Pravat Dissertation Project

7/29/2019 Pravat Dissertation Project

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E X E C U T I V E S U M M A R Y :

A s w e a l l k n o w I P O

I N I T I A L P U B L I C O F F E R I N G i s t h e hottest topic in the

current industry, mainly because of India being a developing country and

lot of growth in various sectors which leads a country to ultimate success. And

when we talk about countrys growth which is dependent on the kind of work and

how much importance to which sector is given. And when we say or talk about

industries growth which leads the economy of country has to be

balanced and given proper f inance so as to reach the levels to

fulfill the needs of the society. And industries which have massive outflow

of work and a big portfolio then its very difficult for any company to work

with limited finance and this is where IPO plays an important role. Stock markets are

barometers of the economy. It is expected that the markets and their indicators, in theform of indices, reflect the potential of the corporate listed on them and, in the

process, the direction and health of the economy. If a countrys economy is

performing well and expected to grow at a healthy rate, the market is usually

expected to reflect that. Indian economy is increasingly exposed to global markets

post liberalization in the early 90s. So before analyzing domestic markets one

needs to analyze the Global economy. In India we have number of recognized

stock exchanges which consists of a few at national level and majority at regional

level. When an unlisted company makes either a fresh issue of securities or offersits existing securities for sale or both for the first time to the public, it is called an

IPO. This paves way for listing and trading of the issuers securities in the Stock

Exchanges. Many factors determine the price of an initial public offering (IPO),

ranging from a company's marketing prowess to investor sentiment. The financial

history of a company in addition to its profit-earning potential for the future also

affects the price of an IPO. Pricing affects the performance of the IPO in the

market as it leaves an impact on the investors and most of them are not much

financially aware. Sometimes it may happen that there appears a huge demand for

an IPO in the bidding process during the book building method, which in turn

raises the issue price of the IPO, but when it comes into the market it does not

perform as expected. Instead its price drops thus putting the investors at a loss and

losing the confidence of the investors. Thus it is important for an IPO to be

optimally priced so that it justifies with the issue price. In this report I have tried to


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look into the matter that whether the 20 IPOs, which were taken as a sample out of

the population of about 115 IPOs issued in the last three years, have justified their

issue price or not. If yes, then why? And if not, then what are the reasons which

lead to the drop in price. It is seen that the IPOs are generally overpriced during the

issue. But some of them were not able to sustain at the price or above, instead theyfell down. But few of them which found some reason to support them, sustained at

the price or is trading at a price higher than the issue price. Thus this report throws

some light over the post issue performance of the IPO and comparing the

performance of the IPOs which are currently overvalued or undervalued. And it

also gives an idea how to look at an IPO before investment so that an investor is

not at loss after investing in the IPO or at least minimize the risk of investing in a

weak IPO.


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INTRODUCTION

After the liberalization of Indian economy in 1992 , the Indian financial market has

seen numeral developments. Number of companies has adopted the way of ipo for

raising funds due to availability of plenty of funds. An initial public offering (IPO)involves an interaction between the underwriter, the issuing firm, investors that

buy shares at the subscription price and those that purchase or sell shares in the

aftermarket. There is uncertainty surrounding the market price that results from the

IPO. Some investors feel that IPOs are low execution fruits. If investors were to

get allocations in IPOs and were to turn over these shares on the day of the listing

of the firm, then on an average they would able to get returns higher than the

market. There is however an element of risk here. The risk is in blocking ones

money in IPOs and getting no allocations.IPO stands for Initial Public Offering

and means the new offer of shares from a company which was previously unlisted.

This is done by offering those shares to the public, which were held by the

promoters or the pr ivate investors prior to the IPO. In the case when

other investors or Promoter held the shares the stake holding comes down

to the extent their shares are offered to the public. In other cases new shares are issued to the

public and the shares, which are with the promoters stay with them. In both cases

the share of the promoters in the total capital comes down. For example say there are 100

shares in a company and 50of these are offered to the public in an IPO

then in such a case the promoter s stake in the company comes down

from 100% to 50%. In another case the company issues 50 additional

shares to the public and the stake of the promoter comes down from 100% to

67%.Normally in an IPO the shares are issued at a discount to what is

considered their intrinsic value and thats why investors keenly await IPOs and

make money on most of them. IPO are generally priced at a discount, which

mean s th at i f th e in trin sic valu e of a s hare is perceived to be Rs.100

the shares will be offered at a price, which is lesser than Rs.100 say

Rs.80 during the IPO. When the stock actually lists in the market it will

list closer to Rs.100. The difference between the two prices is known

as Listing Gains, which an investor makes when investing in IPO

and making money at the listing of the IPO. A Bullish Market gives IPO

investors a clear opportunity to achieve long term targets in a short term phase.


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There are several benefits to being a public company, namely:

*Diversifying equity base

*Exposure, prestige and public image

*Attracting and retaining better management and employees through liquid equity

participation

There are several disadvantages to completing an initial public offering

namely:

*Significant legal, accounting and marketing costs

*Ongoing requirement to disclose financial and business information

* Meaningful time, effort and attention required of senior management

*Public dissemination of information which may be useful to competitors,

suppliers and customers.

What is an IPO?

An IPO is the first sale of stock by a company to the public .A company can

raise money by issuing either debt or equity. If the company has never issued

equity to the public, it's known as an IPO.


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Definition of 'Initial Public Offering - IPO'

The first sale of stock by a private company to the public. IPOs are often issued by

smaller, younger companies seeking the capital to expand, but can also be done by

large privately owned companies looking to become publicly traded .

Why an IPO?

An initial public offering (IPO) of stocks is a share offering to the public by a

small or medium-sized enterprise (SME) undertaken to raise additional cash for

future growth or to enable existing stockholders to cash out by selling part of their

holdings. Among other things, a successful IPO will provide a company with an

objective valuation of its stock, create a good public image of the companythus

lowering its cost of borrowingand provide it with a pool of publicly owned

shares for future acquisitions of other companies. However, there are also

drawbacks to being a public company, such as loss of freedom (including costly

disclosure requirements and close monitoring by the public and government) and,

if a takeover is threatened, potential loss of control. Initial Public Offerings or IPOs

help companies in raising capital to fund their plans for business expansion. At the

same time, the general public is given the opportunity of investing in promising

companies by subscribing to the issued IPO.


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Types of IPO

There are many types of IPO, illustrating the different management and owner

compensation contracts in firms.

1. The plain vanilla IPO is undertaken by a privately held company, mostlyowned by management, who want to secure additional funding and

determine the companys fair market value.

2. A venture capital-backed IPO refers to a company in which management hassold its shares to one or more groups of private investors in return for

funding and advice. This provides an effective incentive scheme for venture

capitalists to implement their exit strategy after they have successfullytransformed a firm in which they invested so that it is financially viable in

the market.

3. In a reverse-leveraged buyout, the proceeds of the IPO are used to pay offthe debt accumulated when a company was privatized after a previous listing

on an exchange. This process enables owners who own majority shares to

privatize their publicly trading firms, which are undervalued in the market,

thus realizing financial gains after the public was informed of the high

intrinsic value of the private firm.4. A spin-off IPO denotes the process whereby a large company carves out a

stand-alone subsidiary and sells it to the public. A spin-off may also offer

owners of the parent firm and hedge funds the opportunity to capitalize

mispricing in both the subsidiary and parent if the market is not efficient

enough. An interesting example in the United States was the spin-off of bid

by Creative Computers in 1998, which enabled arbitragers to capitalize the

mispricing between the two listed companies.


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The IPO Process

The first task of management is to select the underwriters who will be responsiblefor the new issue. This is done roughly three months before the IPO date. The

underwriters provide the issuing firm with procedural and financial advice. Later

they will buy the stock and then sell it to the public. The company, with the aid of

lawyers, accountants, and underwriters, submits a registration statement to a

regulatory body (such as the Securities and Exchange Commission (SEC) in the

United States) for approval of the public offering. The registration statement is a

detailed document about the companys history, business, and future plans.

