Performance of new equity share issues: an India experience

Abstract

Oversubscription of public issues of new equity shares was a common phenomenon experienced in India during the Seventies. The overwhelming public response to new equity issues, which are normally considered riskier than the existing shares, makes one wonder about their economic justification. This dissertation attempts an enquiry in that direction by examining the performance – measured by risk – during 1970-78. The objectives of the study were: (a) To measure initial performance, that is, performance from the date of closure of subscription list to the date of first quotation. (b) To see if initial performance is significantly different across: (i) different types of new issues, namely initial issues of new companies, further issues of existing non-FERA companies and FERA issues; (ii) different industries; (iii) the issues made at premium and the issues made at par; (iv) different categories of investors as defined by the number of shares applied for. (c) To test empirical validity of some of the popular hypotheses about performance of new issues. (d) To test market efficiency by measuring the after-market performance, that is, performance after the trading has started in the securities.

A sample of 98 issues was selected from the newly quoted shares on Bombay Stock Exchange. A modified form of Capital Asset Pricing Model was used to measure the performance. The model accommodates changes in the systematic risk of securities as they get matured. A framework is developed for different methods to compute security return for initial performance. Implications of different financing strategies for new issues are discussed. An approach is given for computation of market return in Indian context.

The results show positive initial performance irrespective of the method of computing the security returns. The performance is significantly different across different types of new issues and across different industries. Issues made at premium were not found to be better performers compared to those made at par. Lower categories of investors fetched higher returns compared to higher categories of investors. The results of examination of after-market performance indicate that the new issues continue to yield extra-normal returns up to one month after the trading has started in them. After the first month of trading, however, there are few departures from efficiency. The study has implications for operators in the securities market, corporations making public issues and policy-makers in the field of capital issues.