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CHAPTER-VI

PRICING OF PUBLIC ISSUES

Pricing of public issues is the most contentious issue in the management of

public issues. In case of follow-on public offerings, the pricing of securities is known

to some extent from the prices quoted on the floor of the stock exchange. However, in

case of Initial Public Offerings (IPOs), the determination of offer price is more

complicated. The disclosures made in the offer documents are new to the investors

and the performance of the company is yet to be tested in the secondary market. The

role of the lead merchant banker acting as issue managers, thus, becomes more

important with respect to pricing of IPOs.

Lead merchant bankers play a decisive role in the determination of issue price

for public issues. Issue price of securities is determined by the issuing companies in

consultation with the merchant bankers, called issue managers. It is determined in the

light of legal and regulatory framework of a country. Till 1992, pricing of public

issues were regulated by Capital Issue (Control) Act, 1947 in the country. Now, with

the repeal of this Act, the issue price of securities is determined by the relevant

provision of Companies Act, 1956 and Securities and Exchange Board of India

(SEBI) Act, 1992.

During the era of Controller of Capital Issues (CCI), the task of issue

managers regarding determination of issue price of securities was limited, as the issue

price was strictly determined on the basis of formula provided by CCI. After the

liberalization of Indian economy in 1992, the concept of free pricing of public issues

was introduced. The issuing companies were made free to determine the issue price of

their securities. As the issuers are not well versed about the prevailing market

conditions, they are more dependent upon lead merchant bankers to determine the

issue price of shares. So, pricing of public issues has become a complex and

challenging job for merchant bankers which demands the best skill and expertise.

Disclosure and Investors Protection (DIP) Guidelines issued by SEBI provide

for the determination of issue price by issuer in consultation with the lead merchant

bankers. The issue price is based on certain parameters at the micro and macro level.

At the company level, issue price is determined on the basis of quantitative factors

like earning per share, price earnings ratio, net worth, net asset value, average return

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on net worth, capital structure and track record of dividend payments by the company.

The qualitative factors at micro level which affect the determination of issue price

include the standing of the company, background of the promoters, their business

experience, market share of their product etc. Besides this, the major determinants of

issue price at macro level include the present condition of secondary market, market

interest rate, national and global economic conditions, and the rate of growth of GDP

and industrial production.

Fairness of issue price determined by the issuer in consultation with the lead

merchant banker is tested at the time when equity shares are listed on the recognized

stock exchange. It is measured by the degree of under pricing/overpricing from the

company’s point of view. Investors judge the fairness of issue price on the basis of

percentage of positive\negative return obtained on and after the listing day.

6.1 Methods of Pricing of Public Issues Various policies and methods used for pricing of equity issues followed during

the pre and post reforms periods are explained below:

6.1.1 Pricing Regulations during Pre Reforms Era Raising of capital by companies in India from securities market was free from

all controls until the Second World War. During the Second World War, the colonial

Government needed to raise funds in order to support the war efforts. Thus, under the

Defence of India Rules, it put restrictions requiring the issuer to obtain the prior

permission of the Govt. before going to the public. This was continued even after

independence and was formally incorporated in the Capital Issues (Control) Act,

1947.

The office of Controller of Capital Issues (CCI) in the Ministry of Finance,

Government of India, administered the Act. Under the Act, Central Government’s

permission was required with regard to (i) the timing of the issue (ii) the size of the

issue and (iii) the price at which securities were to be issued.

6.1.2 CCI Formula for Valuation of Equity Shares

Till mid 1992, Indian capital market was under the direct control of Central

Govt. through CCI. The new companies were allowed to issue shares at the face value

only and the existing companies with sound financial structure could issue shares at

premium. There were strict norms for the issue of rights shares and bonus shares. For

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the pricing of equity issues by unlisted and listed companies, CCI provided a formula

for the ‘fair value’ of equity shares. This formula was based on the:

(i) Net Asset value ( NAV),

(ii) Profit Earning Capacity Value ( PECV), and

(iii) Market Value (MV), in case of listed companies.

The NAV, as at the latest audited balance sheet date was calculated on the

basis of the total assets of the company and deducting there from all debts, dues,

borrowings and liabilities including current and likely contingent liabilities and

preference capital, if any. This NAV calculated from the assets side of the balance

sheet in the above manner was cross checked with equity capital plus free reserves &

surpluses, less the likely contingent liabilities.

The Price Earning Capacity Value (PECV) was calculated by capitalizing the

average of the after tax profits at the following rates:

(i) 15% in the case of manufacturing companies.

(ii) 20% in the case of trading companies, and

(iii) 17.5 % in the case of ‘Intermediate companies’, that is to say, companies

whose turnover from trading activities was more than 40% but less than 60%

of their total turnover.

In case of listed companies, the market price of equity shares will be the

guiding force for determining the issue price of equity shares to be issued. In such

cases, the market price was taken cognizance of in the following manner:

(i) The average market price was determined taking into account the stock market

quotations in the preceding three years( after making appropriate adjustments

for bonus issues and dividend payments as under:

(a) The high and low of the preceding two years: and

(b) The high and low of each month in the preceding 12 months.

The conservative CCI formula, which used to calculate the ‘fair value’ on the

basis of accounting information, was critised on a number of counts. This often

resulted in extreme under pricing and heavy over subscription. The heavy under

pricing deterred the companies from going to public. Consequently, very few issuers

took initiative to issue equity shares to the public. Debt played a major role in

financing the projects and the primary equity market could not develop significantly.

The Capital Issues (Control) Act, 1947 and CCI was repealed in May 1992.

With this, Government’s control over issue of capital, pricing of the issues, fixing the

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premium and rates of interest on debentures etc. ceased and the market was allowed to

allocate resources on competitive basis.

6.1.3 Pricing Methods of Public Issues during Post Reforms Period In 1991, Government of India ushered in reforms in the area of industrial and

trade policy. Liberalisation and privatization of economy required large funds to be

channelized from savings into investment. In 1992, Government of India decided to

have a separate statutory authority to regulate the Indian capital market. So, Securities

and Exchange Board of India (SEBI) Act was passed in Parliament and SEBI was

made a statutory authority.

After repeal of CCI, corporates were given freedom in terms of price, size and

timing of their public issues. SEBI guidelines have provided that the issuer company

in consultation with lead merchant banker shall decide the price. There is no price

formula stipulated by SEBI and it does not play any role in price fixation. However,

price of public issue of equity is to be determined on the basis of following points.1

a. EPS, pre-issue, for the last three years (as adjusted for changers in capital).

b. P/E pre-issue.

c. Average return on net-worth in the last three years.

d. Net Asset Value per share based on last balance sheet.

e. Comparison of all accounting ratios of the issuer company as mentioned

above with the industry average and with the accounting ratios of the peer

group.

f. The accounting ratios disclosed in the offer document shall be calculated after

giving effect to the consequent increase of capital on account of compulsory

conventions outstanding as well as on the assumption that the option

outstanding , if any, to subscribe for additional capital shall be exercised.

6.1.4 SEBI Guidelines for Pricing of Issues

SEBI (Disclosure and Investor Protection) Guidelines, 2000 as amended from

time to time have provided guidelines for the pricing of public as well as rights issues

of equity shares or any security convertible at later date into equity shares in the

following manner:

The companies (both listed and unlisted) , including the eligible infrastructure

companies, have the freedom to price their equity shares or any security convertible 1. DIP Guidelines, 2000, updated up to August 20, 2009.

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into equity in public or rights issues as the case may be. The banks (both public and

private) can also freely price their shares subject to the approval by the Reserve Bank

of India. A company (listed or unlisted) may issue shares to applicants in the firm

allotment category at a different price from the one at which the net offer to the public

is made. That is, at a higher price than at which the securities are offered to the public.

However, the difference between the prices should not be more than 10% of the price

at which securities are offered to other categories of public.

Similarly SEBI guidelines provide that the company is free to determine the

denomination of shares for public/ rights issues and to change the standard

denomination. In case of initial public offerings by unlisted companies, if the issue

price is Rs. 500 or more, the issuer company shall have the discretion to fix the face

value below Rs. 10 per share, subject to the condition that the face value shall in no

case be less than Rs. 1 per share. However, in case the issue price is less than Rs. 500

per share, the face value shall be Rs 10 per share.

6.1.4 Pricing Methods of Equity Shares There are two methods which have been followed by the issuer companies for

the determination of issue price of public issues of equity shares in India. These are

Fixed Price method and Book Building method as discussed below:-

(i) Fixed Price Method

Under this method, price at which equity shares are to be issued to the public

is pre determined by the issuer company in consultation with the lead merchant

banker. Issue price is determined subject to compliance of the eligibility and

disclosure norms of SEBI and the relevant provisions of Companies Act, 1956. Issue

price is determined before the issue opens for subscription. The price at which the

securities are offered/ allotted is known in advance to the investors. The company also

knows in advance about the total funds which can be raised from the market.