Specifically, the SEC requires information on the details of the company (form S-

1), its financial history (form S-2), and expected cash flows (form S-3). The

company must be able to back up the information provided to the SEC.

Selection of Underwriters

The board of a firm planning to launch an IPO will first meet with potential

candidates for underwriters among investment banks and then select the lead

underwriter. The choice of underwriter is based on criteria that include: a

preliminary valuation of the firm based on its financial information; and thecharacteristics of the underwriter, such as previous IPO experience, strengths and

weaknesses, client network, research capabilities, and support for post-IPO issues.

Discounted cash flowanalysis and earnings multiples (such as the price/earnings

ratio) are typically used to come up with the preliminary value of the company.

Types of Underwriting

The management of the IPO firm selects the underwriters and decides on the type

of underwriting it wants. There are two types of underwriting: firm commitment,

and best efforts. If the underwriter enters a firm commitment with the company, the

underwriter is confident about the issue and is willing to buy all the shares if there

is insufficient demand. In a firm commitment offering, the underwriters will buy

the IPO shares at a discount in the range 3.57.0% and then sell them on to the

public at the full offer price.
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In a best efforts case, the investment bankwill only do

as much as it reasonably can to sell the shares and will return unsold equity to the

firm. This practice is common for less liquid securities. However, if there is excess

demand, the bank will ask for a green shoe option, allowing it to buy additional

stock from the IPO firm.

Selection of an Exchange

Different exchanges have different listing requirements. In general, they require

minimum levels of pretax income,net tangible assets, and number of stockholders.

For example, a New York Stock Exchange listing requires an income of either

US$2.5 million before federal income taxes for the most recent year or US$2

million pretax for the each of the preceding two years. The firm must have been

profitable in the two years before a listing.

Subscription Procedure

IPO shares are distributed in different ways to investors. One approach is an open

auction, where investors are invited to submit bids stating the number of shares

they wish to purchase and the price they will pay for them. The highest bidders get

the securities. The Google IPO of US$1.7 billion in 2004 and the Morningstar IPO

of US$140 million in 2005 used this open auction method.

The book building method is the most

commonly used in the United States today and is gaining popularity and

dominance across the globe . Each bid indicates the number to be purchased, and

may include a limiting price. Such information is recorded in a book, from which

the name book building is derived. These indications of interest provide valuable

information, because all bids are compiled to ascertain the market demand for the

security.
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INTRODUCTION

The Indian securities market considered as one of the most promising emerging

markets and one of the top eight market of the world. The market comprises of

equity, debt, and derivative segments and has a large investor base. The investorbase comprises of individuals, corporate, and foreign institutional investors, and

has been rapidly rising over the past decade after financial market deregulation and

economic liberalization.

Securities market is an economic institute within

which takes place sale and purchase transactions of securities between subjects of

economy on the base of demand and supply. Also we can say that securities market

is a system of interconnection between all participants(Professional & Non-

professional) that provides effective conditions to buy and sell securities and also :

-to attract new capital by means of issuance new security.

-to transfer real asset into financial asset.

-to invest money for short or long term periods with the aim of deriving profit.

TYPES OF SECURITIES: Securities are broadly categorized into:

1.

debt securities (such as banknotes, bonds and debentures),2. equity securities, e.g., common stocks; and, derivative contracts, such as

forwards, futures, options and swaps

COMPONENTS OF SECURITIES MARKETS

The major components of the securities markets are listed below:

-brokers, Custodians, Share Transfer Agents,Depository Participants, Credit Rating Agencies, Merchant Bankers

Institutions, Mutual Funds, Banks

of Persons, Companies,

Mutual Funds, Financial Institutions, Foreign Institutional Investors
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(DEA), Department of Company Affairs (DCA)

Different kinds of issuesWhat are the different kinds of issues which can be made by an Indian company in

India?

Primarily, issues made by an Indian company can be classified as Public, Rights,

Bonus and Private Placement. While right issues by a listed company and public

issues involve a detailed procedure, bonus issues and private placements are

relatively simpler. The classification of issues is as illustrated below:

(a) Public issue

(i) Initial Public offer (IPO)(ii) Further public offer (FPO)

(b) Rights issue

(c) Bonus issue

(d) Private placement

(i) Preferential issue

(ii) Qualified institutional placement

(a) Public issue: When an issue / offer of securities is made to new investors for

becoming part of shareholders family of the issuer3 it is called a public issue.Public issue can be further classified into Initial public offer (IPO) and Further

public offer (FPO). The significant features of each type of public issue are

illustrated below:

(i) Initial public offer (IPO): When an unlisted company makes either a fresh issue

of securities or offers its existing securities for sale or both for the first time to the

public, it is called an IPO. This paves way for listing and trading of the issuers

securities in the Stock Exchanges.

(ii) Further public offer (FPO) or Follow on offer: When an already listed companymakes either a fresh issue of securities to the public or an offer for sale to the

public, it is called a FPO.

(b) Rights issue (RI): When an issue of securities is made by an issuer to its

shareholders existing as on a particular date fixed by the issuer (i.e. record date), it


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is called a rights issue. The rights are offered in a particular ratio to the number of

securities held as on the record date.

(c) Bonus issue: When an issuer makes an issue of securities to its existing

shareholders as on a record date, without any consideration from them, it is called

a bonus issue. The shares are issued out of the Companys free reserve or sharepremium account in a particular ratio to the number of securities held on a record

date.

(d) Private placement: When an issuer makes an issue of securities to a select

group of persons not exceeding 49, and which is neither a rights issue nor a public

issue, it is called a private placement. Private placement of shares or convertible

securities by listed issuer can be of two types:

(i) Preferential allotment: When a listed issuer issues shares or convertible

securities, to a select group of persons in terms of provisions of Chapter XIII ofSEBI (DIP) guidelines, it is called a preferential allotment. The issuer is required to

comply with various provisions which interalia include pricing, disclosures in the

notice, lockin etc, in addition to the requirements specified in the Companies Act.

(ii) Qualified institutions placement (QIP): When a listed issuer issues equity

shares or securities convertible in to equity shares to Qualified Institutions Buyers

only in terms of provisions of Chapter XIIIA of SEBI (DIP) guidelines, it is called

a QIP.


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IPO- Advantages and Disadvantages

The following are the advantages of a public limited company.

More Capital:

A company can raise huge amount of funds to finance its capex programs like

expansion, modernization, diversification, etc. as well as working capital

requirements.

No cost of capital:

It does not need to pay interest on the capital raised from public. Even it does not

need to repay the capital. Only in case of liquidation /bankruptcy it needs to pay

the residual amount after paying bank loans, debentures, preferential shares etc.

Huge amounts can be raised:

It can raise huge amount of capital by going to public which maynt be possible

otherwise. It is difficult for private companies to raise capital.

Brand Value:

Companys brand value will get increased because people come to know about the

company very well. It increases the visibility and reputation of the company and

thereby enhances the brand image of the company.

Correct Valuation:

Since the share price reflects the companys financial healthiness it would become

easy to arrive at a price in case of mergers and acquisitions.

Owner Diversification:

Most of the funds of the founders are blocked in the firm till the firm grows and

becomes more valuable. By means of IPO, they can sell some stake to diversify

their holdings and can reduce the risk of their personal portfolios.


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Increased Liquidity:

The shares when get listed on the stock exchange, can be easily traded, providing

more liquidity.

Employee Prestige and Retention:

Employee pride and confidence in the company may increase .company can attract

as well as retain employees by offering them equity incentives like stock

options/stock purchase plans.

The following are the disadvantages of public ltd company.

