public offering.

The number of bidding centers, in case of 75% book building process should not be less
than the number of mandatory collection centers specified by SEBI. In case of 100% book
building process, the bidding centers should be at all the places where the recognized stock
exchanges are situated.

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Book Building Process in India:

The steps which are usually followed in the book building process can be summarized
below:
(1) The issuer company proposing an IPO appoints a lead merchant banker as a BRLM.

(2) Initially, the issuer company consults with the BRLM in drawing up a draft prospectus
(i.e. offer document) which does not mention the price of the issues, but includes other
details about the size of the issue, past history of the company, and a price band. The
securities available to the public are separately identified as net offer to the public‖.

(3) The draft prospectus is filed with SEBI which gives it a legal standing.

(4) A definite period is fixed as the bid period and BRLM conducts awareness campaigns
like advertisement, road shows etc.

(5) The BRLM appoints a syndicate member, a SEBI registered intermediary to

underwrite the issues to the extent of net offer to the public.

(6) The BRLM is entitled to remuneration for conducting the Book Building process.

(7) The copy of the draft prospectus may be circulated by the BRLM to the institutional
investors as well as to the syndicate members.

(8) The syndicate members create demand and ask each investor for the number of shares
and the offer price.

(9) The BRLM receives the feedback about the investor‘s bids through syndicate
members.

(10) The prospective investors may revise their bids at any time during the bid period.

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(11) The BRLM on receipts of the feedback from the syndicate members about the bid
price and the quantity of shares applied has to build up an order book showing the demand
for the shares of the company at various prices. The syndicate members must also maintain
a record book for orders received from institutional investors for subscribing to the issue
out of the placement portion.

(12) On receipts of the above information, the BRLM and the issuer company determine
the issue price. This is known as the market-clearing price.

(13) The BRLM then closes the book in consultation with the issuer company and
determine the issue size of
(a) Placement portion and
(b) Public offer portion.

(14) Once the final price is determined, the allocation of securities should be made by the
BRLM based on prior commitment, investor‘s quality, price aggression, earliness of bids
etc. The bid of an institutional bidder, even if he has paid full amount may be rejected
without being assigned any reason as the Book Building portion of institutional investors
is left entirely at the discretion of the issuer company and the BRLM.

(15) The Final prospectus is filed with the registrar of companies within 2 days of
determination of issue price and receipts of acknowledgement card from SEBI.

(16) Two different accounts for collection of application money, one for the private
placement portion and the other for the public subscription should be opened by the issuer
company.

(17) The placement portion is closed a day before the opening of the public issue
through fixed price method. The BRLM is required to have the application forms along
with the application money from the institutional buyers and the underwriters to the
private placement portion.

(18) The allotment for the private placement portion shall be made on the 2nd day from
the closure of the issue and the private placement portion is ready to be listed.

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(19) The allotment and listing of issues under the public portion (i.e. fixed price portion)
must be as per the existing statutory requirements.

(20) Finally, the SEBI has the right to inspect such records and books which are
maintained by the BRLM and other intermediaries involved in the Book Building
process.

Pricing:

Before establishment of SEBI in 1992, the quality of disclosures in the offer documents
was very poor.

The main drawback of free pricing was the process of pricing of issues. The issue price was
determined around 60-70 days before the opening of the issue and the issuer had no clear
idea about the market perception of the price determined.

In Book Building the price is determined on the basis of demand received or at price above
or equal to the floor price.

The Allotment Process through Book-building:

Step1-The Company will 'discover' its price

Earlier, the company determined a fixed price for the stock issue. The issue was marketed
to the general public through advertisements and a media campaign.

Today, companies prefer a book building process. Book building is the process of price
discovery. That means there is no fixed price for the share. Instead, the company issuing
the shares comes up with a price band. The lowest price is referred to as the floor and the
highest, the cap. Bids are then invited for the shares. Each investor states how many shares

17
they want and what are they willing to pay for those shares (depending on the price band).
The actual price is then discovered based on these bids.

Step2-Players of the game

Three classes of investors can bid for the shares:

Qualified Institutional Buyers: QIBs include mutual funds and Foreign
Institutional Investors. At least 50% of the shares are reserved for this category.

Retail investors: Anyone who bids for shares under Rs 50,000 is a retail investor.
At least 25% is reserved for this category.

The balance bids are offered to high net worth individuals and employees of the
company.

Individuals who apply for the IPO put in their bids.

The process is transparent. One can check on the issue subscription at the BSE and NSE
Web sites.

After evaluating the bid prices, the company will accept the lowest price that will allow it
to dispose the entire block of shares. That is called the cut-off price.

The process can be illustrated with an example:

Number of shares issued by the company = 100.

