Impact of ipo/fpo’s performance in indian capital market free essay sample

Financial capital is one of the most important components of a business. The need for financial capital grows with a growth in the business. At a certain stage, it becomes imperative to raise a large amount of financial capital to expand and sustain the business, and at an affordable cost to the company. An IPO – an acronym for Initial Public Offer – is one of the most popular methods of raising money from the general public and investors. IPO DEFINITION An initial public offer, as the name indicates, is the first (initial) instance of a company (called the issuer) offering its commons stock (or shares) to the general public for subscription. It is a common misconception that only newly formed companies resort to raising money through an IPO. Even long established private companies can access the IPO route to raise capital, and become publicly traded companies as a result. An IPO is considered as a â€Å"rite of passage† into the big league of publicly traded stocks. Any company that needs to be listed on a stock exchange has to offer its shares to the public. In addition to IPO, an already listed and publicly traded company may issue an FPO Follow on Public Offer – to raise further capital for the company.  the two. METHOD OF PRICING OF IPO/FPO IN INDIA There are various ways to price the stocks but what is commonly used now is a process called book building. It is basically a capital issuance process used in an Initial Public Offer which aids price and demand discovery. It is also a process used for marketing a public offer of equity shares of a company. During the period for which the book for the IPO is open, bids are collected from investors at various prices, which are above or equal to the floor price. The offer/issue price is then determined by the issuing company after the bid closing date based on the various bids that have been collected. LITERATURE REVIEW S S S Kumar , a study on â€Å"Short and Long-run Performance of Bookbuilt IPOs in India†,â€Å"International Journal of Management Practices Contemporary Thoughts†,year 2007 â€Å"One of the important reforms Indian markets witnessed in the recent past is the introduction of issuing shares through the book building process which aims at efficient price discovery. The paper attempts to see how the IPOs issued through book building process fare both in short-run as well as in long run. Results indicate that the IPOs are under-priced as is evidenced by the positive listing day returns and are out performing the market in the subsequent months almost up to twenty four months. However, after two years of listing they generate negative returns. This finding is consistent with the /PO performance literature from the other countries but is in contrast with the first long run study on 1POs in the long run in India. Vijaya B Marisetty2 (Department of Accounting and Finance Monash University ) and Marti G Subrahmanyam (Stern School of Business ,New York University ),† â€Å"Group Affiliation and the Performance of Initial Public Offerings in the Indian Stock Market †, Journal of Financial Markets , October 2008 . â€Å"This paper document the effects of group affiliation on the initial performance of 2,713 Initial Public Offerings (IPOs) in India under three regulatory regimes during the period 1990-2004. This document distinguishes between two competing hypotheses regarding group affiliation: the â€Å"certification† and the â€Å"tunneling† hypotheses. they lend support to the latter by showing that the underpricing of business group companies is higher than that of stand-alone companies. Furthermore, they find that the long run performance of IPOs, in general, is negative. We also find that Indian investors over-react to IPOs and their over-reaction (proxied by the oversubscription rate) explains the extent of underpricing†. Arun Kumar Gopalaswamy, Kartikeya Chaturvedi, N. Sriram, (2008) Long run post issue performance of fixed price and book built IPOs: an empirical study on Indian markets, Journal of Advances in Management Research, Vol. 5 Iss: 2, pp. 64 – 76 Sehgal, Shikha Singh, Balwinder, â€Å"Determinants of initial and long-run performance of IPOs in Indian stock market†. Asia-Pacific Business Review Journal, Oct-Dec, 2008, Source Volume: 4 Source Issue: 4 â€Å"The paper investigates the possible determinants of  underpricing and the long-run performance of 438 Indian initial public offerings (IPOs) listed on the Bombay Stock Exchange during June 1992March 2001. The mean underpricing has been found to be 99. 20 per cent, which is very high if compared with the international evidence. Age of the firm, listing delay at IPO and number of times the issue is subscribed have been found to be the important determinants of underpricing. Indian IPOs do not tend to underperform in the long-run and underpricing has been primarily found to explain the long-run performance. The study, thus provides evidence of overreaction hypothesis. † Seshadev Sahoo and Prabina Rajib, â€Å"After Market Pricing Performance of Initial Public Offerings (IPOs)†: journal vikalpa , volume 35 , no 4 †¢ october december 2010 â€Å"This paper is motivated by the apparent belief that IPOs are underpriced on the initial listing day and thereafter underperforms compared to the market benchmark. While evaluation of the listing day performance seems straightforward on surface, it actually invokes several complications for the subsequent performance measurement. This paper focuses on the evaluation of price performance of IPOs up to a period of 36 months including the listing day. It also examines the usefulness of IPO characteristics at the time of issue to seek an explanation for the post-issue price performance. Arwah Arjun Madan (Lecturer, St. Mira’s College for Girls, Pune Research Scholar, nia, pune)a study on â€Å"investments in ipos in the indian capital market†,journal Bimaquest Vol. III Issue 1, January 2003 â€Å"This paper aims (1) To look at the behaviour of IPOs in the primary capital market in the pre and post Liberalization Era: (a) extent of underpricing during the CCI SEBI times and (b) the influence on returns considering various factors such as Issue Size, Age, Foreign Equity, Issue Rating, and Issued Capital.(2) To assess the long-run performance of IPOs for a period of five years after listing Performance of IPO vis-a-vis Stock Index Industry Index RATIONALE OF STUDY It is a well documented fact that IPOs tend to be generally under-priced, though some issues tend to be overpriced. From the viewpoint of financial research, IPO under-pricing in the sense of abnormal short-term returns on IPOs has been found in nearly every country in the world. This suggests that IPO under-pricing may be the outcome of basic problems of information and uncertainty in the IPO process, and is unlikely to be a figment of institutional peculiarities of any one market. There have also been various studies made to suggest the reasons for such underpricing. From the investors’ point of view, this under-pricing appear to provide the sure and quick profit that most dream about. Though first day return could vary, few of the issues tend to provide a very high return over the first day. RECENT VIEW OF SEBI(OVERPRICING OF IPO) (SOURCE- THE ECONOMIC TIMES, 1 MAY 2011) With an aim to rein in cases of over-pricing and over-hyping of IPOs by merchant bankers, market watchdog Sebi wants them to tell the investors about their past record in handling the public offers and also keep the prices at realistic levels. SEBI has expressed its displeasure in very clear terms to the merchant bankers over the cases where IPOs have been priced in such a manner that there is little left on table for the public investors in terms of potential returns, a senior official said. At the same time, the regulator is also not happy with the hard-selling of these overpriced IPOs to the retail investors in a manner that good returns are assured from investment in such share sales, even if the pricing is beyond rational levels, he added. As a remedial measure, SEBI wants the merchant bankers to prominently disclose to the investors their track records, which would comprise of the performance of shares vis-a-vis the price in the IPOs managed by them.