Disclosure of information:

Once a company becomes public it has to disclose so much information to public

on regular interval .This includes share holding pattern, quarterly and annual

financial statements directors report etc .Because of this restriction companies will

always be under pressure to and show profits in every quarter. This some times

doesnt allow the management to take bold steps which may yield long term

benefits but less profits in short term.

Decisions take time:

Implementation of any key decisions is subjected to the approval by the board of

directors elected by share holders .This process may take more time.

Cost of IPO:

The cost of the process is very high, though its one time expenditure .The

investment banker/under writer charges heavily for doing this activity.


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Intermediaries

The role of intermediary is very crucial for connecting with the public issue. But

there are norms set by SEBI for the intermediaries.

Merchant Bankers

They play the most vital role among all intermediaries. They assist the company

right from preparing prospectus to the listing of securities at the stock exchanges.

Merchant Bankers have to satisfy themselves about the correctness and prosperity

of all the information provided in the prospectus. It is mandatory for them to carry

due diligence for all the information provided in the prospectus and they must issue

a certificate to this effect to SEBI.

Underwriters

Underwriters are those intermediaries who underwrite the securities offered to the

public.

Registrar & Share Transfer Agents

They are the person who processes and prepares the basis of allotment of shares to

public based on the applications received from the public.

Bankers to the Issue

They are who accept application and application money from the public on behalf

of the company.

Stock Brokers & Sub-Brokers

Brokers are the intermediaries who use their contact /sources to invite the public to

subscribe for shares issued by the company. These brokers get a commission for

inviting public.

Depositories

Depositories are persons who hold the share in the dematerialized form for the

public. It also reduces the burden of carrying to deliver it after every transaction.


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Financial Markets

The financial markets have two major components, the money market and the

capital market.

Financial Markets

|

| |

Money Market Capital Market

| |

Securities Market Other forms of

| Lending and

| borrowing

|

New issue Market Secondary Market

(Primary Market)


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Capital Market

The Capital Market is a market for financial investments that are direct or indirect

claims to capital. It is wider than the Securities Market and includes all forms of

lending and borrowing. The Capital Market comprises the complex of institutionsand mechanisms through which intermediate term funds and long term funds are

pooled and made available to business, Govt. and individuals.

Securities Market

The Securities Market refers to the markets where financial

instruments/claims/obligations that are commonly and readily transferable by sale.The Securities Market has two inter-dependant and inseparable segments, the new

issues (primary) market and the stock (secondary) market.

Primary and secondary market

In the primary market securities are issued to the public and the proceeds go to the

issuing company. Secondary market is term used for stock exchanges, where

stocks are bought and sold after they are issued to the public.

Primary market

The first time that a companys shared are issued to the public, it is by a process

called the initial public offering (IPO) .In an IPO the company offloads a certain

percentage of its total shares to the public at a certain price. Private companies and

public sector enterprises, in need of money, may issue securities such as shares,

debentures, bonds, commercial paper etc. The market mechanism for the buying

and selling of new issues of securities is known as primary market. This market is

also termed as New Issue Market because it deals in new issues of securities.

Most IPOs these days dont have a fixed offer price. Instead they follow a

method called BOOK BUILDING PROCESS, where the offer price is placed in a

band or a range with the highest and the lowest value.


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Secondary Market

Once the offer price is fixed and the shares are issued to the people, stock

exchanges facilitate the trading of shares for the general public. Once a stock is

listed on an exchange, people can start trading in its shares. In a stock exchange theexisting shareholders sell their shares to anyone who is willing to buy them at a

price agreeable to both parties. Individuals cannot buy or sell shares in stock

exchange directly; they have to execute their transaction through authorized

members of the stock exchange who are also called stock brokers.

MARKET REGULATORS

Securities market is regulated by following governing bodies:

Stock exchanges

development and regulate securities market. All the powers under this act are

exercised by SEBI.

porate

sector in relation to issue, allotment and transfer of securities, disclosures to be

made in public issues and nonpayment of dividend. Powers under this Act are

exercised by SEBI in case of listed public companies and public companies

proposing to get their securities listed.

of transaction in securities through control over stock exchanges. Most of the

powers under this act are exercised by Department of Economic Affairs (DEA),

some are concurrently exercised by DEA and SEBI and a few powers by SEBI.

transfer of ownership of dematerialized securities. SEBI administers the rules and


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regulation under this Act.

The Securities and Exchange Board of India was

established in 1988, as a government department. The passing of the SEBI Act in

1992 made SEBI the apex regulator of the Indian securities markets. It wasestablished to regulate and develop the growth of the capital market. SEBI

regulates the working of stock exchanges and intermediaries such as stock brokers

and merchant bankers, accords approval for mutual funds, and BSE Training

Institute Ltd. 18 registers Foreign Institutional Investors who wish to trade in

Indian scrips. Section 11(1) of the SEBI Act provides that it shall be the duty of the

Board to protect the interests of investors in securities and to promote the

development of, and to regulate the securities market, by such measures as it thinks

fit. SEBI regulates the business in stock exchanges and any other securitiesmarkets and the working of collective investment schemes, including mutual

funds, registered by it. SEBI promotes investor's education and training of

intermediaries of securities markets. It prohibits fraudulent and unfair trade

practices relating to securities markets, and insider trading in securities, with the

imposition of monetary penalties, on erring market intermediaries. It also regulates

substantial acquisition of shares and takeover of companies and can call for

information from, carry out inspection, conduct inquiries and audits of the stock

exchanges and intermediaries and self regulatory organizations in the securities

market. SEBI has introduced various reforms including improved transparency,

computerization, enactments against insider trading, improved capital adequacy,

imposed restrictions on forward trading, and enacted provisions to encourage

corporate membership in the stock exchanges. Stock exchanges have also laid

down strict compliance measures covering detection of irregular trading practices

through sophisticated surveillance systems, margining, trading volume controls

and set up investor protection funds. Stock exchanges ensure compliance of

brokers on a continuous basis through inspection and other measures.


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ACT & REGULATIONS:

The Companies Act, 1956

The Companies Act deals with issue, allotment and transfer of securities and

various aspects relating to company management. It provides for standard of

disclosure in public issues of capital, particularly in the fields of company

management and projects, information about other listed companies under the

same management, and management perception of risk factors. It also regulates

underwriting, the use of premium and discounts on issues, rights and bonus issues,

payment of interest and dividends, supply of annual report and other information.

The Companies Act, 1956 (Act) has over 600 sections, 14 schedules, various rules,

which are read along with various circulars, notifications and clarifications issuedby the Department of Company Affairs from time to time. The details of the

relevant regulatory authority are provided for in each section of the Act. The Act

also details the filing of various forms with the Registrar of companies (ROC),

Central Government, and provides for maintenance of registers/records and access

to outsiders. The Act also lays down penalty provisions through fine and/or

imprisonment for noncompliance of the provisions of the Act and on whom the

penalty is leviable. The enforcement of the provisions of the Act are carried out by

the Central Government (through Dept. of Company Affairs), the company LawBoard, (CLB) Regional Director of BSE Training Institute Ltd. 35 the CLB,

Registrar of Companies. The Securities and Exchange Board of India is the

concurrent authority of some matters relating to listed Companies. The

administration body under the Companies Act is Company Law Board.

The SEBI Act, 1992

Major part of the liberalization process was the repeal of the Capital Issues

(Control) Act, 1947, in May 1992. With this, Governments control over issues of

capital, pricing of the issues, fixing of premia and rates of interest on debentures

etc. ceased, and the office which administered the Act was abolished and the

market was allowed to allocate resources to competing uses. However, to ensure

effective regulation of the market, SEBI Act, 1992 was enacted to establish SEBI

with statutory powers for:


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(a)Protecting the interests of investors in securities,

(b)Promoting the development of the securities market, and

(c) Regulating the securities market.