Price band = Rs 30 - Rs 40.

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If individuals have bid for prices as follows:

Bid Number of Price per

Shares Share (RS)

1 20 40
2 10 38
3 20 37
4 30 36
5 20 35
6 20 33
7 20 30

The shares will be sold at the Bid 5 price of 20 shares for Rs 35.
Why?
Because Bidders 1 to 5 are willing to pay at least Rs 35 per share.

The total bids from Bidders 1 to 5 ensure all 100 shares will be sold (20 + 10 + 20 + 30
+ 20).

The cut-off price is therefore Bid 5's price = Rs 35.

Bidders 1 to 5 get allotments at that price. Bidders 6 and 7 don't get an allotment because
their bids are below the cut-off price.

The bids are first allotted to the different categories and the over-subscription (more
shares applied for than the shares available) in each category is determined.

Retail investors and high net worth individuals get allotments on a proportional basis.

If a retail investor has applied for 200 shares in the issue, and the issue is over-
subscribed five times in the retail category, he qualify to get 40 shares (200 shares/5).

Sometimes, the over-subscription is huge or the issue is priced so high that the bidder
can't really bid for too many shares before the Rs 50,000 limit is reached. In such
cases, allotments are made on the basis of a lottery.

If a retail investor has applied for 5 shares in an issue, and the retail category has been
over-subscribed 10 times, the investor is entitled to half a share.

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Since that isn't possible, it may then be decided that every 1 in 2 retail investors will get
allotment. The investors are then selected by lottery and the issue allotted on a
proportional basis among.

Reverse Book Building

Reverse book-building is a mechanism by which companies listed on a stock exchange can
delist their shares. The reasons for delisting may be several and sometimes intentional.

The reverse book building is an efficient price discovery mechanism of de-listing of

securities, which is provided for capturing the sell orders on online basis from the
shareholders through respective BRLM. In the reverse book-building scenario, the acquirer
or promoter of a company offers to get back shares from the shareholders. It is a mechanism
where, during the period for which the reverse book building is open, offers are collected
at various prices, which are above or equal to the floor price from the shareholders through
trading members appointed by the acquirer or promoter of a company. The reverse book
building price (i.e. final price/ exist price) is determined by BRLM in consultation with the
acquirer or promoter of the company after the offer closing date in accordance with the
SEBI (De-listing of Securities) Guidelines, 2003. Which desires to get de-listed, in
accordance to book building process. The offer price has a floor price, which is fixed for
de-listing of securities below which no offer can be accepted. The floor price is the average
of 26 weeks traded price quoted on the stock exchange where the shares of the company
are most frequently traded preceding 26 weeks from the date of public announcement is
made. There is no ceiling on the maximum price.

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 1.4 BUY BACK OF SHARES
It is a process whereby a company purchases its own shares or other specified securities
from the holders thereof for improving the earnings per share (EPS), or to improve return
on capital or return on net worth and to enhance the long-term shareholder value, among
other things.

Objectives of buy back:

 To increase promoters holding
 Increase earnings per share
 Rationalize the capital structure by writing off capital not represented by available
assets.
 Support share value
 To thwart takeover bid
 To pay surplus cash not required by business

Comment – It is an interesting fact to note that MNCs are using buyback process as the best
strategy to maintain their share price in a bear run by buying back the shares from the open
market at a premium over the prevailing market price.

Procedure for Buy Back:

 Where a company proposes to buy back its shares, it shall, after passing of the
special/Board resolution make a public announcement at least one English
National Daily, one Hindi National daily and Regional Language Daily at the
place where the registered office of the company is situated.

 The public announcement shall specify a date, which shall be specified date‖ for
the purpose of determining the names of shareholders to whom the letter of offer
has to be sent.

 A public notice shall be given containing disclosures as specified in Schedule I of

the SEBI regulations.

 A draft letter of offer shall be filed with SEBI through a merchant Banker. The
letter of offer shall then be dispatched to the members of the company.

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  A copy of the Board resolution authorizing the buyback shall be filed with the
SEBI and stock exchanges.

 The date of opening of the offer shall not be earlier than seven days or later than
30 days after the specified date.

 The buyback offer shall remain open for a period of not less than 15 days and not
more than 30 days.

 A company opting for buy back through the public offer or tender offer shall
open an escrow Account.

 Comment – MNCs are taking advantage of the depressed market conditions to

mop up the shares. There is nothing legally wrong in buying back shares, but it
should be by paying a fair price to minority shareholders.

Difference between Delisting and Buyback:

De-listing is different from buy back of securities in which the securities of a company are
extinguished with consequent reduction of capital of the company. In the case of de-listing
there is no reduction of capital. It is needless to mention that in the case of buy back
securities, the company itself is the acquirer and hence provides the funds for buy back. In
the case of de-listing, the securities are acquired by a person other than the company and
who could be the promoter, majority shareholder or a person in control of the management
and the funds have to be provided by that acquirer.