Response of public to the issue is known by the company only after closure of the

issue.

After the introduction of fixed price method under free pricing policy in 1992,

there has been a sharp increase in the number of public and rights issues from the

primary market. As a result, the number of public issues rose sharply from 196 with

Rs. 1,711.36 crore in 1991-92 to 528 in 1992-93 for Rs. 6,060.83 crore and further to

1,343 public issues with Rs. 13,311.60 crore in 1994-95. The annual number of public

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issues has been the highest at1428 raising an amount of Rs. 11,822.18 crore in 1995-

96. Similarly amount raised through rights issues was Rs. 12,629.81 crore from 488

issues in 1992-93 and Rs. 9,306.22 crore from 384 issues in 1993-94.

However, the issuer companies and the lead merchant bankers failed to justify

their issue price when the shares were traded on the stock exchange. The overpricing

of public issues following the introduction of free pricing and fixed price method and

decline in the market prices of those issues had an adverse effect on the capital

market. As per the Prime Database study, out of 3872 new issues listed during the

period of four years from April 1, 1992 to March 1996, 2987 issues were traded

below offer price and 205 issues were not traded at all while 118 issuing companies

even vanished. Only 562 issues were traded in the secondary market above the offer

price.

So, in fixed price method, issuing companies were the net gainers during the

public issue boom period. It resulted in the lack of investors’ confidence in the

market. A number of defects in fixed price method like delay in the IPO process, lack

of flexibility, risk of failure due to non receipt of minimum subscription etc. were

found to be limiting the development of capital market in the country. Although under

fixed method, the issuer is free to determine the offer price, but market forces of

demand and supply are not allowed to determine the offer price of equity shares under

this method. A need, therefore, was felt by SEBI to innovate in the pricing method of

public issues which led to the introduction of book building method.

(ii) Book Building Method

Book building is a method of price discovery. In this method, offer price of

securities is determined on the basis of real demand for the shares at various price

levels in the market.

As defined by SEBI guidelines, 1995, “book building is 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 of offer document.”

In book building method, the final issue price is not known in advance. Only a

price band is determined and made public before opening of the bidding process. The

spread of price between floor price and cap in the price band should not be more than

20%. It means that the cap should not be more than 120% of the floor price. The

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issuer company appoints a merchant banker as book runner lead manager (BRLM),

who may be assisted by other co- managers and by a team of syndicate members

acting as underwriters to the issue. The BRLM sends copies of Red Herring

Prospectus to the Qualified Institutional Buyers (QIBs), large Investors, SEBI

registered Foreign Institutional Investors (FIIs) and to the syndicate members.

BRLM also appoints brokers of the stock exchanges, called bidding centres.

They accept the bids and application forms from the investors. These bidding centres

place the order of bidders with the company through BRLM. They are liable for any

default, if any, made by their clients, who have applied through them. Brokers/

Syndicate members collect money from clients/ investors. Money received by them at

the time of accepting bids is called margin money. Bids can be made through on-line

and transparent system of National Stock Exchange and Bombay Stock Exchange

depending upon the agreement of the issuer with the stock exchange(s). An issue

through book building system remains open for 3 to 7 working days. In case of

revision of price band, it can be extended by 3 days. Rights issue remains open for at

least 30 days and not more than 60 days.

The BRLM, on receipt of the feedback from the syndicate members about the

bid price and the quantity of shares applied builds up an order book showing the

demand for the shares of the company at various prices. The syndicate members must

also maintain a record book for the orders received from institutional investors for

subscription to the issue out of placement portion.

On the completion of book building process, the final price is determined by

Issuer Company in consultation with the BRLM. Then the BRLM files final offer

document with the Registrar of Companies before allotment of shares. The final offer

document mentions the issue size and the offer price discovered through book

building process.

Book building method is a flexible method for the issuing company as well as

the bidders. The issuing company has the option to withdraw the offer from the

market if the demand for the securities does not exist. The bidders can revise their

bids before the closing of bidding process and offer different quantities at different

prices.

In Indian primary capital market, book building process was introduced in

1995 on the recommendations of an expert committee appointed by SEBI under the

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Chairmanship of Y.H.Malegam to review the existing disclosure requirements in offer

documents and the basis of pricing the issue.

Initially, book building process was permitted for placement portion of the

issue and for the issues exceeding Rs. 100 crores. But no issuer company used this

process for pricing their issues till the end of 1998 due to stringent entry norms of

SEBI and the bearish conditions in the Indian capital market. In 1998-99, SEBI

reduced the issue size limit of Rs. 100 crore to 25 crore in order to encourage the use

of this method. On the suggestions of market intermediaries, SEBI issued modified

guidelines during the year 1999-2000, whereby the issuer company was given the

option to book build either 90% of the net public offer or 75% of the net public offer.

The balance of the issue was allowed to be offered to the public at fixed price,

determined through book building process. In 1999-2000, an IT company, Hughes

Software Systems Ltd. was the first company to use book building process for its

initial public issue of equity shares amounting to Rs.275.63 crore. The issue was

oversubscribed by 26 times and its books were built at the upper ceiling of the price.

In all, five IT companies brought their IPOs through this route in 1999-2000. During

the year 2000-01, both unlisted and listed companies were allowed to make public

offerings through book building route after satisfying the eligibility norms set by

SEBI. These norms required pre issue net worth of not less than one crore in three out

of five years and a track record of distributing profits for at least 3 out of preceding 5

years; and issue size not exceeding 5 times its pre issue net worth for unlisted

companies and not more than 5 times of pre issue net worth in case of listed

companies.

The minimum issue size limit of Rs. 25 crore was removed by SEBI in 2001 in

order to broaden the base of book building facility. Further, in August 2003, the new

criterion of net tangible assets was added besides appraisal route as an alternative to

the mandatory book building route. The new guidelines require that the issuer

company should have net tangible assets of at least 3 crore for 3 full years, of which

not more than 50% should be held in monetary assets. The SEBI has amended these

guidelines from time to time in order to make the price discovery process more

realistic.

Types of Book Building Process: Three types of options have been provided by

SEBI to the issuer companies under book building. These options are as follows:

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(a) 75% Book Building, 25% Fixed Price Offer: In this type of offer, 75% of

the issue is offered to institutional investors who participated in the bidding

process. Balance 25% is offered to the public through prospectus and shall be

reserved for allocation to individual investors who had not participated in the

bidding process. The price for 25% offer is the price as determined through

book building. First, the book building portion remains open for 3 to 7 days

and on discovery of issue price after the completion of book building process,

the fixed price portion opens for subscription.

(b) 90% Book Building, 10% Fixed Price Offer: Here issuer company offers

90% of the issue through book building and the balance 10% through fixed

price offer at a price discovered through book building. This option was

available to the issuers during 1999-2000 and 2000-01 and later on

discontinued by SEBI.

(c) 100% Book Building Offer: In this type of offer, the whole issue is offered

through book building route. Issue opens and closes on the same dates for all

categories of investors. Different categories of bidders bid at the point of

time. This type of issue takes minimum number of days for the completion of

the process of issue and allotment of shares. Generally, the issue is listed on a

Recognised Stock Exchange after 3 weeks from the closure of the issue (2

weeks for completion of allotment +1 week for completion of listing

formalities).

Allocation/ Allotment Procedure in Book Building Issues In case of 100% one stage book building, the allocation to Retail Individual

Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers

(QIBs) is made in the ratio of 35:15:50 respectively. Retail Individual Investor (RII)

means an individual who offers for securities up to the value of Rs.2,00,000 and Non

Institutional Investor means an individual, who applies for securities for value

exceeding Rs.2,00,000 ( limit revised by SEBI from Rs. 50,000 to Rs. 1,00,000 vide

circular no. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29th 2005. In SEBI Board

meeting held on October 25, 2010 (PR No. 231/2010), this limit was further increased

to Rs. 2,00,000).

In case the book built issue is made pursuant to the requirement of mandatory

allocation of 60% to QIBs in terms of Rule 19(2) (b) of Securities Contract

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(Regulation) Rules (in case of big issues where issue size exceeds five times pre-issue

net worth of the issuer company), then allocation to RIIs, NIIs and QIBs is made in

the ratio of 30:10:60 respectively. When book building issue is made on ‘75% Book

Building and 25% fixed Price’ basis, the allotment to RIIs, NIIs and QIBs is made in

the ratio of 25:25:50 respectively. In case of 90% book built issues, a minimum of

15% of the offer size was reserved for individual investors who made bids through the

syndicate members and the balance of book built portion was available for allocation

to investors other than retail investors. The 10% fixed price portion was allotted to

individual investors who could not participate in book building process. All applicants

are allotted shares on a proportionate basis within their respective investor category.