Its regulatory jurisdiction extends over corporate in the issuance of capital and

transfer of securities, in addition to all intermediaries and persons associated withsecurities market. It can conduct enquiries, audits and inspection of all concerned

and adjudicate offences under the Act. It has powers to register and regulate all

market intermediaries and also to penalize them in case of violations of the

provisions of the Act, Rules and Regulations made there under. SEBI has full

autonomy and authority to regulate and develop an orderly securities market.

.

Securities Contracts (Regulation) Act (SCRA), 1956

SCRA provides for direct and indirect control of virtually all aspects of securities

trading and the running of stock exchanges and aims to prevent undesirable

transactions in securities. It gives SEBI regulatory jurisdiction over:

(a) Stock exchanges through a process of recognition and continued supervision,

(b) Contracts in securities, and

(c) Listing of securities on stock exchanges.

.


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A

PROJECT REPORT ON

PRICING AN IPO

A Calculated Trick: Is it justified often?

WITH REFERENCE TO

BHUBANESWAR STOCK EXCHANGE LTD. (BHSE)

SUBMITTED TO

MAHENDRAINSTITUTE OF MANAGEMENT AND TECHNICAL STUDIES

IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF TWO YEAR

FULL TIME POST GRADUATE DIPLOMA IN MANAGEMENT

SUBMITTED BY

PRAVAT KUMAR BEHERA

ROLL NO:MFC/11-13/105

UNDER THE SUPERVISION OF

Name: Name:

Designation: Designation:

(Company Supervisor) (Faculty Supervisor)


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CertificateCertified that Mr./Ms _________________________ has completed the Summer Internship Programme at(Company name)_____________________________ from _________ to _____________ and worked on the

project titled ______________________. This is an original piece of work and has not been used for any other

purpose.

Signature

(Company Supervisor)

Name:

Date

_____________________________________________________________________________________________

(ii)

Certificate to be given by the Faculty Supervisor in Institutes letter head

CertificateThis is to certify that the project report entitled ________________________________ is a bona fide work of Ms. /

Mr. _________________________________ , a student of Mahendra Institute of Management and Technical

Studies (MIMTS) bearing Roll No._____________ and was successfully conducted at (companys Name)____________________________ under my supervision as a part of Summer Internship Programme (SIP) from

______________to _________ in partial fulfillment for the award of Post Graduate Diploma in Management. To

the best of my knowledge this is an original piece of work and has not been submitted to any Institute/ University

for award of any other degree or diploma.

Signature

(Faculty Supervisor)

Name:

Designation:

Date


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DeclarationI Mr./Ms __________________________ bearing enrolment number _____________ do hereby declare that this

project report titled __________________________has been prepared on the basis of my learning through

Summer Internship Programme at ___________(Company Name) from --------- to --------- under the joint

supervision of Mr.//Ms ________________ and Prof. __________. The findings of the study are original and the

study materials used have been duly recognized in the body of the report. This report has not been submitted to

any Institute/University for the award of any degree or diploma in full or part.

Signature of the Student

Date:


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Acknowledgements

With all humility I would like to express that I am very lucky to undergo summer training at -------------------------------

------------ (Company Name). It was a golden opportunity for gaining practical experience and self development.

Further, I am honoured to have so many wonderful people who helped me insistently in several ways for the

completion of this project report.

I am extremely thankful to Mr.. (Company Supervisor) who in spite of his/ her busy schedule of

work spared his/ her invaluable time to listen and guide all through the project period. Without his/her active

support and supervision it was not possible to complete the project work.

I sincerely acknowledge my gratitude to Professor Mr./Ms./Mrs.____________________________ who was not

only involved in the entire process but also shared his/her knowledge, encouraged me and gone through the

report before it was submitted for evaluation. Thank you, Dear Sir/Madam.

I would like to thank Dr.__________________________, Director, Dr. __________________, Dean, and

Prof._______________________ for their active support and arrangements to make my learning and life easier at

_________________ (Company Name).

All my friends deserve thanks for their cooperation and sharing of valuable information that helped me in the

preparation of this report.

Last but not least I owe my heartfelt gratitude to my parents for their constant help, encouragement and

emotional support during the entire period of Summer Internship without which this report would not have been

completed.

Name of the Student

Date:


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CONTENTS

Page No.

Certificate from Company Supervisor (i)

Certificate from the Faculty Supervisor (ii)

Declaration (iv)

Acknowledgements (v)

List of Tables (vi)

List of Figures (vii)

Executive Summary (viii)

Abbreviations used (ix)

Chapter I Introduction 1-30

Chapter II Data Analysis 31-63

Chapter III Observation and Major Findings 64-70

Chapter IV Conclusions and Suggestions 71-75

Appendices 76-81


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References 82-90

Bibliography 91-100

Executive SummaryTitle - PRICING AN IPO, A Calculated Trick: Is it justified often?

Objectives - The objective of the project is as follows:

-To know about IPO and why companies issue IPO and other related factors.

-To know about the parties involved in the issue and their work.

-To analyze the performance of the IPOs in a post issue scenario and to draw a

conclusion whether the IPOs were able to justify the issue price or not. And also to

conclude that, does the companys pricing policy is towards the welfare of the

investors or not.

Methods and data sources - I have collected data only from secondary sources.

Major findings -

Summary of Conclusions -

Suggestions -


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CHAPTER 1

INTRODUCTION

1.1: Profile of the organization

Bhubaneswar Stock Exchange Ltd. -

Bhubaneswar Stock Exchange was incorporated as a company on 17th April 1989.

It is a company limited by guarantee without having share capital. Subsequently

pursuant to Securities Contracts Regulation (SCRA) Act 1956 by the Govt. of

India in 2004 in order to provide for corporatization and demutualization of the

Stock Exchange, BhSE was converted into a company limited by the shares by

way of fresh incorporation on 9th Dec 2005. Further pursuant to requirement of

demutualization in 2007 by diluting more than 51% of share capital to people other

than its members-brokers, BhSE diluted its shares capital to comply with this

requirement. The present share holding pattern of BhSE is represented up to 41%

by its member-brokers and remaining 59% by public other than its member-

brokers.

Objectives-

The objective of BhSE is to facilitate, assist, regulate or control the business of

buying, selling or dealing in stocks, shares, like securities in the interest of the

securities market and that of investors in securities within the meaning of SCRA.

In that line BhSE is a market infrastructure institution which has been facilitating

and providing infrastructure for carrying out the business of buying, selling or

dealing in shares and securities. Further BhSE is a public institution fordischarging public utility services. In this contest BhSE has been working for

protection of interest of the investors, increasing the level of financial literacy

among the investors and providing assistance to the investors for redressal of

grievance against any stock broker or listed company. BhSE is also now actively

engaged in conducting seminars, workshop and investors awareness programmes


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for the benefit of investors. BhSE also has been providing support and guidance to

the management students in their Summer Internship Programme (SIP)

assignment.

Business Operation-

Business operation of BhSE commenced on 2nd January 1991 with a membership

strength of around 160, which was increased to more than 200 in 1995. The present

business volume of BhSE is of the order of Rs 5 crore. Advent of National Stock

Exchange with interest of online trading and spreading of NWT (Nation Wide

Terminus) across the country lead BhSE, like other small and regional stock

exchange of the country, face a major setback in generating volume of business.

Thus the business of local segments shifted to NWTT (Nation Wide Trading

Terminus) of BSE and NSE. However presently BhSE has provided its member

brokers the business platform of NSE and BSE through interconnected stock

exchange of India.Further it is now actively working for revival of its own business

platform in association with NSE and BSE in terms of sec-13 of the SCRA. BhSE

has also been registered as depository participant (DP) of CDSL to provide DP

services to the investors in securities under operation of DEMAT account with it.