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 1.5 ROLE OF VARIOUS INTERMEDIARIES IN IPO

Intermediary‘s help corporations design securities that will be attractive to investors, buy
these securities from the corporations, and then resell them to savers in the primary markets.

Merchant Bankers/ Lead Manager:

Merchant bankers play an important role in issue management process. Lead managers
have to ensure correctness of the information furnished in the offer document. They have
to ensure compliance with SEBI rules and regulations as also Guidelines for Disclosures
and Investor Protection. To this effect, they are required to submit to SEBI a due diligence
certificate confirming that the disclosures made in the draft prospectus or letter of offer are
true, fair and adequate to enable the prospective investors to make a well informed
investment decision. The role of merchant bankers in performing their due diligence
functions has become even more important with the strengthening of disclosure
requirements and with SEBI giving up the vetting of prospectuses. Their functions are:

 To act as intermediaries between the company seeking to raise money and the
investors. They must possess a valid registration from SEBI enabling them to do
this job.
 They are responsible for complying with the formalities of an issue, like drawing
up the prospectus and marketing the issue.
 If it is a book building process, the lead manager is also in charge of it. In such a
case, they are also called Book Running Lead Managers.
 Post issue activities, like intimation of allotments and refunds, are their
responsibility as well.

Underwriters:
Underwriters are required to register with SEBI in terms of the SEBI (Underwriters) Rules
and Regulations, 1993. In addition to underwriters registered with SEBI in terms of these
regulations, all registered merchant bankers in categories I, II and III and stockbrokers and
mutual funds registered with SEBI can function as underwriters. Part III gives further

23
details of registration of underwriters. In 1996-97, the SEBI (Underwriters) Regulations,
1993 were amended mainly pertaining to some procedural matters.

Bankers to an Issue:
Scheduled banks acting as bankers to an issue are required to be registered with SEBI in
terms of the SEBI (Bankers to the Issue) Rules and Regulations, 1994. These regulations
lay down eligibility criteria for bankers to an issue and require registrants to meet periodic
reporting requirements. Part III gives further details of registration of bankers to an issue.

Portfolio managers:
Portfolio managers are required to register with SEBI in terms of the SEBI (Portfolio
Managers) Rules and Regulations, 1993. The registered portfolio managers exclusively
carry on portfolio management activities. In addition all merchant bankers in categories I
and II can act as portfolio managers with prior permission from SEBI. Part III gives further
details of the registration of portfolio managers.

Registrars to an Issue and Share Transfer Agents:

Registrars to an issue (RTI) and share transfer agents (STA) are registered with SEBI in
terms of the SEBI (Registrar to the Issue and Share Transfer Agent) Rules and
Regulations, 1993. Under these regulations, registration commenced in 1993-94 and is
granted under two categories: category I - to act as both registrar to the issue and share
transfer agent and category II - to act as either registrar to an issue or share transfer agent.
With the setting up of the depository and the expansion of the network of depositories, the
traditional work of registrars is likely to undergo a change.

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 1.6 IPO GRADING

IPO grading (initial public offering grading) is a service aimed at facilitating the assessment
of equity issues offered to public. The grade assigned to any individual issue represents a
relative assessment of the fundamentals of that issue in relation to the other listed equity
securities in India. IPO grading is positioned as a service that provides an independent
assessment of fundamentals to aid comparative assessment that would prove useful as an
information and investment tool for investors. Moreover, such a service would be
particularly useful for assessing the offerings of companies accessing the equity markets
for the first time where there is no track record of their market performance.

IPO grade assigned to any issue represents a relative assessment of the fundamentals of that
issue in relation to the universe of other listed equity securities in India. This grading can
be used by the investor as tool to make investment decision. The IPO grading will help the
investor better appreciate the meaning of the disclosures in the issue documents to the
extent that they affect the issue‘s fundamentals. Thus, IPO grading is an additional investor
information and investment guidance tool.

Credit Rating agencies (CRAs) like ICRA, CRISIL, CARE and Fitch Ratings who are
registered with SEBI will carry out IPO grading. SEBI does not play any role in the
assessment made by the grading agency. The grading is intended to be an independent and
unbiased opinion of that agency. IPO grading is not mandatory but is optional and the
assigned grade would be a onetime assessment done at the time of the IPO and meant to
aid investors who are interested in investing in the IPO. The grade will not have any
ongoing validity.