Earlier, the applicants of QIBs category were allotted shares on discretionary basis

which was later on discontinued by SEBI in September, 2005.

6.2 Public Issues of Equity through Fixed Price and Book Building Method

Book building method of price discovery was introduced mainly to overcome

the limitations of price determination through fixed price method. Various studies on

the IPO pricing and on the extent of under pricing/overpricing of equity issues from

1992-93 to 1996-97 showed that the issuer companies in consultation with the lead

merchant bankers was not able to determine the fair price of equity issues, especially

in case of IPOs. So, after the introduction of book building process by Hughes

Software Systems Ltd. in 1999-2000 for their IPO of equity, book building route has

become the choice of a large number of companies for their issues of large size.

Table 6.1 shows the number and amount of public issues of equity floated

through fixed price method and book building method.

As depicted in the table, a total of 326 equity issues were floated though

fixed price method for an aggregate amount of Rs. 7781 crore (5.44%) during the

period of study. On the other hand, 292 issuer companies involving an aggregate

amount of Rs. 1,41,742 crore (94.56%), preferred book building route for price

discovery. However, fixed price method was most common till 2000-01, when equity

issues were of comparatively small size and book building route was in its

introductory stage. After 2002-03, trend shifted to book building route and majority of

equity issues during 2005-06 (71 out of 102) and 2006-07 (71 out of 85) were through

book building route.

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Table 6.1

Fixed Price and Book Building Equity Issues (Rs. in crore)

Year Fixed Price equity Issues Book Building Issues % of amount No. Amount

Rs. Average

Size Rs.

No. Amount Rs

Average Size Rs.

FP BB

1997-98 58 1,132 19.51 - - - 100 - 1998-99 22 504 22.91 - - - 100 - 1999-00 50 1,475 29.5 5 1,500 300 49.6 50.4 2000-01 102 1,043 10.23 13 1,441 480.33 42 58 2001-02 05 248 49.6 01 834 834 23 77 2002-03 04 784 196 02 255 127.5 75 25 2003-04 14 1,045 74.64 15 16,776 1,118.4 06 94 2004-05 10 379 37.9 19 21,053 1,108.05 02 98 2005-06 31 787 25.39 71 22,889 322.38 03 97 2006-07 14 384 27.43 71 24,609 346.6 02 98 2007-08 12 294 24.5 78 51,925 665.71 01 99 2008-09 04 74 18.5 17 1,960 115.29 04 96

Total 326 8,149 25.0 292 1,41,742 485.42 5.44 94.56 Source:- Compiled from offer documents of companies, Prime Database, SEBI

Website. From the analysis of average size of issue, it comes to light that small

companies preferred fixed price method and the issuer companies with large issue size

floated their issues through book building method. Average size of issues floated

though fixed price method varied from Rs. 10.23 crore in 2000-01 to Rs. 196 crore in

2002-03. But, in case of book building method, its range varied much higher from Rs.

127.5 crore in 2002-2003 to Rs. 1118.40 core during the year 2003-04. All the mega

equity issues (size above Rs. 300 crore) and the offer for sale by Government of India

for their corporations were through book building route. This is also verified from the

percentage of amount of issues raised through both the methods. An aggregate of

94.56% of the total amount of equity was raised through book building method during

the period under review. Thus, the amount raised through fixed price method was

merely 5.44%. From 2003-04 onward, amount raised through book building route was

above 90% in each year, with the maximum of 99% during 2007-08.

6.3 IPOs Listed with NSE During the period from 1997-98 to 2006-07, a total of 441 IPOs of equity

share were floated in the primary market in India. Out of this, a total of 234 IPOs

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were listed at National Stock Exchange (NSE). Table 6.2 presents the year wise total

number of IPOs and the IPOs listed at NSE.

Table 6.2

Total IPOs and IPOs Listed with NSE

Source: - Offer documents, Prime Database, SEBI website.

The table shows that the proportion of total IPOs getting listed at NSE has

been growing over the period. In 1997-98, only 9 (17.65%) IPOs out of total 51 issues

were listed with NSE. Similarly only 21 (18.42%) issuer companies preferred to list

their IPOs with NSE out of total 114 in 2000-01. This was the period, when large

number of small companies floated their equity issues and they could not meet the

criteria of NSE listing with respect to size of the issue. So they preferred regional

stock exchanges for listing. However, with the dominance of NSE in the secondary

market in India and the companies coming up with equity issues of large size, NSE

has become the final destination for majority of companies for listing of shares from

2002-03 onwards.

6.4 Number of IPOs Managed by Individual Lead Merchant Bankers

NSE listed initial public offerings of equity have been managed by lead

merchant bankers individually as well as jointly by two or more of them. Generally,

companies with small issue size appointed a single lead manager while more than one

merchant banker were appointed in case the IPO size was large. For the purpose of

Year Total IPOs NSE Listed IPOs % of IPOs listed at NSE

1997-98 51 9 17.65

1998-99 18 5 27.78

1999-00 52 18 34.61

2000-01 114 21 18.42

2001-02 6 2 33.33

2002-03 6 6 100

2003-04 19 15 78.95

2004-05 23 23 100

2005-06 76 68 89.47

2006-07 76 67 88.16

Total 441 234 53.06

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analysis of price determination by lead managers, it is felt necessary to know the

number of NSE listed IPOs managed by different merchant bankers in their individual

capacity as well as jointly with other lead managers. Out of total 234 IPOs listed with

NSE during the period under review, the table below presents the number of IPOs

managed by top lead merchant bankers individually and jointly.

Table 6.3

NSE Listed IPOs Managed by Top Lead Merchant Bankers Individually and Jointly

S.No. Lead Merchant Bankers IPOs Managed Total % of Total NSE

Listed IPOs managed Individually Jointly IPOs

managed Individually Jointly

1. Enam Financial Consultants 11 39 50 4.47 16.67

2. Kotak Mahindra Capital Co. 7 39 46 2.95 16.67

3. SBI Capital Markets 7 37 44 2.95 15.81

4. JM Morgan Stanley 6 38 44 2.56 16.24

5. DSP Merrill Lynch 7 34 41 2.95 14.53

6. ICICI Securities 5 30 35 4.47 17.09

7. Karvy Investors 8 12 20 3.42 5.13

8. IL&FS Investsmart 5 12 17 2.14 5.13

9. UTI Securities Exchange 6 9 15 2.56 3.85

10. Anand Rathi Securities 6 5 11 2.56 2.14

11. Centrum Capital 6 4 10 2.56 1.71

12. Allianz Securities 6 3 9 2.56 1.28

13. Micro Securities 4 4 8 1.71 1.71

14. IDBI, IDBI Capital markets, IDBI Bank

1 6 7 - 2.56

15. Edelweiss 2 3 5 - 1.28

16. HSBC Securities & Capital Markets

2 3 5 - 1.28

17. Keynote Corporate Services 3 1 4 1.28 -

18. Khandwala Securities. 4 - 4 1.71 -

Source: - Compiled from offer documents of companies, Prime Database and SEBI Website.

The above table gives the picture of the top lead merchant bankers engaged in

the management of NSE listed IPO. As is clear from the table, Enam Financial

Consultants tops the list by managing the largest number of IPOs both individually

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and jointly with other lead managers. It was able to manage total 50 NSE listed IPOs

including 11 IPOs managed in individual capacity. Kotak Mahindra Capital Co. was

the preferred choice of 46 issuing companies with 7 issuer companies appointing them

as sole lead manager for their initial public issues. Similarly, SBI Capital Markets and

JM Morgan Stanley have been able to secure the trust of 44 issuer companies each.

All these merchant bankers along with DSP Merrill Lynch and ICICI Securities acted

as lead managers for medium and large size issues. These lead managers were active

during the entire period under review.

The merchant banking companies engaged in the management of small and

medium size equity issues included Karvy Investor Services, IL&FS Investsmart,

Anand Rathi Securities and IDBI Capital Markets Ltd. Hyderabad based merchant

banker, Karvy Investor Services was able to secure the business of managing 20 IPOs

including 8 in their individual capacity during the last three years of study period.