Activities of BhSE-

1- Clearing Settlement and Surveillance Operation:

This is the most important activity of the stock exchange. The transaction in shares

and securities which are carried out by the member of broker of the stock exchange

are settled through the clearing house with the help of centralized banking system

and depository system. Clearing house plays a major role in clearing and

settlement function of a stock exchange how ever in case of major stock exchange

like NSE and BSE the set operation is done through a clearing corporation which isa separate entity to facilitate these activities.

Surveillance mechanism is a very vital function of a stock

exchange. This function ensures fairness and transparency in the transaction by

undertaking various safe guards. Which include maintenance of broker base

minimum capital (BMC), collection of different types of margins, monitoring of


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trading activities of brokers individually and as a whole, monitoring the gross

exposure limit of outstanding position of brokers on any individual share etc.

2- Secretarial and Corporate affairs:

Secretarial department deals with the matter relating to meetings of board of

directors, various committees and general body. This department is also

responsible to compile with the statutory requirement in terms of provisions of the

companies act 1956. Corporate affairs department deals with the matter relating to

formulation of policies, rules regulations, looking after certain risk management

mechanism of BhSE such as Settlement Guarantee Fund, Investors Protection Fund

etc. This department also deals

with matters relating to other developmental activities of stock exchange.

3- Listing of Securities:

Presently listing department is a part of secretarial and corporate affairs function of

the BhSE. This department plays a very important role for listing of shares and

securities on the stock exchange. This department facilitates to raise capital in the

primary market through issue of shares and securities. This department monitors

and ensures that the public Issue of shares and securities are done according to the

Companies Act 1956. It monitors the whole issue process prior to the public issueand even in the post issue of securities, by a company, and makes sure it is made in

fair and transparent manner. And it also ensures that allotment of shares and

securities to various categories of investors is made in a proper manner as per the

regulatory frame work. On being satisfied with the performance of various

intermediary involved in the public issue process and complains made by

concerned companies the listing department recommend to the authority of stock

exchange. Another major responsibility of the listing department is to monitor the

compliance or requirement by a listed company in terms of listing condition asprescribed in the listing agreement executed between such listed company and the

stock exchange.


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4- Membership:

It deals with the matter relating to membership of the exchange. The

responsibilities of the department include activities such as

(a) Admission of individual and body corporate as the member brokers in terms ofrules and regulations of the stock exchange.

(b) Ensuring compliance of requirements by the member brokers in terms of rules

and regulations of the SEBI Act 1992, and securities contract (regulations) rules

1957.

(c) Ensuring and monitoring mentions of base minimum capital by the member

brokers with the exchange in terms of its rules and regulations.

(d) To conduct an inspection of books of accounts and other documents of the

member brokers.

(e) Providing membership service.

5- Investor Service:

This department acts as an intermediary in redressing the grievance of the investor

in securities against brokers and listed companies. It provides services to the

investing public where there is any complaint against the stock brokers or a listed

company.

6- Training and Education:

It has been working for spreading of equity culture and for increase the level of

financial literacy in the interest of investors. It also conducts investor awareness

programme, seminar, workshop etc from time to time at different location. BhSE

also runs few courses on Capital Market which includes three months course, one

month course and 15 days training programme. BhSE is also engaged in providing

guidance in support services to the students of various institutes and Business

school.


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7- Depositary Participant Service:

BhSE is a registered depository participant of central depository services for

providing depository participant service to the investors in securities. The

department is responsible for:(a) Providing service to a person intending to open DEMAT account.

(b) Dematerialization of shares and securities of a DEMAT account holder on his

request.

(c) Operation of DEMAT accounts of investors such as- Debit and Credit of shares

and securities in the DEMAT account as per the instruction of the account holder.

Capital Structure and Financing

Particulars As at 31st March,2011

(In Rs)

Sources of Funds

OWN FUNDS

Share Capital 57,98,980

Reserve and Surplus 5,50,53,742

LOAN FUNDS

Secured Loan 21,03,766

Unsecured Loan Nil

Deferred Tax Liability 36,783

Total 6,29,93,271

Application Of Funds

FIXED ASSETS


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Gross Block 3,08,53,119

Less: Depreciation 1,45,12,200

Net Block 1,63,40,919

CAPITAL WORK IN

PROGRESS

68,56,122

2,31,97,041

INVESTMENTS 72,70,000

CURRENT ASSETS,

LOANS & ADVANCESCash and Bank Balances 4,60,37,276

Loans & Advances 1,41,05,570

(A) 6,01,42,846

LESS:

CURRANT LIABILITIES

AND PROVISSIONS

CURRANT LIABILITIES 2,74,74,033

Provisions 13,81,413

(B) 2,88,55,446

(A-B) 3,12,87,400

12,38,829Total 6,29,93,271


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If we see the current Balance Sheet of the company we can see the sources and

application of funds. We found that the company has taken a loan of Rs 21, 03,766.

Thus the Debt /Equity ratio comes out to be 0.03. That means for every Re. 1 the

company has a liability of Re. 0.03 which is not too much of debt.

Working Capital Management -

Since the stock exchanges are service providing firms and that they do not

manufacture any product thus they do not have any significant working capital.

Dividend Policy and Practice -

The declaration and payment of dividend is recommended by the Board of

Directors and approved by the shareholders of the Company at their discretion anddepends on a number of factors, including the results of operations, earnings,

capital requirements and surplus, general financial conditions, etc. As such the

company has not paid any dividend till date.

Cost Revenue Structure-

Mainly the revenue in BhSE is generated by Annual Listing Fee. Some other

sources are

- Members Subscription

- Dividend received from ISE

- Rent received

- Income from training and education

- Income from ISEDepositary Participant

- Interest income on pre corporatized corpus.

Share Performance-


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BhSE is not a public company. It is a company limited by shares. Thus it is not

listed and its shares are not traded. But as per unofficial sources the shares are

being traded at a price of Rs 4 to 5.

Pricing -

Although BhSE is a service providing company but moreover it is a public utility

company. As such it does not have any tangible product like manufacturing

companies. As far as it is concerned about the listing and the member subscription

BhSE charges not much but a very notional fee.

Challenges

1- Upon introduction of on-line trading in place of age old out-cry system andexpansion o trading terminals by major stock exchanges such as NSE and BSE to

the various parts of the country, like other RSEs in the country, BhSE is struggling

for operation of a proper and independent business platform. This has exposed

BhSE to a survival threat like other RSEs.

2- In the light of fast changing capital market scenario with the advent of new

securities market technology and product lines, independent business platform has

become expensive and required skill sets are difficult to procure for a smaller

regional stock exchange like BhSE. This has doubled the concern of BhSE whilebattling for survival.

3- In the event of withdrawal mandatory provision by Ministry of Finance for

listing of securities on RSEs and introduction of liberalization delisting norms by

SEBI, BhSE has los listing support of most of the active corporate houses belong

to their respective states with support of their State Government. This has badly

narrowed one of the major revenue generation sources of BhSE.

Growth Plans-

1- BhSE is working for revival of a vibrant business platform in association with

National Stock Exchange and Bombay Stock Exchange in terms of Sec. 13 of the

SCRA.


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2- Financial literacy is one of the thrust areas, which needs to be undertaken in a

proper manner and in a massive way for the growth of securities market and for

growth of economy of the country as a whole. BhSE has been working for it.

3- BhSE is active in providing short term courses in Capital Market as a part of its

activities. It is also exploring the possibility to introduce diploma course in CapitalMarket.

1.2: Statement of the problem

In general we think that the price of IPO is based on a company name and goodwill

or it can fix at a amount where company will get profit.. Here the problem is I want

to find out who are the other factor affect the price of an IPO and whether the priceis justified or not?