Features of IPO grading:

IPO grading covers both internal and external aspects of a company seeking to make an
IPO in general. The internal factors include competence and effectiveness of the
management, profile of promoters, marketing strategies, size and growth of revenues,
competitive edge, technology, operating efficiency, liquidity and financial flexibility,
asset quality, accounting quality, profitability and hedging of risks. Among external
factors, the key one is the industry and economic/business environment for the issuer.

25
Here, it is important to note that internationally, the global rating agencies such as
Standard & Poors and Moodys do not perform grading of IPOs at all. While Standard &
Poors is the majority stakeholder in CRISIL Ltd, Moodys is the single biggest stakeholder
in ICRA Ltd. Similarly, the third global player Fitch IBCA (which acquired another
rating agency Dun & Bradstreet in 2000) also does not grade IPOs as yet. The IPO
grading is indicated on a five point scale and a higher score indicating stronger
fundamentals.

An IPO grading Scale:

IPO GRADING ASSESSMENT

5/5 Strong fundamentals

4/5 Above average

fundamentals
3/5 Average fundamentals
2/5 Below average
fundamentals
1/5 Poor fundamentals

Cost Involved In IPO Grading:

Though nothing has been declared officially but most of the credit rating has said that IPO-
grading would not cost much to the issuers. They would be charging 10 basis points of the
amount to be raised with a ceiling of about Rs 10-15 lakhs. Thus, even in the case of a mega
IPO, there would be a cap on fees, he noted. Around 100 IPOs hit the market on an average
every year. However, despite this seemingly big number, the total receipts for the entire
rating industry on account of grading fees would be only about Rs 10-15 crores.

26
CHAPTER – 2
LITERATURE
REVIEW

27
 2.1 BACKGROUND OF THE TOPIC

Early Phase: 1992-1995 (Fixed Pricing):

The initiation of the process of reform in India also would not have been possible without
changes in the regulatory framework. The New Economic policy (1991) led to a major
change in the regulatory framework of the capital market in India. The Capital Issues
(Control) Act 1947 was repealed and the Office of the Controller of Capital Issues (CCI)
was abolished. The Securities and Exchange Board of India (SEBI), established in 1988
and armed with statutory powers in 1992, came to be established as the regulatory body
with the necessary authority and powers to regulate and reform the capital market. SEBI
came to be recognized as a regulatory body for the capital market after the abolition of the
CCI. The control on pricing of capital issue has been abolished and easy access is provided
to the capital market. Initial Public Issue caught the attention of general public only after
the success of Reliance, when millions of small investors made huge returns which were
unheard of till then. Dhirubhai Ambani was the first promoter who raised huge amounts
through the public issue route to finance large facilities.

The issue process was smoothened, procedures were simplified and free pricing was
allowed, although with certain restrictions, The Indian market had the concept of par value
of equity shares, and anything above par was considered premium. The only companies
that were allowed to come with premium issues were those, which had a three year profit-
track record for the preceding five years. New companies without this record could float
premium issues if their promoting companies had the same track record and they had to
hold 50% of the post issue capital. Any new company floated by first generation
entrepreneurs could only issue equity at par. There was no restriction about prices in a
premium issue.

The offer was always at a fixed price, whether premium or par. The companies had to
appoint intermediaries like merchant bankers, registrars, bankers etc. Merchant bankers had
the responsibility of fixing the prices, in consultation with the company, carrying out with
due diligence, preparing the prospectus (offer documents) etc. The prospectus had to be
submitted to SEBI for getting scrutiny.

The trend continued in the early nineties as many large projects were launched after the
economy was liberalized. Many of these companies came out with public issues and the

28
retail participation increased dramatically. But many of the companies which raised money
during this period just disappeared without a trace.

Late Liberalization Period: 1996-2005 (Book Building):

The late nineties and the first few years of the current decade did not see much activity in
the primary market even though we saw a huge bull run led by technology stocks at the
turn of the decade. The bad experiences of retail investors kept them away from the market
and made it difficult for companies to launch successful issues. The corporate sector was
recovering from the damage caused by large capacity expansions and new projects set up
in the nineties.

The dormant primary issues market came alive after 2003 mostly because of the divestment
programme of the government. The issue of Maruti Udyog, through which the government
sold part of its stake in the company, rekindled retail investor interest in the primary market.
The issue was made at a very reasonable price and investors made very good returns
immediately.

The year 2004 saw the primary market activity at its historic peak as some large private
companies also came out with issues. Further divestment by the government; including the
largest ever issue by an Indian company from ONGC, attracted more retail investors into
the market. The IPO market continues to buzz in the current year as well. Taking advantage
of the strength in the secondary market, many high profile companies are lining up to raise
money from the market. The year started with the issue from Jet Airways which attracted
a lot of interest from investors. As a result of tougher regulations, the quality of the issues
has gone up substantially.