Small merchant bankers having limited area of operation in the field of management

of public issues included Keynote Corporate Services, Micro Securities, Khandwala

Securities, Centrum Capital Edelweiss and Allianz Securities etc. These merchant

bankers were active during the period from 2004-05 to 2006-07 and their range of

IPOs managed varied from four to eight.

The table further presents the percentage of IPOs managed by individual

merchant bankers out of the total 234 NSE listed IPOs during the period of study. The

share of each merchant banker individually was less than 3% with the exception of

Enam Financial Consultants and Karvy Investors Services. While Enam Financial

Consultants was the only lead manager to manage 4.47% of total of 234 IPOs listed

with NSE, Karvy Investors Services managed 3.42% of total NSE Listed IPOs in their

individual capacity.

6.5 Performance of Individual Lead Merchant Bankers Another criteria for measuring the performance of lead managers is to

compare the offer price of the security (determined by the issuer company in

consultation with the lead manager) with the market price of the security at different

intervals of time. For this purpose closing market price of equity shares at the

following time intervals has been taken:

a. On the first trading day (Listing day).

b. After one week from the first trading day

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c. After one month from the first trading day

d. After three month from the first trading day

e. After six month from the first trading day

f. After twelve months from the first trading day

The closing market price on the above time intervals has been compared with

the offer price and after dividing the difference with the offer price, return of

individual IPO has been calculated for each lead merchant banker individually.

Average return at different points of time has been calculated by dividing the result by

100. Average return at different points of time of all IPOs managed by individual

lead merchant banker has been calculated and compared with the average market

return of all IPOs listed on NSE during the period from 1997-98 to 2006-07.

6.5.1 Lead Merchant Bankers with More than Ten NSE Listed IPOs Table 6.4 depicts the performance of individual lead managers who managed

more than ten IPOs individually and jointly with others.

159

Table 6.4

Average Return from IPOs Managed by Different Merchant Bankers

(Lead Merchant Bankers Managing More than 10 NSE Listed IPOs)

S. No. Average Return

Average Return (in %age) at Different Points of Time

On First Trading

Day (FTD)

After One

Week from FTD

After One Month from FTD

After 3

months from FTD

After 6

months from FTD

After one

Year from FTD

Average Market Return from IPOs

40.73 39.85 43.36 43.33 79.84 79.10

i. Enam Financial Consultants. 44.40 16.36 43.73 65.85 39.47 56.85

ii. Kotak Mahindra Capital Co. Ltd. 37.54 35.47 40.95 58.51 62.80 95.57

iii. SBI Capital Markets. 26.61 21.29 30.21 37.14 41.74 99.89

iv. J.M. Morgan Stanley 18.19 14.32 13.73 17.90 14.39 30.02

v. DSP Merrill Lynch 39.64 42.47 46.41 64.72 137.57 97.57

vi. ICICI Securities Ltd. 56.59 68.58 65.58 78.15 158.67 122.99

vii. Karvy Investor Services 32.00 29.93 32.58 68.60 26.11 79.30

viii IL&FS Investsmart 45.94 40.63 53.03 70.87 134.44 262.72

ix. UTI Securities Exchange 19.93 16.66 11.96 1.19 23.29 74.17

x. Anand Rathi Securities 12.55 16.17 24.31 35.20 34.34 40.84

Source:- Compiled from offer documents, Economic Times, Bhav Copy of NSE, Prime Database.

(i) Enam Financial Consultants Ltd.

Enam Financial Consultants as lead manager to the public issues participated

in total 50 NSE listed IPOs including 13 IPOs in 2005-06 and 16 in 2006-07. It was

the preferred choice of issuer companies with medium and large sized IPOs. These

included large IPOs of NTPC, Suzlon Energy, Reliance Petroleum, Parsvnath

Developers and Power Finance Corporation Ltd Jointly with other lead managers.

Table 6.4 presents the average return to investors from the NSE listed IPOs managed

by Enam Financial Consultants Ltd.

160

The average returns from the NSE listed IPOs managed by Enam Financial

Consultants is shown in the table 6.4 along with the average market return at different

time intervals. On the first trading day, IPOs managed by Enam provided 44.40%

average return to the investors while average market return from NSE listed IPOs was

40.73%. However after one week from listing date, average return from Enam

managed IPOs fell sharply from 44.40% to merely 16.36%. At the interval of one

month, six months and twelve months after listing, the average return from IPOs

managed by Enam was much less than the average market returns. Only after three

months of listing, the IPOs managed by Enam outperformed the average market

return. At the end of 12 months after listing, IPOs managed by Enam could secure

56.85% average return for the investors, while IPOs listed with NSE provided 79.10

% average return to the investors.

Some of the IPOs managed by Enam Financial Consultants which showed

negative return after 12 months of first trading day included Geometric Software,

PNB Gilts, IT&T Ltd, Gujarat Mineral Development Corporation and Visa Steel Ltd.

etc.

The comparison between the average return of total IPOs and the IPOs

managed by Enam has also been shown in the chart 6.1

Chart 6.1

161

(ii) Kotak Mahindra Capital Company Ltd.

Kotak Mahindra Capital Company was one of the active merchant bankers in

the area of public issue management during the period under study. It participated in

most of the mega issues as lead manager and managed 46 issues by NSE listed

companies individually as well as jointly with other lead managers during the period

of study.

Chart 6.2

Table 6.4 and chart 6.2 shows the average return obtained by the investors

from the IPOs managed by Kotak Mahindra during the period covered by the study.

On comparison of the average return with NSE listed IPOs’ average market return, it

comes to light that investors obtained an average return of 37.54% on first trading

day, which was less than the market return of 40.73%. After one week from first

trading day, Kotak Mahindra managed IPOs provided an average return of 35.47% to

the investors, whereas NSE listed IPOs provided an average return of 39.85%. It is

revealed by the table that the IPOs managed by Kotak Mahindra provided an average

return of 40.95%, 58.51% and 95.57% after a period of one month, three months and

12 months respectively from first trading day, which was better than the average

market return from IPOs for the same time intervals. Thus, we can say that IPOs

managed by Kotak underperformed the market on 1st day, after one week and six

months but outperformed the market after one month, three months and twelve

months from 1st day of trading at stock exchange.

162

(iii) SBI Capital Markets Ltd. (SBI Caps.)

Among the subsidiaries of public sector banks, registered as merchant banker

with SEBI, SBI Capital Markets played the dominant role in public issue management

activities. It was the preferred issue manager of the public issues of almost all public

sector banks. During the period under review, it was able to manage 44 NSE listed

IPOs. Their average return over the period of study is presented in the table 6.4 and

chart 6.3.

Chart 6.3

Table 6.4 and chart 6.3 depict the performance of SBI Caps on the basis of

average return earned by investors at different points of time over the period of study.

It comes to light from the table that investors obtained an average return of 26.61%

from the IPOs managed by SBI Caps on the first day but NSE listed IPOs provided a

higher return of 40.73% on 1st day of trading. After a period of one week, one month,

three months and six months from 1st trading day, SBI Caps managed IPOs provided

an average return of 21.29%, 31.21%, 37.14% and 41.74% respectively to the

investors, whereas NSE listed IPOs provided a better average return of 39.85%,

43.36%, 43.33% and 79.84% to the investors at the same time intervals. However,

SBI Capital Markets managed IPOs provided average return of 99.89% over the

period of 12 months, which was higher than the NSE listed IPOs of 79.10%. Thus,

IPOs managed by SBI Capital Markets underperformed the market at five points of

163

time and provided better return than the market only at the end of twelve months from

the listing day.

(iv) JM Morgan Stanley

From 1997-98 to 2006-07, JM Morgan participated as lead manager in 44

NSE listed IPOs including 38 IPOs jointly managed with other merchant bankers. Its

major preference in the issue management function has been to participate in large

sized issues jointly with other lead managers. The average returns from NSE listed

IPOs managed by JM Morgan is shown in table 6.4.

It is revealed from the table that IPOs managed by JM Morgan Stanley

provided an average return of 18.19% on the first trading day and 14.32%, 13.73%,

17.90%, 14.39% and 30.02 % to the investors after first week, one month, three

months, six months and twelve months respectively from the first trading day. When

these return percentages are compared with the NSE listed market IPOs returns, it

comes to notice that NSE listed IPOs provided higher average returns than the return

provided by the IPOs managed by JM Morgan at all points of time covered by the

study. These return percentages lead to the conclusion that JM Morgan managed IPOs

underperformed the market at all points of time. Some of the IPOs managed by JM

Morgan which provided negative returns at all points of time included Cadila Health

Care, PNB Gilts, Pritish Nandly Communication, IT&T ltd, Visa Steels and House of

Pearls Ltd.