1.3: Need for and importance of the study

Many factors determine the price of an initial public offering (IPO), ranging from a

company's marketing prowess to investor sentiment. The financial history of a

company in addition to its profit-earning potential for the future also affects the

price of an IPO. Pricing affects the performance of the IPO in the market as it

leaves an impact on the investors and most of them are not much financially aware.

Sometimes it may happen that there appears a huge demand for an IPO in the

bidding process during the book building method, which in turn raises the issue

price of the IPO, but when it comes into the market it does not perform as

expected. Instead its price drops thus putting the investors at a loss and losing the

confidence of the investors. Thus it is important for an IPO to be optimally priced

so that it justifies with the issue price. So here I want to know whether the issue

price is justified or not and which factor affect the pricing of IPO.


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1.4: Review of literature

1.5: Scope

Here I have taken only last 3 years data about those company who had issued there

share and again I have choose only 11 company and try to justified their issue

price of share.

1.6: Objectives

The objective of the project is as follows:

-To know about IPO and why companies issue IPO and other related factors.

-To know about the parties involved in the issue and their work.

-To analyze the performance of the IPOs in a post issue scenario and to draw a

conclusion whether the IPOs were able to justify the issue price or not. And also to

conclude that, does the companys pricing policy is towards the welfare of the

investors or not.

1.7: Methodology

Here I have taken data from only secondary sources. I have taken 111 companies

who were issued IPO in last 3 years and divide them to some group according to

overvalued IPOs, undervalued IPOs and neutral IPOs and randomly choose some

company from each of the group.

1.8: Limitations of the study

Here I have taken only last 3 years data about those company who had issued there

share and again I have choose only 11 company and try to justified their issue price

of share. And here I also used only secondary data.


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Statistical Framework

In the last three years about 111 IPOs have been issued. It has been observed that

mostly all of them were overvalued at the time of the issue. And it has also been

observed that currently about 71% of them are being traded at a price higher thantheir intrinsic value and about 20% are being traded at a price below the intrinsic

value of the IPO and about 9% are being traded at a price near to the intrinsic

value.

Project Analysis

A sample of 15 IPOs have been selected out 111 IPOs issued in the last three years,

some of which are trading at a price higher than the issue price is called overvaluedIPO,some of them are trading at a price lower than the issue price is called

undervalued IPO, and very few of them are trading at a price equal or nearly equal

to the issue price is known as neutral IPO.

Then for each IPO an analysis has been done which includes the:

- About the issue and their grading

- Risk factors

- Fundamental analysis (Pre and Post Issue)

- Price chart study

- Market sentiment study

After the analysis a generalized conclusion has been derived and few

recommendations have been suggested for the pricing of an IPO.


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UNDERVALUED IPOs

1. Adani Power:

(Issued: August 2009)

SectorPower Generation

About the Company-

The Company was incorporated as Adani Power Limited on August 22, 1996. The

Company became a private limited company on June 3, 2002 and the name of the

Company was subsequently changed to Adani Power Private Limited. The

Company was, thereafter, converted into a public limited company on April 12,

2007 and the name of the Company was changed to Adani Power Limited. Further,

upon ceasing to be a private limited company, the word private was deletedthrough a special resolution at the EGM of the Company held on March 28, 2007.

Company Promoters:

Gautam S Adani

Rajesh S Adani

Issue Detail:

*Issue open: July 28,2009-July 31,2009

*Issue Size: 301,652,031 Equity Shares of Rs. 10

*Face Value: Rs. 10 per Equity Share

*Price Range: Rs. 90-Rs. 100 Per Equity Share

*Listing At: BSE, NSE

*IPO Grading: ICRA has grade 3 out of 5

*last 52 weeks H/L:115.80/44.10


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If we look at the fundamental of the company it looks above average which is also

evident from the fact that ICRA has graded Adani power as 3out of 5. From the

above table it is clear that the fundamental parameters has increased when pre and

post issue figures are compared.Net worth of the company has increased 2.77 times

which shows that profit is increasing year on year. But if we look at the P/E ratio it

is very high if compared with the Industry average of 15.3. This may be because of

very low post issue EPS of 0.78. Company has not paid any dividend in the last

two years.

If we see the technical chart of Adani power ltd. we can make out that the stock

has been traded at a price lower than the issue price since 1 year which is also

evident from the prices of last 52 weeks. Thus we see that although the company is

not performing so well and it could not gain the investors confidence may be

because there is hardly any increase in PAT of the company and it incurred loss.

And since the stock is overpriced from the beginning, thus being overvalued, the

demand was less and the supply was high so this may be one more reason why the

price kept on decreasing.


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2. ARSS Infra:

(Issue: March 2010)

Sector: Construction & Contracting

About the Company:

The Company was incorporated as ARSS Stones Private Limited on May 17, 2000 under the

Companies Act, 1956, with its registered office at N-1/93, IRC Village, Nayapalli, Bhubaneswar.

On May 20, 2005, the name of the Company was changed to ARSS Infrastructure Projects

Private Limited. The Company has been converted to a public limited company in pursuance of a

special resolution passed by the members of the Company at the Extraordinary General Meeting

held on November 15, 2005.

About the Issue:

Public issue of 22,88,888 equity shares of Rs. 10/- each of ARSS Infrastructure Projects Limited

for cash at a price of Rs. 450 per equity share (including a share premium of Rs. 440 per equity

share) aggregating upto Rs. 10300 lacs ("issue"). The issue will constitute 18.23 % of the pre

issue and 15.42 % of the post issue fully diluted paid up equity capital of the company. The Issue

has been graded by Credit Analysis and Research Limited ("CARE") and has been assigned

"IPO Grade 2" indicating below average fundamental.

Risk Factors:

1- Our Company has defaulted on payment of interest and repayment of loan to various banks /

financial institutions.

2- The power supply at one of our Units has been disconnected by the Central Electricity Supply

Company of Orissa Limited (CESCO) due to default in payment ofelectricity bills and other

related disputes and the complaint filed by our Company with concerned authority.

Analysis:


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If we look at the fundamentals of the company it looks below average which is also evident from

the fact that CARE has graded the company with 2 out of 5. From the above table it is clear that

the fundamental parameters has increased when pre and post issue figures are compared.Net

worth of the company has increased 2.26 times which shows that profit is increasing year on

year. If we look at the P/E ratio it decreased to a value which is much less than the industry

average of 14.16. Company has also paid dividend for the last two years. If we see the technical

chart we see that just after the issue in 2010 the stock price has increased to a price double to the

issue price but at the end of the year the price started decreasing and kept on decreasing till date.

Thus we can say that although at the time of the issue the IPO was overvalued but subsequently

its price decreased and it is currently trading at a price lower than the current book value. Thus it

could be said that initially people took the IPO very positively may be because it bagged too

many contracts but then it could not sustain.

3. Raj Oil Mills:(Issued: Aug 2009)Sector: Edible Oil & Solvent Extraction


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About the Company:

Raj Oil Mills Limited was incorporated on October 17, 2001. The Company has received

Commencement of Business Certificate on November 6, 2001. The Company was formed to

undertake the business of buying, selling, manufacturing, and processing of edible oils, edible oil

seeds and other related products. The Company was promoted by Mr. Shaukat S. Tharadra. It

acquired the running business of M/s. Raj Oil Mills, partnership firm (exclusive of Land &

Building and intangible property in the form of Brands, Trademarks and Copyrights). M/s. Raj

Oil Mills, partnership firm, founded in the year 1943 by late Mr. Haji Suleman Jamal. M/s. Raj

Oil Mills, partnership firm have not carried out any valuation from any independent valuer. The

mentioned transaction took place at a lump sum amount of Rs. 75 lacs as a consideration for

assignment of the running business M/s. Raj Oil Mills, partnership firm through the mutual

consent of the Company and M/s. Raj Oil Mills, partnership firm through entering the mentioneddeed of assignment.

