Final year project for PGDBM from MS ramaiah Institute Of Management.
It discuss various reasons why IPO fails in Market and various takes of Investors and Rural India on IPO.
4. Details study of various 22 different companies whose IPO came in market in year 2009 .
5. Rural India .We had made conclusion on base of all surveys, study, details and research we had done during our Empirical Study
6. FIRMS ARE GOING PUBLIC The main purpose of an IPO is to raise capital for the corporation. Other than raising capital, the reasons for IPOs which we found were: Liquidation of the shares of the company so that the founders and the rest of the existing shareholders will be able to "cash out“. Increased Capital. Raised capital can be used as working capital, acquisitions, research and development, marketing, and expanding plant and equipment. Expansion of the company into new territories not only by means of more funding, but also by regulatory or marketing reasons . Being public is associated with credibility and accountability. Expansion of the company either by acquisition or merger. Leveraging future sales or business to create extra value for the company.
7. BOOK BUILDING PROCESS “a process undertaken by which a demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for such securities is assessed for the determination of the quantum of such securities to be issued by means of a notice, circular, advertisement, document or information memoranda or offer document.” However, book building is a transparent and flexible price discovery method of initial public offerings (IPOs) The traditional fixed price method of tapping individual investors suffered from two defects: Delays in the IPO process Under-pricing of issue.
9. Book Building VS Fixed Price Option in the IPOs In fixed price process in IPOs, prices of IPO is fixed before and allotments of shares to all investors are made on proportionate basis. Institutional investors normally are not interested . In Book Building the price is determined on the basis of demand received or at price above or equal to the floor price. Book Building process book is built by Book Runner Lead Manager (BRLM) to know the everyday demand
10. Limitations of Book Building Mechanism The issuer company should be fundamentally strong and well known to the investors . The book-building system works very efficiently only in matured market conditions . The investors are aware of the various parameters affecting the market price of the securities. There is a possibility of price rigging on listing as promoters may try to bail out syndicate members. Green Shoe Option - It is experienced that IPO through Book Building method in India turns out to be overpriced or underpriced after their listing of them - It can prevent the IPO from huge price fluctuations and save investors from potential loss. Such mechanism is known as Green Shoe Option ICICI Bank has, used Green Shoe Option in first time
11. RURAL INDIA The villager, born humbly and bred hard, Content his wealth, and poverty his guard, In action simply just, in conscience clear, By guilt untainted, undisturbed by fear, His means but scanty, and his wants but few, Labour his business, and his pleasure too, Enjoys more comforts in a single hour Than ages give the wretch condemned to power. - Charles Churchill WOMEN OF RURAL INDIA - Women the word sounds so powerful.- Today women are equally competent behind the veils and outside world. - They are more confident and one can find them in every possible sphere of human‘s life. - Thanks to the efforts of government, NGOs, social welfare organizations and many such institutions, there has been a drastic improvement. Empowering Rural India Governments have been emphasizing economic development by ensuring growth rates of seven-eight per cent annually No. Of notable steps are taken by the Government of India for Empowering Rural India
21. Question 3 : Does 2009 IPOs gave returns according to your expectations ? Yes - 65 % No - 35 % Question 4 : If not invested in IPO. What was the reason ? - Various reasons were given and most of them conclude on one thing that Investor don‘t have trust on IPO . - Other reason told by them was of account decoration done by IPO issuing company which results in over pricing of IPO . - Few of investor raised question on genuineness of IPO Grading system and shown their disbelief in grading system of IPO.
22. Question 5 : Generally what are your clients response towards investment in IPO ? Investor responded strongly on this question. Responses were in favour as clients wants to buy IPO at lower price and want to yield profit long run . Question 6 : What risks you associate with IPOs? Aggressive pricing – 25% IPO grading system – 10% Accounting Practise – 40 % Other – 25%
23. Suggestions Classes of IPO’s During our empirical study we found need of classifying IPO into category that will help investors and other readers to know more about IPO and about their nature. There are four classes of IPO's:1. Story Teller – These Companies make lot of Hype about them. They may be well known and growing, unknown but with a great story of potential growth . They open with price above IPO list price. 2. Breath Takers – Financial model of these organisation is Ok, they're profitable. Risk is higher and returns don’t compensate the risk. 3. Dogs - Their financial model doesn't work, they don't know why they need the money or they are just trying to give your money to their original investors . Stock manipulation are high in these companies 4. Gladiators - Old companies with proven financial models that for some well defined business reason need the public capital markets. These can provide reasonable long term holds, and often do a slow rise.
24. Factors to watch before investing in IPOs We want empirical study to be helpful for Investors and Corporate. Therefore we have developed few Factors which are to be watched before investing in IPOs which will develop trust of Investors in IPO and will result in Success of IPO . Primary, we suggest reading the offer document carefully. Their email IDs are given in the abridged prospectus. If they do not provide, send a complaint to Sebi. Is this an IPO or an FPO? Is this a fixed-price or a book-building issue? Is this a “good” promoter? If there is any foreign collaboration of repute, it helps. What is the promoters‘ background and experience? Experience in the same business/industry Is the promoter a liability or an asset? If you find too many defaults/litigations of a material nature or even one of a very serious nature, a the issue. – Criminal proceedings against the promoters. What is the status of the issuing company? What to look for in the Balance Sheet? Fixed assets, Investments, Loan Advances. How has been the performance of the company?
