Indian IPOs during 1999-2000: an empirical analysis

Abstract

1) Introduction and context description: Broadly speaking companies are private or public. when a private company decides to go public it may sell stock in accordance with the stock market regulator`s guidelines. An IPO (Initial public offering) is the first sale of stock by the company to the public. The pricing for the IPO may be done via two roués viz. the book-building route and the fixed price route. The IPO market in India has grown and matured over the last one and a half decade. The growth of the Indian IPO market can be broadly divided in three periods viz. 1. The initial stage (early 1990s) 2. The second stage (1999-2000) 3. The third stage (post 2001) The project intends to study the second phase of the IPO market. The various issues covered under this project include extent of underpricing method of offering sectorial and time specific trends size of the offer and the post listing performance of the firm. 2) Research questions: • What is the extent of underpricing during the IPOs offered during 1999-2000? • Are their inherent/ emergent patterns in the underpricing of IPOs offered during 1999-2000? If yes are the trends statistically significant? • How does the underpricing for IPOs offered via the book building root differ from those offered via the fixed price route? • What is the post-listing performance of the IPOs offered during 1999-2000? • Are their inherent/emergent patterns in the post-listing performance of IPOs offered during 1999-2000? If yes are the trends statistically significant? • How does post –listing market performance for IPOs offered via the book building root differ from those offered via the fixed price route? 3) Methodology: • The data regarding IPOs were collected from prime database, a New Delhi based consultancy. • The data regarding post listing market performance of the were obtained from prowess Database a CMIE service. • The data were processed and results drawn based on the parameters under study in the project. 4) Findings : • The extent of underpricing was quite high in 1999 compared to 2000. • Price discovery via the book building route appears to be more accurate as compared to the fixed price route. • The firms which offered IPOs via the book building route performed better compared to fixed price IPOs in terms of providing returns to the shareholders. 5) Limitations of the study: • Data not available for a wide range of sectors. • Macro-economic variables not considered as a guiding factor of the firms performance. 6) Scope for further work: • Effect of different macro-economic variables on performances of IPOs • Comparison of the three phases of IPOs in the Indian stock market. 7) Key words (up to five) IPO, Underpricing Book building /Fixed price. Learning’s from the IP process: • Understanding of the Indian IPOs. • Understanding of the behavior and psychology of the stock market. This study discusses the IPOs in the Indian market during 1999-2000. It tries to understand the trends in the underpricing of IPOs. The IPOs were found to be substantially underpriced. However the extent of underpricing was less in IPOs offered via the book-building compared to those offered via the fixed price router. The study also compared the IPOs offered in different industries. It was found that the IT industry was most active in IPOs during the period under study. However the industry did not offer good post-listing returns compared to the electronics and consumer media industry. Overall while the promoters made money in the IPOs the investors lost it post listing.