About the Issue:

Public issue of 95,00,000 equity shares of Rs. 10 each for cash at a price of Rs. 120 per equity

share, including a share premium of Rs. 110 per equity share, aggregating Rs. 11400.00 lacs.

This Issue has been graded by ICRA Limited as IPO Grade 2, indicating below average

fundamentals through its letter dated April 20, 2009.

Risk Factors:

1- Our inability to maintain distribution network can adversely affect our Revenues.

2- Our Company currently enjoys certain benefits in terms of Excise Duty exemptions, which

may not be available to us in the future thereby affecting our profitability.

3- The shortage or non-availability of power and fuel may adversely affect the manufacturing

processes and our performance may be affected adversely.

4- Our Company uses hazardous chemicals in its manufacturing processes; any failure to comply

with statutory regulations may adversely affect our operations.


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Analysis:

If we look at the fundamentals of the company it looks below average which is also evident from

the fact that ICRA has graded Raj Oil Mills with 2 out of 5. From the above table it is clear that

the fundamental parameters has increased when pre and post issue figures are compared.Net

worth of the company has increased 2.52 times which shows that profit is increasing year on

year. But if we look at the P/E ratio it decreased and is very low from the industry average of

13.4. Company has also not paid any dividend in the last two years.

If we see the technical chart we can make out that the stock price is continuously decreasing

since the issue of the IPO which is also evident from its last 52 weeks low/high price. Thus we

can say that although at the time of the issue the IPO was overvalued but subsequently it is now

been traded at a price even lower than the current book value. Raj Oil Mills was a company with

below average fundamentals and overvalued IPO and neither it has paid any dividend and thus

could not gain confidence of the investors and as a result its price kept on dropping. Even if we

look at the share holding pattern the promoter holding has decreased showing the loss of

confidence among the promoters too which may also be one of the reason of declining price.

Although at that time the market was not as volatile as is seen in case of Raj Oil Mills.

4. Aqua Logistics Ltd:(Issued: Feb 2010)Sector: Transport

About the Company:

The Company was originally incorporated as Aqua Logistics Private Limited on September 20,

1999 under the Companies Act, 1956 vide Certificate of Incorporation issued by the Registrar of

Companies, Mumbai. The Company was converted into a public limited company vide fresh

Certificate of Incorporation dated March 05, 2009 and subsequently the name of the Company

was changed to Aqua Logistics Limited.

About the Issue:

Public issue of 68, 72,852 equity shares of Rs.10/- each for cash at a price of Rs. 220 per equity

share (including a premium of Rs. 210 per equity share) for non institutional and QIB bidders

and Rs. 215 per equity share (including a premium of Rs. 205 per equity share) for Retail

Individual bidders aggregating upto Rs. 15,000 lacks (the issue), by aqua logistics limited. The


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issue will constitute 33.53% of the fully diluted post issue paid-up capital of our company. The

net issue to public will constitute 33.53% of the fully diluted post issue paid-up capital of our

company. The Issue has been graded by Brickwork Ratings India Private Limited and has been

assigned a grade of 3/5 indicating average fundamentals.

Risk Factors :

1- There has been a delay in the implementation schedule of the Project which is in the initial

stages of implementation. Inability to complete the project as per the stated schedule of

implementation may lead to cost/time overruns and may impact our future profitability.

2- We have not yet placed orders for specialised equipments aggregating Rs. 3,051.89 Lacs

required by us. Any delay in placing the orders/ or supply of equipments may result in time and

cost overruns, and may affect our profitability.


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Analysis:If we look at the fundamentals of the company it looks average which is also evident from the

fact that Brickworks Rating India Pvt. Ltd. has graded the company with 3 out of 5. From the

above table it is clear that the fundamental parameters has increased when pre and post issue

figures are compared.Net worth of the company has increased 2.52 times which shows that profit

is increasing year on year. If we look at the P/E ratio it increased and is at par with the industry

average of 36.09. Company has also not paid any dividend in the last two years. If we see the

technical chart we can make out that the stock price has increased in 2010 but dropped in the

beginning of 2011 and since then could not recover and is trading at a price below than the issue

price which is also evident from its last 52 weeks low/high price.

Thus we can say that although at the time of the issue the IPO was overvalued but subsequently

it is now been traded at a price near to the current book value. Aqua Logistics is a company with

average fundamentals and overvalued IPO and neither it has paid any dividend and thus could

not gain confidence of the investors and as a result its price kept on dropping in 2011. Even if we

look at the share holding pattern the promoter holding has decreased showing the loss of

confidence among the promoters too which may also be one of the reason of declining price.

5. DB Realty:

(Issued: Feb 2010)


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Sector- Real Estate

About the Company:

The Company was originally incorporated as a public limited company in the name of D B

Realty Limited, under the Companies Act, on January 8, 2007 and received certificate for

commencement of business on February 28, 2007. The Company was converted to a private

company and the name was changed to D B Realty Private Limited, pursuant to a shareholders

resolution dated May 14, 2007 and received a fresh certificate of incorporation on July 9, 2007.

Subsequently, the Company was converted to a public company and the name was change to D

B Realty Limited, pursuant to a shareholders resolution dated September 5, 2009 and received a

fresh certificate of incorporation on September 23, 2009. The Company has been engaged in the

business of real estate development and there has been no change in the activities being carried

out by the Company since its incorporation.

About the Issue :

Public issue of 32,051,282 equity shares of face value of Rs. 10 each of D B Realty Limited forcash at a price of Rs. 468 per equity share (including a share premium of Rs. 458 per equity

share), aggregating Rs. 15,000 million. The issue shall constitute 13.18% of the fully diluted

post-issue capital of our company. This Issue has been graded by CRISIL and has been assigned

the IPO Grade 2/5 indicating below average, through its letter dated Novmber 27, 2009.

Risk Factors :

1- Our business is heavily dependent on the availability of real estate financing in India. Difficult

conditions in the global financial markets and the economy may cause us to experience limited

availability of funds.

2- We have not obtained certain approvals for some of our projects and some of our projects arein the preliminary stages of planning and require approvals or permits and we are required to

fulfil certain conditions precedent, which may delay our projects and make us incur certain

additional costs.

Analysis:


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If we look at the fundamentals of the company it looks below average which is also

evident from the fact that CRISIL has graded the company with 2 out of 5. From

the above table it is clear that the fundamental parameters has increased when pre

and post issue figures are compared.Net worth of the company has increased 2.22

times which shows that profit is increasing year on year. If we look at the P/E ratio


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it decreased but still a bit on higher side than the industry average of 14.16.

Company has also not paid any dividend in the last two years.

If we see the technical chart we can make out that the stock price has a decreasing

trend although it tried to recover in the mid 2010 but dropped drastically at the endof 2010 and since then could not recover and is trading at a price below than the

issue price which is also evident from its last 52 weeks low/high price. Thus we

can say that although at the time of the issue the IPO was overvalued but

subsequently it is now been traded at a price much less than the current book value.

DB Realty is a company with below average fundamentals and overvalued IPO

and neither it has paid any dividend and thus could not gain confidence of the

investors and as a result its price kept on dropping. The price has fallen sharply at

the end of 2010 which is not just with the company but if we look at thecomparison chart the whole realty sector has fallen very sharply at the same period

which is evident by the chart of BSE Realty.

OVERVALUED IPOs

6. Coal India :

(Issued: Nov 2010)

Sector: Mining

About the Company:

In order to provide for a higher growth in coal sector to meet the growing energy needs of the

country, the Government in 1973, nationalized the coal mines by enacting the Coal

Nationalization Act. Pursuant to the nationalization of coal mines, the company was incorporated

as a private limited company with the name of Coal Mines Authority Limited, under the

Companies Act on June 14, 1973. Thereafter in 1975, Department of Coal, Ministry of Energy,

GoI, with a view to integrate and streamline the structural set up in a manner which could be

conducive to a more efficient administration, issued letter, providing for the re-organisation of

Coal Mines Authority Limited as Coal India Limited, which was to be responsible for the

entire coal mining sector owned and controlled by the Central Government. In compliance with

the direction from the Ministry of Energy, Department of Coal, and pursuant to a resolution of


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the shareholders dated October 15, 1975 and approval of the Ministry of Law, Justice and

Company Affairs, the name of the Company was changed to Coal India Limited.