2006 onwards scenario:

India's IPO market emerged as the eighth largest with $7.23 billion (Rs 30,000 crores) in
net proceeds through 78 public issues, global research and consultancy firm Ernst & Young
said in its Global IPO report. Across the world, the companies raised $246 billion, up from
$167 billion in 2005, through a total of 1,729 IPOs, led by Chinese companies at the top
with net proceeds of $56.6 billion. However, the biggest number of IPOs came from the
United States with 187 offerings, followed by Japan with 185 and China with 175 IPOs.

29
According to the study, India's increasing number of larger deals has been driven by the
growth of Indian corporations and their need for additional capital for potential
acquisitions. In 2007 Indian IPOs continue to surge in numbers. Continued strength is
expected in the real estate and energy sector. "The rapid growth in emerging market
economies has resulted in a migration of capital from the developed economies into the
emerging markets," E&Y said.

The localization trend in India is evidenced by several billion-dollar IPOs hosted by Indian
exchanges. In 2006, India's largest IPO, Reliance Petroleum raised $1.8 billion, followed
by the oil production and exploration company, Cairn Energy, which raised $1.3 billion
with both companies listing on domestic exchanges.

However, some Indian companies are also listing abroad, especially London, Singapore
and Luxembourg, primarily for higher valuations and visibility, the report noted.

The private equity rush into India is creating the potential for many IPO exits. In 2006,
private equity firms invested more than $7 billion in India. Top global private equity funds
as well as local funds, have been key drivers of Indian IPO markets.

30
 2.2 RATIONAL OF THE STUDY:

 To navigate new investors for primary market and for proper investment in IPO.

 To learn the procedure of filling the IPO‘s, its basic norms and regulation.

 To know the guidelines of SEBI for IPO‘s.

 To understand the various Pricing techniques.

 To understand practically the fundamental and Technical analysis of IPO‘s.

31
 2.3 REVIEW OF EXISTING LITERATURE:

The literature review on IPOs can be divided in the following main heads-

a) Reason and timing of going public.

Going public marks a watershed in the life cycle of the firm. While increased equity can
support the firm‘s future plans of growth, the trade-off for the firm is that of increased
public scrutiny.

 Brealy and Myers (2005) state that in the context of USA the firms may seek
private equity in their initial years and only later go for public issues.

 Pagano, Panetta and Zingales (1998) in their study of Italian firms, find that firms
going public are not seeking money for growth but are rebalancing their accounts
after high investment and growth.

 Lerner (1994) found that there are times (windows of opportunity) when the
markets could be extremely optimistic about a particular industry and it may be a
good time for the firms in that industry to go public.

The post IPO period sees a reduction in leverage as well as investment. They state that
going public is a conscious choice that some firms make while some others prefer to remain
private. Thus going public is not a natural element in the life cycle of a firm.

b) Valuation of IPOs.

 Benveniste and Spindt (1989) find that under writers try to resolve the information
asymmetry problem between the firm and the investors by providing an incentive
to the investors to reveal their private information about the firm.


32
  Kim and Ritter (1999) in their study of 190 firms find that under writers forecast
the next year’s earnings numbers and multiply them with PE ratios of comparable
firms in the industry to get the approximate price of the IPO. However they also
found that PE ratios using historical earnings numbers do not give accurate results
whereas when forecasted earnings numbers are used then the valuation is much
more accurate.

 Purnanandam and Swaminathan (2002) say that IPOs are priced 50% higher than
industry peers. Also they find that more the IPO is overpriced with respect to its
peers, worse is its long term performance.

c) Allocation mechanism.

The allocation mechanisms are specified by the regulators in different countries. Loughran,
Ritter and Rydqvist (1994) find 3 main categories across countries-Auctions, Fixed price
offers and Book Building. Sherman (2005) finds that Book building is a superior
mechanism for selling IPOs rather than auctions.

33
 2.4OBJECTIVES OF THE STUDY:

Main Objectives:

An attempt has been made to analyse the various IPOs and recommend others to invest
in good initial public offerings after thorough research of financial statements of the
companies

Sub objectives:

 To understand various dimensions and problems in IPO process.

 To understand post IPO performance.

 To analyse financial position of Companies as depicted in its Annual report as it

serve an important basis for investors to judge company performance and future
prospects.

34
CHAPTER – 3
RESEARCH

35
 3.1 RESEARCH METHODOLOGY

 Descriptive Research:

Descriptive research is used to obtain information concerning the current status of the
phenomena to describe what exists with respect to variables or conditions in a situation.
Descriptive research, also known as statistical research, describes data and characteristics
about the population or phenomenon being studied. Descriptive research answers the
questions who, what, where, when and how. Although the data description is factual,
accurate and systematic, the research cannot describe what caused a situation.