Average market return from IPOs and average return from IPOs managed by

JM Morgan is also presented in the chart 6.4.

164

Chart 6.4

(v) DSP Merrill Lynch Ltd

DSP Merrill Lynch Ltd is a foreign based merchant banker registered with

SEBI. During the period under review, it acted as issue manager in 41 NSE listed

IPOs including lead manager individually to seven IPOs. It has participated as lead

manager with other lead managers in top ranking large sized IPOs including IPO of

Jet Airways, Reliance Petroleum, Parsvnath Developers, Cairn India and Idea Cellular

etc.

Table 6.4 and chart 6.5 shows the performance of DSP Merrill Lynch on the

basis of average return to investors from the NSE listed IPOs managed by it at

different points of time covered by the study. On comparison between average return

and IPO market return, it comes to light that the investors obtained 39.64% average

return from The DSP Merrill managed IPOs on the date of listing, while the average

market return from NSE listed IPOs stood at 40.73% on that day. Average return from

IPOs managed by this lead manager was 42.47%, 46.41%, 64.72%, 137.57% and

97.57 % after one week, one month, three months, six months and twelve months

respectively from the listing day. On comparison of this average return with average

market return, it was found that the average return from IPOs managed by DSP

Merrill outperformed at all points of time except on the 1st day of trading.

After six months from listing, DSP Merrill managed IPOs reaped the highest

average return of 137.57%, while the average market return from IPOs was 79.84%.

165

This was due to the highest average positive return from the IPO of Sonata Software

Ltd in 1998-99 and the better performance of the IPOs of Canara Bank and Indian

Bulls Financial Services Ltd at 169% and 410.52% respectively. The comparison of

average market return of IPOs and average return of DSP Merrill managed IPOs has

also been shown in chart 6.5

Chart 6.5

(vi) ICICI Securities Ltd.

A subsidiary of Indian private bank, ICICI Securities acted as lead manager

individually and jointly in 35 NSE listed IPOs. It has wide network of operations with

respect to issue management activities. Issuer companies with large size of IPOs

preferred ICICI Securities as lead manager to their issues. Performance of this

merchant banker with regard to average return from equity IPOs managed by it has

been shown in table 6.4 and presented in chart6.6.

166

Chart 6.6

ICICI Securities managed a total of 35 IPOs during the period from 1997-98

to 2006-07. It has been depicted in the table that average return from IPOs managed

by ICICI Securities outperformed the average market return from IPOs at all points of

time under study. It was the highest to the tune of 158.67% and 122.99% after six

months and twelve months respectively from the time of closing of first trading day.

The average market returns from the NSE listed IPOs was 79.84% and 79.10%

respectively at these points of time.

Some of the IPOs managed by ICICI Securities which contributed to the

higher average return included again Sonata Software Ltd, Television Eighteen Ltd,

Canara Bank, Ifo Edge (India) Ltd and Global Broadcast News Ltd. Similarly, some

IPOs managed by ICICI Ltd which showed negative return at the end of six months

and twelve months from listing included South India Bank, Ajanta Pharma, Nector

Life Sciences and Melstar Information Technology Ltd. etc.

(vii) Karvy Investor Services Ltd.

Karvy Investors Services Ltd. managed 20 NSE listed IPOs and has been

active during the last three years of period under review. It is engaged in the

management of small size IPOs. The issue size of IPOs managed by Karvy varied

from Rs. 12.25 crore of Rama Krishna Forging Ltd. in 2004-05 to Rs. 168 crore of

NITCO Tiles in 2005-06.

167

The average returns of NSE listed IPOs managed by Karvy is shown in the

table 6.4. The chart 6.7 compares the NSE IPO market returns and the average return

earned by investors from the IPOs managed by Karvy Investor Services.

Chart 6.7

It is highlighted in the table that IPOs managed by Karvy provided an average

return of 32.00% to the investors, while NSE listed IPOs provided 40.73% average

return to the investors on the 1st trading day. Similarly, IPOs managed by Karvy

underperformed the market after one week, one month and six months from the date

of listing. After six months from listing, investors could fetch only 26.11% average

return from the Karvy managed IPOs, whereas the NSE listed IPOs provided 79.84%

average return to investors.

On the other hand, Karvy managed IPOs provided an average return to

investors at the higher rate than the average market return of IPOs after three months

and 12 months from the date of first trading day. It was 68.60% and 79.30 % after

three month and twelve months respectively from the first trading day, while the

market secured an average return of 43.33% and 79.10% at these points of time.

Some of the fixed price IPOs managed by Karvy did not perform well at the

floor of the stock exchange. These included Vishal Exports, Sah Petroleum in 2004-

05 and Compulink Systems Ltd. in 2005-06. So average return from Karvy managed

168

IPOs outperformed the market at two intervals of time only while it underperformed

the average market return at four intervals of time.

(viii) IL&FS Investsmart

IL&FS Investsmart started its operations in the field of management of NSE

listed IPOs from 2000-01. It managed a total of 17 NSE listed IPOs including five in

their individual capacity. Table 6.4 presents the average return from IPOs managed

by IL&FS Investsmart and the market average return from NSE listed IPOs at

different points of time. On comparison of both these returns, it is found that the

average return from IPOs lead managed by IL&FS Investsmart has been higher than

the average market return from NSE listed IPOs at all points of time right from the

first trading day.

The average return from the IPOs managed by IL&FS Investsmart showed

exceptionally higher return as compared to average market return from IPOs at the

time interval of six months (134.44%) and 12 months (262.72%) from 1st trading day.

The average market return at these points of time was 79.84% and 79.10%

respectively..

The NSE listed IPOs managed by IL&FS Investsmart, which contributed to

higher average return at different intervals of time included IPOs of Balaji Telefilms,

Divi Laboratories, Dishman Pharma, Gateway Distriparks, and All Sec. Technologies

Ltd. IPO of Divi Laboratories provided a positive return of 521.35% and 1096.75%

after the period of six months and 12 months from 1st trading day. Some of its IPOs

which showed negative return at most of the time intervals included IPOs of Celebrity

Fashions, Uttam Sugars, R.Systems and FIEM Industries.

The average return of IPOs managed by IL&FS Investsmart along with

average market return from IPOs is also presented in chart 6.8

169

Chart 6.8

(ix) UTI Securities Exchange Ltd.

UTI Securities Exchange is engaged in the management of public issues from

the year 1997-98 and was engaged in the IPOs of comparatively small size. It

managed 15 NSE listed IPOs individually and jointly with other lead managers during

the period under review. The range of size of IPOs managed by UTI Securities varied

from Rs. 5.79 crore to Rs. 576 crore. Six of the IPOs managed by it were below the

size of Rs. 50 crore each. The average returns provided to the investors from the IPOs

managed by this merchant banker are shown in table 6.4 and chart 6.9.

Chart 6.9

170

As is shown in the table and chart, the average return from the IPOs managed

by this merchant banker has been far below than the average market return from NSE

listed IPOs at all intervals of time. On the 1st trading day, it provided 19.93% average

return to investors while the average market return stood at 40.73%. The worst

position occurred after three months of listing day, when the IPOs managed by UTI

securities could fetch only 1.19% average return in comparison to 43.33% average

market return. The gap between both types of returns was less at the end of 12 months

after 1st trading day.

Overall, the IPOs managed by UTI Securities did not perform well at the floor

of the stock exchange at different time intervals covered under study.

(x) Anand Rathi Securities Ltd.

Anand Rathi Securities as lead manager in primary capital market was active

for the last three years during the period under review. It managed a total of 11 NSE

listed IPOs including individually managed 6 initial public offerings. This merchant

banker was also involved in the management of comparatively small sized IPOs

ranging from Rs. 35.76 crore to 135.99 crore. However, these IPOs did not perform

well in the secondary market after listing as is clear from the table and chart.

Chart 6.10

The table shows the dismal picture of NSE listed IPOs managed by Anand

Rathi Securities on the basis of average return obtained by investors. On the listing

day itself, the IPOs managed by this merchant banker provided 12.55% average return

171

as compared to 40.73% average return from NSE listed IPOs. The situation remained

same after one week of listing also. At all other points of time, that is, after one

month, three months, six months and twelve months from the 1st trading day, the

average return from IPOs managed by Anand Rathi was much less than the average

return obtained from the IPO market at NSE.

Negative returns from the IPOs of Tips Industries, XL Telecom, Technocrat

Industries and Indus Fila Ltd and marginally positive return from other IPOs managed

by this lead manager were responsible for comparatively lower average return of IPOs

than average market return.