About the Issue:

Public offer of 631,636,440 equity shares of face value of Rs. 10 each of Coal India limited

through an offer for sale by the President of India, acting through the Ministry of Coal,

Government of India for cash at a price of Rs. 245 per equity share aggregating up to Rs.

154,750.93 million. The offer comprises a net offer to public of 568,472,796 equity shares (the

net offer) and a reservation of 63,163,644 equity shares for subscription by eligible employees

(the employee reservation portion). The offer shall constitute 10.00% of the post offer paid-up

equity share capital of our company and the net offer shall constitute 9.00% of the post offer

paid-up equity share capital of our company. This Offer has been graded by CRISIL Limited,

ICRA Limited and Credit Analysis & Research Limited, and has been assigned the CRISIL IPO

Grade 5/5, IPO Grade 5/5 and CARE IPO Grade 5/5, respectively, indicating that the

fundamentals of the Offer are strong relative to the other listed equity securities in India.

Analysis:


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If we look at the fundamentals of the company it looks to be very strong which is also evident

from the fact that CRISIL, ICRA and CARE, all the three rating agencies has graded the

company as 5 out of 5. From the above table it is clear fundamental parameters such as networth

has increased when pre and post issue figures are compared.PAT is showing a growth of about

50% in just one year wich is a substantial growth rate. If we look at the P/E ratio it is lower than

at the time of the issue and it may be because of increase in EPS but P/E is still high as compared

to industry average may be because of high price as compared to its peers.

If we see the technical chart the stock was trading at a price which on an average was near to

its issue price. Thus although being an overvalued stock it was able to gain the confidence of

investors and has traded at a high price even though the market was showing a slight downturn.

If we see the last 52 weeks low/high price then we observe that it has traded above the issue

price and that the investors has well accepted thid overvalued stock as it has strong

fundamentals, GoI as promoters and the company is paying handsome dividends too.

7. Jubilant foodworks:

(Issued: Feb 2010)

Sector- Miscellaneous


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About the Company:

The Company was incorporated on March 16, 1995 under the Companies Act as a

private limited company under the name Dominos Pizza India Private Limited.

The Company was converted into a Public Limited company pursuant to a special

resolution of our shareholders, dated September 14, 1996, following which thename was changed to Dominos Pizza India Limited, and a fresh certificate of

incorporation was issued consequent to the conversion into a public limited

company, on December 11, 1996. Subsequently, the name of our Company was

further changed to its present name Jubilant FoodWorks Limited and a fresh

certificate of incorporation was issued on September 24, 2009.

About the Issue :

Public offer of 22,670,447 equity shares of Rs. 10 each (the "equity shares") for

cash at a price of Rs. 145 per equity share of Jubilant Foodworks limitedaggregating to Rs. 3,287,214,815. The offer comprises a fresh issue of 4,000,000

equity shares by the issuer and an offer for sale of 18,670,447 equity shares by the

India Private Equity Fund (Mauritius) and Indocean Pizza Holding Limited. The

offer comprises a net offer to the public of 20,403,403 equity shares and a

reservation of 2,267,044 equity shares for subscription by eligible employees, at

the offer price. The offer shall constitute 35.63% of the post-offer share capital of

our company. The net offer shall constitute 32.07% of the post-offer share capital

of our company. This Offer has been graded by Fitch Ratings India Private Limited

and has been assigned a grade of 3, indicating average fundamentals.

Analysis:


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If we look at the fundamentals of the company it looks average which is also

evident from the fact that it has been rated 3 out of 5 by the rating agency. From

the above table it is clear that the fundamental parameters has increased when pre

and post issue figures are compared.Net worth of the company has increased 5.48

times which shows the company is flourishing and profit is increasing year on

year. If we look at the current P/E ratio it is much higher than the Industry average

of 35.79. But P/E post issue has decreased as EPS has increased about 12 times


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thus masking the effect of increase in price. The company has never paid any

dividend still the investors are optimistic about the firm which is reflected in the

continuous increase of the stock price and high trading volume.

If we see the technical chart of Jubilant Foodworks Limiited we can make out thatsince the day of listing the stock has been traded at a price above the issue price

and the trading price has maintained a continuous uptrend.

Thus we can say that being an overvalued stock it has succeeded in gaining the

investors confidence and thus traded continuous at prices which is much beyond

the issue price and even the book value per share of the firm.

8. JSW Energy:(Issued: Jan 2010)

Sector- Power Generation

About the Company:

The Company was originally incorporated as Jindal Tractebel Power Company

Limited on March 10, 1994 as a joint venture between JSW Steel Limited and

Tractebel, S.A., Belgium. The name of the Company was changed to Jindal

Thermal Power Company Limited on January 17, 2002 after Tractebel, S.A.,

Belgium sold their holding to JSW group companies and financial institutions. The

name of the Company was further changed to JSW Energy Limited on December

7, 2005 and a fresh certificate of incorporation upon change of name was issued by

the Registrar of Companies, Maharashtra on December 7, 2005. The aforesaid

changes were made in the name to reflect the changing nature of the business or

the constitution of the company and to clearly reflect the nature of the business.

About the Issue :

Public issue of 269,821,236 equity shares of Rs. 10 each of JSW Energy Limited

for cash at a price of Rs. 100 per equity share (including a share premium of Rs. 90

per equity share) for non institutional and QIB bidders and Rs. 95 per equity share

(including a share premium of Rs. 85 per equity share) for retail individual bidders

aggregating to Rs. 27,000 million (the issue). The issue will constitute 16.43% of

the post issue paid-up capital of the company. The face value of equity shares is

Rs. 10 each. The issue price is Rs. 100 and is 10 times the face value. This Issue


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has been graded by CARE as CARE IPO Grade 4, indicating above average

fundamentals through its letter dated September 9, 2009.

Analysis:


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If we look at the Fundamentals of the company it looks very strong which is also

evident from the fact that CARE has graded JSW Energy Ltd. with 4 out of 5.

From the above table it is clear that the fundamental parameters has increased

when pre and post issue figures are compared.Net worth of the company hasincreased 2.66 times which shows the company is flourishing and profit is

increasing year on year. If we look at the current P/E ratio it is much higher (about

3 times) than the Industry average of 16.79. Very high P/E may be attributed to the

decrease in EPS of the stock.

If we see the technical chart of JSW Energy Ltd. we can make out that the stock

has always been traded at a price higher than the issue price in the last 52 weeks.

Thus we can say that being an overvalued stock it has succeeded in gaining the

investors confidence and thus traded continuous at prices which is much beyond

the issue price and even the book value per share of the firm.

9. Godrej Properties:

(Issued: Jan 2010)

Sector- Real state

About the Company:

Our Company was originally incorporated as Sea Breeze Constructions and

Investments Private Limited on February 8, 1985 by Mr. Mohan Khubchand

Thakur and Mrs. Desiree Mohan Thakur. In the year 1987, we became a part of the

Godrej group and in the year 1989 we became a subsidiary of Godrej Industries

Limited (erstwhile Godrej Soaps Limited). The name of our Company was

changed to Godrej Properties and Investments Private Limited pursuant to a special

resolution of the shareholders dated July 2, 1990. In the year 1991, the status of our

Company was changed to a deemed public company by deletion of the word

Private from the name of the Company. Subsequently the sta

Pravat Dissertation Project

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