 Analytical Research:

Analytical research takes descriptive research one stage further by seeking to explain the
reasons behind a particular occurrence by discovering causal relationships. Once causal
relationships have been discovered, the search then shifts to factors that can be changed
(variables) in order to influence the chain of causality.

36
 3.2 DATA COLLECTION METHOD:

The task of data collection begins after a research problem has been defined and research
design/plan chalked out. While designing about the method of data collection to be used
for the study, the researcher should keep in mind two types of data.

1) Primary Data:

The data, which are collected for the first time, directly from the respondents to the base of
knowledge & belief of the research, are called primary data. The normal procedure is to
interview some people individually or in a group to get a sense of how people feel about
the topic. So far as this research is concerned, primary data is the main source of
information. The data collected is through questionnaire & information provided by the
respondent.

2) Secondary Data:

When data are collected and compelled from the published nature or any other‘s primary
data is called secondary data. So far my project is concerned secondary data is an important
part of my project that‘s why I had collected the data from websites and newspapers.

37
 3.3 HYPOTHESIS:

Hypothesis is usually considered as the principal instrument in the research. Ordinarily

when one talks about hypothesis, one simply means a mere assumption or some supposition
to be proved or disproved. But for a researcher, hypothesis is a formal question that he
intends to resolve. Thus a hypothesis may be defined as a proposition or a set of
propositions set forth as an explanation for the occurrence of some specified group of
phenomena either asserted merely as a provisional conjuncture to guide some investigation
or accepted as highly probable in the light of established facts.

Types of Hypothesis:

Null Hypothesis and Alternate Hypothesis

Alternate hypothesis is usually the one which one wishes to prove and the null hypothesis
is the one which one wishes to disprove. Thus a null hypothesis represents the hypothesis
we are trying to reject and alternate hypothesis is all other possibilities.

Hypothesis of the Study:

H0: ― Investor‘s behaviour is favourable in investing in IPO.

H1: ―Investor‘s behaviour is unfavourable in investing in IPO.

38
 3.4 LIMITATIONS OF THE STUDY:

My Study and analysis has following limitations.

 Due to time Constraint, I could not analyse more on it.


 My own inexperience might have affected the study & analysis

 My analysis is based on past performances, and past performance is
not Guarantee of future results.

 The work is based on secondary data. The secondary data can be inaccurate as it
is published format.

39
 3.5 FUTURE SCOPE OF THE STUDY:

 The Comparative analysis of primary (IPO) and secondary market.


 The comparison between IPO‘s & future and options.

 The analysis of pros & cons of long term investment in securities market.

 The effect of FII‘s on Indian secondary market.

 The Comprehensive study on the measures of corporate governance for razing
funds from primary market.

40
 CHAPTER – 4
ANALYSIS AND
INTREPRETATION

41
 4.1 FUTURE CAPITAL HOLDINGS LTD.

Issue Details
Issue Opens January 11.2008
Issue Closes January 16,2008
Price Band Rs. 700-765
Face Value Rs. 10
Issue Size 491.3 crores
Listing NSE, BSE

Company Background:

FCH is the financial services arm of the Future Group; which is a business group focusing
on consumption-led businesses in India and is also one of India's leading organized multi-
format retailers. It was established in the year 2005 and is promoted by Pantaloon Retail
India Ltd (PRIL) (the flagship company of the Future Group), Mr.Kishore Biyani (CEO
and MD of PRIL) and Mr.Sameer Sain (a former MD of Goldman Sachs International).
Och-Ziff, an international hedge fund, has invested in FCHL in June 2007. FCHL has three
primary lines of business; investment advisory services, retail financial services and
research.

Investment Advisory Services:

It provides private equity and real estate investment advisory services to onshore and
offshore clients. These investment advisory services include investment analysis, research
and recommendations

Retail Financial Services:

Its retail financial services Future Money, as a retailer offers financial products and services
in India. It holds rights to provide financial products and services through the retail outlets
which are owned, controlled or managed by PRIL and its subsidiaries. Its primary credit

42
 products currently include consumption loans, which are loans to finance the purchase of
durables, furniture and other consumer goods, and personal loans.

Research:

Future Capital Research conducts and publishes economic research on India with the
objective of enhancing value creation across other businesses.

Purpose of the Issue:

 To expand its retail financial services business, in particular, the growth of loan
portfolio.
 To meet the long term working capital requirements of the company.
 To meet issue related expenses and general corporate purpose.

