IPO Performance on Indian Stock Market
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Published: Wed, 14 Mar 2018
The main focus of this research is to examine the IPOs Performance in Indian Stock Market. Taking the IPOs listed on National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) market during the 2000 to 2010. This research shows the IPOs process, factors influencing the IPOs performance. For example, Issue size, subscription level, Listing Time period etc. Furthermore, the analysis of performance of Indian IPOs in long term and short term prospective. For the long term analysis the buy and hold period of 12 months, 1 year, 2 years and 3 years in considered and for the short term analysis the buy and hold period of listing day, 1 week, 1 month, 3 months, 6 months after listing day have to be considered. Also, the underpricing is there in the Indian equity market and is more common in short term then in long term IPOs. Last, the regulatory framework of IPOs with the SEBI guidance.
Introduction: Initial Public Offers means when a company sell its share or offer its share in pubic for the first time. The offer generally issued by the new and smaller companies to expand their capital but it can also be done by the large privately companies to become public company. The new companies mostly don’t have resources to conduct the IPO. So, they generally depend on the other private funding’s like personal loans, family and friends. Therefore, they look for the investors which help them for their IPO process. Investors offer finance to the company for the stake in the company. The investor is liable in the decision making process and also advice the management in most of the company issues.
When the investors of the company want to liquidate their investment they have options like sell the equity to different company, sell the whole company to another company as an acquisition, or sell the equity in the Initial Public offering of the company. Also, when a company in needs of finance for the development of their company then they have options like private market equity, issue debt in the market or offer equity in the public which means initial public offer in the market. IPOs performance can be affect by different factors like issue size, delay in listing time etc. Some advantages for going public are like significant access to investment capital, some stock price support after the listing etc. While some disadvantages for going public are like for small companies the cost incurred for IPO is very high etc. SEBI is the regulator of the Indian Capital market including the primary market i.e. IPOs. IPOs have some fixed process and which every company has to follow when it comes for the IPO in the market.
According to Chemmanur (1993) an informative-theoretic model is developed with which insiders sell their stock, in both the primary and the secondary market, have all the knowledge about the firm performance. But, an outsider produces information about the firm performance at some cost. The insiders of high value firms are motivated to maximize the outsider information so that this information will be reflected in the secondary market price. However, since information production is costly, only a lower IPO share price will induce more outsiders to produce information. So underpricing results from insiders inducing information production in order to obtain a more precise valuation of their firm in the secondary market.
Shah (1995) has used the time series regression analysis. The main finding of this report was that the price of first IPO listing was 105.6% higher than the offer price. Second, the listing delay between issue dates and listing date affects the IPO underpricing and the delay is also related to the size of the issue. Third, the average long run trading frequency of IPO is 74% which is much worse than the A group companies, which have an average trading frequency of 94%. The trading frequency of IPOs is slightly higher after first listing.
Chen, et al. (2000) investigates the post issue market performance of Initial Public Offers in China’s stock markets. The main focus of this research was on whether and how institutional features unique to China differently affect IPOs performance. The research include the existence of dual class shares for the same firm, means A shares issued to domestic investors and B shares issued to foreign investors and also the long time lag between the IPO offer date and listing date. The main result of this study was first, the A share price are much more underpriced than the B share price during the initial return period. Second, during the post issue period for up to three years the B share IPOs underperform than the A share IPOs. They divided the research into two parts to evaluating the aftermarket performance of IPOs first, the initial return period, defined as the offering date to the first trading date; second, the aftermarket period, defined as the one, two or three years after the IPO. Multivariate regression analysis conducted to examine cross-sectional determinants of the aftermarket performance of China’s IPOs. However, the aftermarket performance is positive in the first year after listing but thereafter returns decline. Buying A-share IPOs immediately from the market after listing and holds the investment for more than three years results in negative returns. Economic factors affect the price of the IPOs.
Jaitly (2004) investigates the pricing of new issues in the Indian equity market during the period shortly following the deregulation of the market for new issues. In this research the importance of book value and market value estimates in determining issue prices as well as prices on the first day of trading and in the result of that pricing of new issues appears to be consistent with rational decision making. They also examine the extent of underpricing of IPOs in India by calculating the rate of return earned by the investors on the first day of trading. On an average, 72% return on the first day and with the government restriction, 160% return. These results are consistent and removal of restriction result in lower returns to investors and lower cost of capital for the issuing firm. And last they examine whether there are difference in first day returns or other variable for companies that issue shares at a price above the government benchmark and the companies that issues shares at price below the benchmark. Results indicate that there are no significant differences in firs day returns between the two groups of companies. However, significant differences between the two groups with respect to relative size of the issue and the difference between the forecasted and current book value.
Objective: The main objectives of this research are as follows:
To study the process of the IPOs.
To study the regulatory framework of IPOs in India.
To measure the underpricing of IPOs in India.
To analyze the short term performance of IPOs in India.
To analyze the long term performance of IPOs in India.
To analyze the factors affecting performance of IPOs in India.
To study the SEBI guideline of IPOs in India.
Data & Methodology:
For the short term analysis the listed IPOs on NSE and BSE has been traded for six months. And for the long run up to three years.
All the data regarding the offer price, issue size, listing date, listing price, and the current price are required.
For the short term analysis the equity share which has listed on NSE and BSE between the year 2000-2010 are to be considered.
For the long term analysis the equity share which has listed on NSE and BSE between the year 2000-2010 are to be considered.
A study required from all the IPOs data which are available for the factors affecting IPOs price performance in the Indian Stock Market.
Blum, James D. (1973), “An Analysis of the Price Behaviour of Initial Common Stock Offerings”, The Journal of Finance, Vol.28, No.1, pp. 215
Chemmuanur, Thomas J., (1993), “The Pricing of Initial Public Offerings: A dynamic model with Information Production”, The Journal of Finance, Vol. 48, No.1, pp 285-304.
Shah, Ajay. (1995), “The Indian IPO market: Empirical Facts” SSRN Library.
Jaitly, S., (2004), “Pricing of IPOs and Their After Issue Performance in the Indian Equity Market”, Vol. 30, No.1, pp 29-45.
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