6.5.2 Lead Merchant Bankers Managing 4 to 10 NSE Listed IPOs IPO pricing performance of small lead merchant bankers, who managed 4 to

10 NSE listed IPOs during the period under review has been analysed in table 6.5

172

Table 6.5

Average Return from IPOs Managed by Different Merchant Bankers

(Lead Merchant Bankers Managing 4 to 10 NSE Listed IPOs)

S. No.

Average Return

Average Return at Different Points of Time (in %age)

At First Trading

Day (FTD)

After One

Week from FTD

After One Month from FTD

After 3 months

from FTD

After 6

months from FTD

After one

Year from FTD

Average Market Return from IPOs

40.73 39.85 43.36 43.33 79.84 79.10

i. Centrum Capital 102.76 114.05 141.10 108.69 67.10 123.31

ii. Allianz Securities 30.08 43.41 22.90 18.42 61.88 64.82

iii. Micro Securities 46.26 - 0.20 -11.09 -7.22 38.94 131.51

iv. IDBI, IDBI Capital Markets.

-7.70 -20.36 -5.56 25.94 -32.94 -39.62

v. Edelweiss Capital 16.17 19.07 20.28 23.22 15.78 18.78

vi HSBC Securities & Capital Markets

34.20 21.41 15.60 15.83 5.58 20.69

vii. Keynote Corporate. 73.74 64.32 100.70 82.82 93.37 149.36

viii. Khandwala Securities 12.21 29.48 11.42 5.12 -26.67 -58.91

Source:- Compiled from offer documents, Economic Times, Bhav Copy of NSE, Prime Database.

The performance of individual lead merchant bankers has been examined as follows:

(i) Centrum Capital Ltd.

As lead manager to the NSE listed IPOs, Centrum Capital entered in the

primary market in 2004-05 by managing the IPO of Saksoft Ltd. It was the lead

manager with other merchant bankers for four IPOs and individually managed six

IPOs listed at NSE. The issue size of all IPOs except one managed by it was less than

Rs. 100 crore.

173

Chart 6.11

Table 6.4 and chart 6.11 presents the average return obtained by investors

from the IPOs managed by Centrum Capital at different time intervals. It is

highlighted in the table that on the first trading day, Centrum Capital managed IPOs

secured 102.76% average return which was much higher than the average market

return of 40.73% at this point of time. Similarly after one week, one month, three

months and 12 months from 1st trading day, the average return obtained by investors

from Centrum Capital managed IPOs outperformed the average market return from

NSE listed IPOs. It was only after six months from 1st trading day that the average

return from Centrum Capital managed IPOs was less than the average market return.

After twelve months from the 1st trading day, IPOs managed by Centrum Capital

secured 123.31% average return as compared to average market return of 79.10 %.

From the analysis of returns from individual IPOs managed by this merchant

banker, it is noted that the exceptionally higher average return from its IPOs has been

due to the higher positive return of IPO of Saksoft Ltd. in 2004-05, Auriopro

Solutions in 2005-06 and Cambridge Technology Ltd in 2006-07.

(ii) Allianz Securities Ltd.

This lead manager managed one NSE listed IPO in 2002-03 and four each in

the year 2005-06 and 2006-07. It managed a total of six small sized IPOs in its

individual capacity. It is found that on the first trading day, IPOs managed by Allianz

Securities provided 30.08% average return to the investors whereas the average

market return from NSE listed IPOs was 40.73%. After one week from 1st trading

174

day, its IPOs secured a higher average return of 43.41% in comparison to average

market return of 39.85%. At all other points of time, average return from Allianz

Securities managed IPOs was less than the average market return from NSE listed

IPOs. After three months from 1st trading day, the average return from the IPOs

managed by this merchant banker was much less at 18.42% than the average market

returns of 43.33% at that point of time.

Comparison between average market return and average return from IPOs

managed by Allianz Securities has also been made in chart 5.12.

Chart- 6.12

Individually, IPO of Allahabad Bank, FCS Software Solutions, Amar

Remedies and Shri Ashtavinavak Vision Ltd showed positive return at all points of

time. However, the IPOs responsible for lower average return than average market

return included the IPO of Shivalik Global, Broadcast Initiative and Oreintal Trimex

Ltd.

(iii) Micro Securities India Ltd.

Micro Securities India Ltd managed eight NSE listed IPOs during the period

from 2003-04 to 2006-07. Issue size of small IPOs managed by it was in the range of

Rs. 10.00 crore to 70.43 crore. Individually, it managed five IPOs of small size

through fixed price method. The performance of this lead merchant banker with

respect to average return received by investors from the IPOs managed by it is shown

in the table 6.5.

175

On the 1st trading day, IPOs managed by Micro Securities provided higher

average return of 46.26% as compared to average market return of 40.73%. However,

after one week, one month and three months from 1st trading day, IPOs managed by

this merchant banker lost money in the form of negative return of 0.20%, 11.09%, and

7.22% respectively. In comparison to this, average market return at this interval of

time was 39.85%, 43.36% and 43.33% respectively.

However, twelve months after 1st trading day, IPOs managed by Micro

Securities provided 131.51% average return to investors in comparison to 79.10%

average market return from NSE listed IPOs. High returns of 203.50% and 196%

from Jai Balaji Sponge and Rama Krishna Forging respectively contributed to high

positive average return at this point of time.

However, average return from Micro Securities was less than the average

market return from NSE listed IPOs at all time intervals except the 12 months after 1st

trading day,. The chart 6.13 depicts the performance of Micro Securities with respect

to average IPO returns at different points of time.

Chart – 6.13

(iv) IDBI, IDBI Bank and IDBI Capital Markets Ltd

Industrial Development Bank of India and now IDBI Bank and its subsidiary,

IDBI Capital Market Ltd. have been acting as lead managers from the very beginning

of the period under review. But they performed the public issue management services

176

occasionally, managing just one NSE listed issue in a year. In all, they managed seven

NSE listed IPOs during the period under study. IPOs managed by this group

performed very poorly on the floor of the stock exchange on account of average return

obtained by investors.

The table 6.5 shows the poor picture of average return obtained by investors

from the IPOs managed by IDBI group in comparison to average market return. On

the 1st trading day, investors lost money in these IPO as it obtained negative return of

7.70% while the average market return from IPOs stood at 40.73%. Out of six time

intervals, the investors lost money due to negative average return at five points of

time. It was only after three months of 1st trading day that it secured positive average

return of 25.94% as compared to average market return of 43.33% at this point of

time. Further, all IPOs except one managed by IDBI gave negative return to investors

within the period of twelve months after 1st trading day. One of its IPO of Corporation

Bank secured marginally positive return at all points of time under review. Chart 6.14

also shows the overall performance of this lead manager with respect to average

returns at different points of time.

Chart 6.14

(v) Edelweiss Capital Ltd.

As lead manager to the NSE listed IPOs, this merchant banker came late on

the scene. It managed three NSE listed IPOs in 2005-06 and two in 2006-07. On

comparison of average return with the average market return from NSE listed IPOs

177

(table 6.5), it was found that the offer price determined by this merchant banker did

not match the market price of IPOs at stock exchange at different intervals of time. On

the day of listing itself, IPOs managed by Edelweiss could secure an average return of

16.17% in comparison to average market return of 40.73% at this point of time.

Similarly, average return earned by investors from the IPOs managed by this lead

manager was much lower than the average market return from IPOs listed at NSE for

all other time intervals as well.

Two of its managed IPOs, that is, Cinema India Ltd and C&C Construction

(in 2006-07) were responsible for lower average return as both of these showed

negative return at various points of time under review. However, two other IPOs

managed by it in 2005-06, viz, Sadbhav Engineering and B.L. Kashyap & Sons Ltd

performed well on floor of the stock exchange.

Low average return from IPOs managed by Edelweiss as compared to average

market return from IPOs is visible in the chart 6.15 also.

Chart 6.15

(vi) HSBC Securities & Capital (India) Ltd

A foreign based SEBI registered merchant banker, HSBC Securities & Capital

(India) Ltd which started operations from 2000-01, acted as lead manager for five

NSE listed IPOs jointly with other merchant bankers. It acted as lead manager of large

sized IPOs namely, Jet Airways, Gujarat State Petronet and Reliance Petroleum.

178

Table 6.5 and chart 6.16 exhibit the average return from IPOs reaped by

investors from the IPOs managed by HSBC Securities and the average market return

from IPOs listed at NSE.