Fundamental Analysis:
Strong background of Indian retail sector:
One of the pioneering groups to participate in the early stage of India‘s retail story, Future
group has over a decade experience and has developed understanding of the retail and
consumption-led sectors. FCHL launched Future Money in June 2007, which offers financial
products and services to individuals. Currently, it has a presence in 26 cities through 95
outlets across India. Its two main retail financial services products are consumption loans and
personal loans. It also intends to distribute life and non-life insurance products in near future.

Strong research division covering macro factors:

Company‘s research business, Future Capital Research (FCR), conducts and publishes
research on macro-economic trends in India. It has also developed proprietary indices to
highlight trends in consumer behaviour. Its reports are also utilized by its advisory division.
In their recent publication X Factor: The Impact of Working Women on India‘s Growth,
Incomes and Consumption‘, it analysed the recent rise in women‘s participation in the work

43
 force and the impact of this phenomenon on growth and consumption trends. Other
publication included. Is Urban Growth Good for Rural India? Studying the urban demand
could be an important engine, which would help to drive a shift from farm to non-farm
employment in rural India. Its in-house research business would help FCHL to invest in the
right segment and right locations.

Dual role of advisory and managing real estate fund:

Currently, FCHL is the investment manager of the Rs3.5bn Kshitij Fund and also advisor
to the investment managers of Rs13.7bn Horizon Fund and Rs7.8bn Indus Fund. It has
also recently entered into a joint venture to create expertise in warehousing logistics.
Their real estate investment activities are in two separate areas of retail/ mixed use and
hotels.

Risks:

 Posted a net loss of Rs124mn in FY08.


 Any downturn in Indian retail and consumption-led sectors would affect their
business.

44
RATIO ANALYSIS:



 The ideal current ratio is 2:1 and the current ratio of both the years is almost near
to the ideal ratio which indicates that the funds are utilized efficiently.

 An ideal debt equity ratio is 2:1.but the debt equity ratio of both the years is low
which implies the use of more equity than debt, which means a larger safety margin
for creditors since owners’ equity is considered as a margin of safety by creditors
and vice-versa.


 Return on Capital Employed shows a negative in the current year which is not a
satisfactory one.

 Operating Profit Margin also decreases in the current year.

45
 Valuation of IPO:
 FCH is demanding for huge premium on its shares, when compared with companies
such as Reliance Capital, India bulls Financial Services, and IL&FS Investment
Managers, based on price to earnings (P/E) multiple.

 The company offers shares at P/E multiple of 137.79 at the floor price and 150.59
at the cap price (based on annualized earnings per share for first half of FY08, on
pre issue capital of the company).

 On the other hand, shares of its peers, Reliance Capital, India bulls Financial
Services, and IL&FS Investment Managers were trading at P/E multiple of 64.72,
27.02 and 41.41(based on annualized earnings per share for first half of FY08 and
share price as on Jan. 10, 2007) while the industry average is 42.8.
 In addition, the limited financial history, together with losses of Rs 124 million in
its books for first half of FY08 is cause of concern.
 The business undoubtedly offers huge room for scalability; earnings visibility is
extremely low at this juncture.
 At Rs 765, the higher end of the price band, the offer values the entire business at
a price-book value (P/BV) of about 6.6 times and entrenched peers in
banking/financial services with similar opportunities for growth — India bulls
Financial, ICICI Bank and IDFC are available at comparable valuations.

46
 4.2 RELIANCE POWER:

Issue Details
Issue Opens January 15,2008
Issue Closes January 18,2008
Price Band Rs. 405-450
Face Value Rs. 10
Listing NSE, BSE

Company profile:

Reliance Power Limited (Reliance Power), part of RADAG has been set up to develop,
construct and operate power projects domestically and internationally. It aims to
develop 13 power projects with an aggregated generation capacity of 28,200 MW.

Reliance Power will have a diversified project portfolio in terms of geography, fuel mix
and technology.

Nine of the proposed thirteen projects are coal-fired or gas-based and two of those have
fuel security; the rest are yet to be finalized. In our view, for such huge capacity, fuel
linkage is of paramount importance.

Long term PPAs for 8,560MW have been signed, constituting just 32% of the
aggregated generating capacity. Of these, Sasan project (based on domestically
procured coal) and Krishnapatnam project (based on imported coal) have been signed
at a tariff of Rs1.19kw/h and 2.33kw/h per unit respectively, the differential attributable
to the high cost of imported coal. A large number of PPAs are yet to be signed,
reflecting some ambiguity on profitability.

47
Key Takeaways:
* Rosa Phase I, RPower's first power project is expected to commence operations from
December 2009, 6 months ahead of schedule. 60% of the project work is completed and
the balance is on track. We expect revenues from the project to stand at INR 3100
million approximately for FY10E.
* The 600 MW Rosa Phase II project has been awarded coal linkage. The
company is expected to achieve financial closure by Q4 2009.
* Commissioning schedule of Sasan project has been advanced by three years from year
2016 to 2013. Supplementary Power Purchase Agreement has been signed in this regard
with the procurers.