25.
26. Do group companies constitute the main clientele?
27. Is most raw materials sourced from group companies?
28. Extent of related party financial transactions?
29. Is there any conflict of interest among group companies?
30. Are there companies in the group doing the same business What are the products/ services of the company? What about technology? What is the size of the issue? A large issue ensures better allotment as also better liquidity What is the promoter’s holding after the issue? A small post-issue stake does not inspire much confidence Is the company/ group company already listed abroad?
39. Repay debt? (to promoters?) Do acquisitions? Fund subsidiaries? Open branches? What are the components of the project cost? How is the company financing the objects of the issue? Are there any further capital raising plans? What are the key risk factors? What has been the utilisation of existing capacity? Are any major government approvals pending? Where is the company listing? Are there any significant trademark/ brand/ copyright issues? What is the record of investor complaints in listed entities?
40. CONCLUSION Reasons why IPO FAILS Aggressive Pricing OF IPO The companies that debuted with high valuations compared to their listed peers failed miserably. The company specific reasons, the common factor among them was their high price to earnings (P/E) multiple that they were asking. Reliance Power. Reliance Power raised Rs 11,700 crore from the market at More Pictures five digit earnings multiple and no revenue from operations . It is yet to generate any revenues from electricity. JET AIRWAYS . With Rs 400 croreprofit in its first year of listing, the stock was reasonably priced at 26 times its trailing year earnings . But within two years of its IPO, its finances were shattered due to a price war and record high crude oil prices. It is still struggling. While it is may not be appropriate to paint all the IPOs with the same brush, we suggest that investors should be cautious that the majority are over-priced and may choose the ones that are priced at a discount to their listed peers
41. ISSUES ON EVALUATING THE ACCOUNTING CHARACTERISTICS OF IPO FIRMS The companies that debuted with high valuations compared to their listed peers failed miserably Two major issues arise from our empirical study for treatment of IPO firms‘ accounting numbers. First, the prior IPO literature shows that the accounting properties of IPO firms are different from other firms and that these properties are likely to be endogenous to the decision to raise outside capital. On the other hand, life cycle–related operating characteristics can also affect the accounting properties of IPO firms. Prior studies investigate this hypothesis and suggest that the accounting properties of IPO firms are not the result of manipulation, but rather are endogenous to a firm‘s decision to seek outside capital and reflect a firm‘s growth characteristics surrounding the IPO date. Taken as a whole, we suggests that simple accounting variables, such as raw sales, SG&A expenses, or R&D expenses, may not capture the more complex and interesting accounting properties of IPO firms.
42. IPO grading system fails to produce desired results Grading of initial public offers has failed to make a major impact either on the investment rationale of retail investors. In fact, study reveals higher the grade of an IPO, the poorer has been its performance in the market. Companies such as Reliance Power, Edelweiss Capital and Gammon Infrastructure, which were rated four out of five have posted losses in the range of 46 to 56 per cent. The Securities and Exchange Board of India had made it mandatory for all IPOs to be graded by rating agencies from April 2007 onwards. Grading do not evaluate it as an investment proposition. Pricing of the issue is an important part, which is not covered by rating agencies while grading an IPO Analysis of the performance of IPOs that hit the market in 2006, 2007 and 2008 shows that the pricing of IPOs was more reasonable in 2006 than in the later two years.
43. Psychological Factors Lower level of Profitability Firms are going public now that are riskier than they used to be in the past. Investor look at the profitability of IPO and find himself standing no where near profit in near future. Low Offering Price Risk Studies find that if a firm goes public with a low offering price, that's an indication of a higher failure risk firm, and if a firm is more mature when it goes public that's an indication of a lower failure risk firm because they have the history behind them and knowledge of operations. Lack of Trust in Capital Market Common person lacks trust in capital market because of everyday news about fraud and scam on Dalal Street. Lack of trust of Investor in any new company will obviously be lower than listed companies Wait for Cooling down – Following old myths During year 2009 its been noticed that many IPO failed in beginning but later gained the trust of market. This simply shows that investors don‘t invest big on IPO at initial stage of opening but later after looking at performance of IPO, they invest into IPO.
44. THANK YOU Presented By Dhirendra Kr. Singh – 8113 NitinGoswami – 8125 Piyush Kr. Tulsian – 8130 Vipin Singh - 8160
![EXECUTIVE SUMMARY AnInitial Public Offering (IPO) is the first sale of a corporation's common shares to public investors. The main purpose of an IPO is to raise capital for the corporation . Every year No. of Investors looses their money in share market and much of the reason for lost is their investment in IPO .Our main objective of Empirical Study is to find the reason why IPOs fails and for that finding we have studied various different aspects associated with IPOs . ,[object Object]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)