Chart 6.16

On analysis of the table, it was found that on the first trading day itself, the

average return from IPOs managed by HSBC Securities was less than the average

market return of NSE listed IPOs. This trend continued for all time intervals from the

1st trading day itself. IPOs managed by it could secure only 5.58% average return in

comparison to market average return of 79.84% at the end of six months from listing

day. Analysis of return from IPOs managed by HSBC Securities revealed that the

large sized IPOs stated above provided moderate positive return to investors but the

IPOs of Mukta Art Ltd and Creative Eye Ltd ( 2000-01) were responsible for the low

rate of average return from HSBC Securities managed IPOs.

Chart 6.16 also highlights the comparative low average return from IPOs

managed by HSBC Securities than the market average return of IPOs.

(vii) Keynote Corporate Services Ltd.

Keynote Corporate Services as lead managers to the NSE listed IPOs

participated in primary market in 2005-06 and 2006-07. It managed only four NSE

listed IPOs- three in their individual capacity and one jointly with ICICI Securities.

As visible from table 6.5, the average return from IPOs managed by Keynote

was higher than the average market return of IPOs at all points of time during the

period under review. On the listing day, investors obtained 73.74% average return

179

from Keynote managed IPOs while the average market return stood at 40.73%. It

was almost double than the average market return at the end of first and third month

from first trading day. Investors secured an average return to the tune of 149.36%

from the IPOs managed by Keynote Corporate Services at the end of twelve months

from first trading day in comparison to the average market return from IPOs was

79.10%. Overall, all the IPOs, except one, managed by Keynote obtained a

favourable response in the secondary market. This is also presented in the chart 6.17.

Chart – 6.17

(viii) Khandwala Securities Ltd.

Khandwala Securities managed four NSE listed IPOs, one in 2000-01 and

three in the year 2005-06. They were the sole lead managers in all the four IPOs.

However, on an average, investors could not gain much from these IPOs.

As depicted in the table 6.5, four IPOs managed by this lead manager could

secure 12.21% average return on the first day of trading itself, which was much below

the average market return from IPOs. Average return to investors turned to be

negative at the end of six months and twelve months from first trading day at the rate

of 26.67% and 58.91 respectively, while the average market return was 79.84% and

79.10% respectively.

Two of the IPOs, namely, Softpro Systems in 2000-01 and Sakuma Exports in

2005-06 showed negative return at all time intervals. On the other hand, Cyber Media

(India) floated in 2005-06 showed comparatively high return at all time intervals.

180

Overall, as shown in chart 6.18, Khandwala Securities as lead managers failed to

provide reasonable return to investors on the IPOs managed by it.

Chart- 6.18

6.6 Year Wise Average Return from IPOs Managed by Different

Merchant Bankers A summary of the annual average return from sample IPOs managed by top

merchant bankers during the period under review has been presented in table 6.6.

Along with it Average Index return based on S&P CNX NIFTY and average market

return from IPOs listed with NSE during the period under review has also been shown

in the table.

It is revealed from the table that the average market return of IPOs showed

negative average return in the years 1997-98, 1999-00 and 2000-01. A high average

market return of IPOs was found in the years 2002-03, 2003-04 and 2004-05 with as

high as 297.69% average return from the NSE listed IPOs. The year 2005-06 and

2006-07 provided comparatively stable market average return of 50.32% and 58.80%

respectively.

On comparison of average market return of IPOs with the average index

return, a lot of variation has been noted. Further, in line with negative average market

return in the initial years of study period, a majority of IPOs managed by individual

merchant bankers also showed negative average return. After 2000-01, however, the

181

majority of IPOs managed by individual merchant bankers showed positive average

return along with positive average market return.

During the period of ten years, an average market return of 79.10% is found

from the IPOs listed with NSE. Overall average return provided to investors by the

IPOs managed by individual merchant bankers showed that the IPOs managed by

Kotak Mahindra, SBI Capital Markets, DSP Merrill, ICICI Securities, IL&FS

Investsmart, Micro Securities and Keynote Corporate Services produced returns

higher than average market return. On the other hand, JM Morgan, Allianz Sec.,

Anand Rathi, Edelweiss, HSBC Securities showed below average market return of

79.10% to investors from the IPOs managed by them. IDBI group and Khandwala

Securities showed negative average return from the IPOs managed by them.

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Table - 6.6 Year Wise Average Return from IPOs Managed by Different Merchant Bankers.

(Figures in percentage) S.No Merchant Bankers 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 Total Average

Average Index (NIFTY) Return 19.84 -3.5 41.18 -24.89 -1.62 13.42 81.29 14.91 67.13 12.29 22 Average Market Return of IPOs -29.97 102.14 -19.26 -30.53 99.02 297.69 105.89 156.87 50.32 58.8 79.1

Average Return by Merchant Bankers 1. Kotak Mahindra -11.25 -25.23 -0.57 -38.51 235.16 414.7 92.31 117.74 56.53 114.83 95.57 2. SBI Capital Markets -29.31 -41.34 -23.32 -31.04 235.16 187.35 123.49 350.45 202.85 24.59 99.89 3. JM Morgan Stanley -11.26 -26.32 -55.94 -27.58 -37.11 161.41 81.58 77.45 73.71 64.27 30.02 4. DSP Merrill 3.6 317.91 -56.74 -36.98 99.03 220.78 87.81 280.68 14.61 42.87 97.57 5. Enam Financial -52.26 - 4.84 -65.72 - 161.55 142.73 87.69 68.1 105.89 56.85 6. ICICI Securities 0.9 307.88 -5.42 - 235.16 220.77 102.66 82.73 22.21 140 122.99 7. Karvy Investors Services - - - - - - - 48.81 114.21 74.87 79.3 8. IL&FS Investsmart - - - 21.71 - 1096.75 288.68 146.42 2.16 20.56 262.72 9. UTI Securities -33.33 - - -9.5 - - 63 225.97 102.31 96.59 74.17

10. Centrum Capital - - - - - - - 290.5 -2.57 82.01 123.31 11. allianz Securities - - - - - 120.5 - - 52.4 21.57 64.82 12. Anand Rathi Securities - - - -24.99 - - - - 82.14 65.38 40.84 13. Micro Securities - - - - - - - 203.5 196 -4.95 131.51 14. Edelweiss Capital - - - - - - - - 52.45 -14.9 18.78 15. HSBC Securities - - - -47.13 - - - 12.84 73.14 43.92 20.69 16. IDBI, IDBI Capital. -26.21 -25.23 -68.29 -9.50 - - - - -61.35 -47.11 -39.62 17. Khandwala Securities - - - -87.17 - - - - -30.64 - -58.91 18. Keynote Corporate Services - - - - - - - - 61.57 237.15 149.36

Source: - Data compiled from offer documents, Economic Times, Bhav copy of NSE and Prime Database.

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6.7 Impact of Annual Average Index (NIFTY) Return on the Annual Average Return of IPOs Managed by Different Merchant bankers

This section of the chapter analyses the impact of the average index return of

NIFTY on the average return of IPOs managed by different merchant bankers (as lead

managers) during the period under review. This analysis has been carried on with the

help of simple linear regression.

The results of simple linear regression analysis have been presented in the

table 6.7, which shows that R-square of the fitted regression explained 84.70%,

81.10%, 78.10%, 48%, 36.10%, 30.60%, 25.90%, 19.70% and 12.60% variation in

average return due to index return in relation to the IPOs managed by HSBC

securities, Karvy Investors, Anand Rathi Securities, Centrum Capital, ICICI

Securities, Micro Securities, Enam and JM Morgan Stanley respectively. This

variation is non significant from statistical angle because calculated F-values were

less than the critical values.

Further, index return failed to establish a statistically significant impact on

average return of IPOs managed by Kotak Mahindra, SBI Caps., DSP Merrill Lynch,

UTI Securities, IL&FS Investsmart, and Allianz Securities because R-Square

explained a very small percentage of variation in IPOs average return due to index

return. The co-efficient of Index return in case of JM Morgan, SBI Capital Markets,

Enam, IDBI Capital Markets, UTI Securities, Karvy, Anand Rathi, HSBC Securities

and Micro Securities were positive at 0.775, 0.91, 1.12, 0.61, 0.453, 0.96, 1.10, 1.25

and 1.95, but these are statistically non significant because calculated‘t’ values are

less than the table values at 1% and 5% level of significance. In case of other

merchant bankers, the co-efficients of index return were not only negative but non

significant also.

184

Table 6.7

Impact of Index (Nifty) Return on Average Return of IPOs Managed by

Different Merchant Bankers Results of Simple Linear Regression Analysis

S.No. Lead Managers co-efficient of constant ( t-Value)

Regression co-efficient ( t-value)

R2 %

Adj. R2 %

F value

N

i. J.M.Morgan 12.98 NS

(0.48) 0.775 NS

(1.08) 12.60NS

1.7 1.16 10

ii. Kotak Mahindra 96.91NS

( 1.68) -0.061NS

(-0.04) 00NS 00 00 10

iii. SBI Caps. 79.88NS

(1.43) 0.91NS

(0.62) 4.5N

S 00 0.38 10

iv. DSP Merrill Lynch 116.37** (2.31)

-0.864NS

(-0.61 4.5N

S 00 0.38 10

v. Enam Financial Consultants.