Valuation:
With commencement of projects targeted before schedule, fuel linkage for Rosa Phase II
acquired, financial closures of 3 projects expected in Q4 09, getting clearances on a faster
pace, we believe RPower is well on track to achieve its ambitious plan to become the
second-largest power generator in India by adding about 30,840MW of capacity by FY16.
The stock is best for long term investment. I rate RPower as Outperformer. Hence it is
recommended to subscribe to the issue.

48
CHAPTER – 5
CONCLUSION

49
 5.1 FINDINGS AND SUGGESTIONS:

Findings:
 The pro-rata system of allotment favours investors who bid for relatively large
numbers of shares. Perhaps, the process should be changed such that those applying
up to 1,000 shares are allotted in full and beyond this number on pro-rata basis.

 Book building is preferred because the allotment of shares is generally done at a price
determined by the lead merchant banker and issuer within the price band. Since QIBs
are the dominant players and bid at somewhat higher prices within the band, the issuer
and merchant banker fix the price at the higher end such that retail investors have to
accept it. Thus, investors chipping in 35 per cent of the capital have little role in price
discovery. As a matter of fact, the IPO demand curve is skewed by differing demands
at different prices by various bidders. This indicates the need to use multiple pricing
for allotment.

 There is considerable amount of difficulties for an investor today in the IPO market
starting from sourcing the application to filling it and submitting it along with
cheques. When we have one of the world's best trading and settlement infrastructure
available why can't we use that infrastructure rather than insisting on a parallel market
for IPOs? This will be a good time to provide a direction to the IPO market as well to
attract new investors into the market.

 The grading process will not take into account price valuation, a key parameter in any
stock investment decision. Said Prime Database MD Prithvi Haldea, The market does
not work on fundamentals. A good company is a bad investment at a high price. The
small investors, for whom the grading exercise is basically meant, would despite
disclaimers expect a high graded IPO to quote above the offer price. The whole
purpose of grading an IPO would be defeated if it cannot help an investor decide what
stock to choose and at what price.

50
 SUGGESTIONS:

Keys to a Successful IPO: At the end to make its IPO effective, some important
considerations that should be kept are:

Obviously, having a successful company to offer to the public marketplace is essential.

Beyond that, it is important to recognize this in not a place for do-it-yourselves. While the
road show represents the formal coming out of the firm, its success will partially depend
on the groups selected for the audience, and this, in turn, depends upon the lead investment
banker/underwriter in the IPO. Choosing the right underwriter is probably second in
importance to choosing the right time to go public. The essential elements to look for in the
ideal lead underwriter are as follows:

1. The underwriter is focused on your industry: The IPO marketplace is a crowded

marketplace and the significant sums you are spending for professional advice to go public
need to be targeted to a firm with real expertise in your industry. Partial evidence of
appropriate expertise would be having an analyst devoted to your industry.

2. The market relies heavily on analyst projections and recommendations: Specifically,

the underwriting firm's analyst in your industry must:

 Have the capacity to cover your company with sufficient attention.


 Understand your company, customers, and competition.

 Indicate sincere commitment to covering your company.


3. Due to the importance of a successful road show, the underwriter must have the ability
and contacts to identify the right investor groups for your presentation and get them
committed to attend. References from previous IPO successes are essential.

4. There must be sufficient evidence of being able to build a quality "book" of potential
orders for your stock.

5. There should be a history regarding the ability to identify the right offer price and size.

51
 5.2 CONCLUSION

Through this research, I came to know that the IPO market is booming market in Indian
history. People now become aware about the IPO than other options of the investment like
fixed deposits, mutual funds, shares, gold and silver and other options of investment.

Hypothesis of the Study: Hence Proved

H0: ― Investor‘s behaviour is favourable in investing in IPO.

In this research report, I came to know that how the mechanism of IPO works in the
industry.

IPO is a broader concept than any other investment options of the investment.

The Project report starts with defining the various public issues with the need for the
company to take out an IPO. It goes explains how the scene has changed dramatically after
liberalization esp. after the on further to explain the advantages of an IPO. It analyses in
detail the Indian IPO Scenario. It explains the evolution of the IPO in India and introduction
of book building process.

52
 5.3 BIBLIOGRAPHY

WEBSITES:

www.moneycontrol.com

www.capitalline.com

www.nseindia.com

www.sebi.gov.in

www.capitalmarket.com

www.wikipedia.com

www.intimesepctrum.com

www.thehindubusinessline.com

www.financialexpress.com

www.myiris.com

www.icraratings.com

NEWSPAPERS:
Economic Times

53
54