25.39NS

(0.65) 1.12NS

( 1.21) 19.7

NS 6.3 1.47 08

vi. ICICI Securities. 184.40** ( 4.16)

-2.26NS

(-1.99) 36.1 27 3.96 09

vii. IDBI, IDBI Bank, IDBI Capital Markets.

19.56NS

(1.22) 0.61NS

(1.33) 30.60NS

13.3 1.77 06

viii. UTI Securities Exchange

61.29NS

(1.15) 0.453NS

(0.39) 3.7N

S 00 0.15 06

ix. Karvy Investors Services

49.15NS

(2.64) 0.96NS

( 2.07) 81.10NS

62.3 4.3 03

x. IL&FS Investsmart 272.9NS

( 1.13) -0.37NS

(-0.07) 0.10

NS 00 00 06

xi. Centrum Capiatal 229.5NS

(1.62) -3.38NS

(-0.96) 48NS 0 .92 03

xii. Allianz Securirities 74.56NS

(1.17) -0.315NS

(-0.20) 3.80

NS 00 0.04 03

xiii. Anand Rathi Securities

20.91NS

(0.86) 1.10NS

(1.89) 78.10NS

56.20 3.56 03

xiv. HSBC Securities & Capital Market.

-1.05NS

(-0.08) 1.25NS

(3.33) 84.70NS

77.00 11.06 04

xv. Micro Securities 70.3NS

( 0.53) 1.95NS

0.59 25.90NS

00 0.35 03

Notes: - 1. ** denotes significance at 5% level for t-values of regression co-efficient and for F-Value of co -efficient of determinants.

2. NS Stands for not significant. 3. N stands for number of years for which average return has been

regressed. The value of constants in case of DSP Merrill and ICICI Securities are 116.37

and 184.40 respectively and are significant at 5% level which shows that the factors

not covered by the study have larger impact on IPOs average return during the period

under study.

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From the values of co-efficient of determination (R-square) and regression co-

efficient of index return, it appears that IPOs average return has been influenced by

the factors other than the index return during the period covered under study.

The results of simple linear regression analysis as depicted by the table 6.7

lead to the conclusion that investors obtained average return which was independent

of Index return in case of all merchant bankers managing the NSE listed IPOs

covered by the study. Index return failed to influence the IPOs average return of all

the IPOs managed by various merchant bankers. This type of situation arises due to

imperfections in the capital market. As already explained Indian capital market is

largely influenced by qualitative factors not covered by the study.

6.8 Impact of Annual Average Market Return of IPOs on the Annual Average Return of IPOs Managed by Different Merchant bankers

A number of merchant bankers are active in the primary market in the role of

‘issue managers’ to the IPOs and FPOs. Top lead managers have an important role in

the primary market with respect to the number of IPOs managed and the average

return obtained by investors from these IPOs. It is, therefore, important to examine the

impact of the average market return of IPOs on the average return of IPOs managed

by individual merchant bankers. The table 6.8 exhibits the position about the impact

of average market return of IPOs on the average return of IPOs managed by different

merchant bankers.

186

Table 6.8

Impact of Average Market Return of IPOs on the Average Return of IPOs

Managed by Different Merchant Bankers

S.No. Lead Managers co-efficient of Constant ( t-Value)

Regression co-efficient ( t-value)

R2 ( %)

Adj. R2

(%) F- value

N

i. J.M.Morgan -12.44 (-0.61)

0.536** (3.28)

57.4**

52.10 10.77

10

ii. Kotak Mahindra 1.03 (0.03)

1.195* (4.64)

72.9*

69.5 21.50

10

iii. SBI Caps. 31.77 (0.67)

0.86 NS

( 2.23) 38.4

NS 30.7 4.99 10

iv. DSP Merrill Lynch

18.81 (0.49)

0.99 ** (3.22)

56.4 **

50.9 10.34

10

v. Enam 10.12 (0.47)

0.64* (3.76)

70.2*

65.2 14.18

08

vi. ICICI Securities 60.48 (1.35)

0.68 NS

(1.98) 36.0

NS 26.9 3.94 09

vii. IDBI, IDBI Bank, IDBI Capital Mark

25.93 (1.57)

0.23 NS

(0.76) 12.70 NS

00 0.58 06

viii. UTI Securities Exchange

15.37 (0.68)

1.13** (4.27)

82.0**

77.5 18.25

06

ix. Karvy 120.83 (4.00)

-0.47 NS

(-1.56) 71.0

NS 42 2.45 03

x. IL&FS Investsmart

-95.3 (-0.77)

3.36** (4.0)

80.0**

75 15.98

06

xi. Centrum -97.44 (-1.80)

2.49 NS

(4.63) 95.6

NS 91.10 21.4

8 03

xii. Allianz Securities 18.74 (0.88)

0.34 NS

(2.83) 88.9

NS 77.8 8.01 03

xiii. Anand Rathi Securities

11.05 (0.86)

1.14 NS

(4.23) 94.7

NS 89.4 17.9

1 03

xiv HSBC Securities -8.31 (-0.43)

1.21NS

(3.01) 90.0

NS 80.1 9.04 04

xv. Micro Securities 49.2 (0.28)

0.93 NS

(0.53) 21.6

NS 00 0.28 03

Notes: - 1. * and ** denotes significance at 1% and 5% level respectively for t-values of regression co-efficient and for F-Value of co efficient of determination.

2. NS Stands for not significant. 3. N stands for number of years for which average return has been

regressed. It is revealed from the table that co-efficient of determination (R2) explained

72.9% and 70.2% variation in average return of IPOs managed by Kotak Mahindra

and Enam Financial due to market return of IPOs. This variation is not only high but

significant at 1% level. On the other hand, the average returns of IPOs managed by

187

JM Morgan, DSP Merrill and UTI Securities Ltd have been found to be influenced by

market return of IPOs because value of R-square (R2) is found to be significant at

5% level. Except this, no other merchant bankers’ managed IPOs return was

influenced due to market return of IPOs during the period of study because

corresponding values of R-square are not significant at 1% and 5% levels.

The regression co-efficient of market return of IPOs in case of Kotak

Mahindra and Enam are 1.19 and 0.64 respectively. These co-efficients have been

found positive and significant at 1% level. Further, in case of JM Morgan, DSP

Merrill, UTI Securities and IL&FS Investsmart, the regression co-efficient have been

found positive and significant at 5% level. It shows that market return of IPOs during

the particular year under study have influenced the average return from IPOs managed

by these merchant bankers. Except this, no other merchant banker managed IPOs have

been influenced by market return of IPOs because the regression coefficients are

statistically non significant at 1% and 5% levels.

Conclusion With the repeal of Capital Issues (Control) Act, 1947 in May 1992, the era of

free pricing of issues has started in the primary market in India. This has made the

role of merchant bankers much more dynamic and challenging with respect to pricing

of issues. Over the time, pricing of capital issues has passed through many stages

from ‘CCI formula’ to fixed price method and book-building method. Book building

process aims at fair pricing of the issue and during the latter period of study under

review, this method has become the preferred route for the pricing of public issues.

Free pricing has induced only genuine companies to raise funds from the market with

lesser restriction. This has made the merchant bankers more professional as SEBI

guidelines state that issue price is to be determined by Issuer Company in consultation

with the lead merchant banker

It has been found that issuer companies with small issue size preferred only

single merchant banker as lead manager. The issuer companies with comparatively

large issue size appointed a group of merchant bankers as lead managers.

The average return of the IPOs managed by well known merchant bankers like

Kotak, SBI Caps, DSP Merrill, ICICI Securities, IL&FS Investmart and Centrum

have been found to be higher than average market return at various points of time. A

reasonable average return has been provided to investors by JM Morgan, Enam and

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Karvy Investor Services. In the initial years of period under review, the average

annual return from IPOs in the secondary market was negative, but in the latter years,

average annual return has been positive and stable.

The impact of annual average index (NIFTY) return and average market return

on IPOs managed by individual merchant bankers examined with the help of simple

linear regression showed that the average index return failed to establish a statistically

significant impact on the average return of IPOs managed by different merchant

bankers. However, the average annual return of IPOs managed by different merchant

bankers has been influenced by the annual average market return of IPOs listed with

NSE.