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INVESTORS PERCEPTION ABOUT INDIAN IPOS HAVING SAFETY NETS SYNOPSIS SUBMITTED TOWARDS THE PARTIAL FULFILLMENT OF DEGREE in MASTER OF BUSINESS Management

UNDER THE SUPERVISION OF:- Submitted by:-

CA DR. ASHISH AGRAWAL (Ph.D., MBA, FCA, DISA, M.Com., NET, LL.B.) sandeep pathak (Enrl. No. 091414720)

Address:- 1252/3, Shastri Nagar,

Meerut.(U.P.) Mobile No. +919897606318

Submitted to:- Indira Gandhi National Open University, New Delhi.

School Of Management Studies(SOMS)

MEERUT CENTER (2728),

MEERUT COLLEGE,

MEERUT. INTRODUCTION

Alarm bells always tend to ring loud and clear in primary market circles. of late, many stocks are logging only a marginal increase in prices immediately and within days of their IPOs getting listed. The recent boom in the stock markets has again motivated many corporates to tap money from the market. During the past few months, the stock markets have scaled new heights, surpassing the previously insurmountable barriers. As the same time, it is to be noted that falls have eroded thousands of crores of investor wealth. For retail investors, especially those who earlier flocked to IPOs of smaller cap stocks, this scenario is unwelcome.

Retail investors form an integral part of the stock markets. The markets cannot survive without their participation. So the loss of wealth had put off the retail investors from the market.

In order to bring back the investors to the stock markets and regain their confidence, the Securities Exchange Board of India (SEBI) has taken some steps. However, law alone cannot achieve the goal. A lot would also need to be done by the issuer companies, their merchant bankers, lead managers and book runners. Safety net options are one of the measures taken by them.DIFFERENT KINDS OF ISSUES:Primarily, issues can be classified as a Public, Rights or preferential issues (also known as private placements). The classification of issues is as follows.

Rights Issue:Rights Issue (RI) is when a listed company which proposes to issue fresh securities to its existing shareholders as on a record date. The rights are normally offered in a particular ratio to the number of securities held prior to the issue. This route is best suited for companies who would like to raise capital without diluting stake of its existing shareholders unless they do not intend to subscribe to their entitlements.

Private placements:A private placement is an issue of shares by a company to a select group of persons under Companies Act, 1956 which is neither a rights issue nor a public issue. This is a faster way for a company to raise equity capital.

A private placement of shares or of convertible securities by a listed company is generally known by name of preferential allotment.

A Qualified Institutions Placement is a private placement of equity shares or securities convertible in to equity shares by a listed company to Qualified Institutions Buyers only in terms of provisions of SEBI guidelines.

Public issue:Public issues can be classified into Initial Public offerings and further public offerings. In a public offering, the issuer makes an offer for new investors to enter its shareholding family.

INITIAL PUBLIC OFFER:An initial 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. While IPOs are effective at raising capital, they also impose heavy regulatory compliance and reporting requirements. The term only refers to the first public issuance of a company's shares; any later public issuance of shares is referred to as a Secondary Market OfferingThere are several reasons for which a private company may wish to become a public company.

THE TWO BIGGEST REASONS ARE:

To raise capital

To allow the original investors or entrepreneurs who started the company to realize profits on their investment and time.

A private company is one in which investment or ownership is limited to select individuals or organizations. A public company is one in which anyone can invest and obtain ownership by purchasing shares on a publicly traded exchange.

SAFETY NET:

It is actually a put option given to the investors, which gives the right but not the obligation to the investors to sell the stock to issuer at a particular price before a certain period. Any safety net scheme of the shares proposed in any public issue shall be finalized by an issuer company with the lead merchant banker in advance and disclosed in the prospectus. Such buy back or safety net arrangements shall be made available only to all original individual allottee limited up to a maximum of 1000 shares per allottee and the offer is kept open for a period of 6 months from the last date of dispatch of securities.

For exp. IPO hits the market with a final price of Rs 50 with safety net option attached to it. The subscribers to IPO can sell the shares to Issuer before 6 month at a price of Rs 50 per share. The investors, thus, have a put option with a strike price of Rs 50 per share with an expiry of six months. As it gives the investors the right to sell the shares at any time before the expiry of six months, the safety net is just like an American option. Such an option makes the instrument attractive to investors.

How It Works:

Suppose the above stock falls to Rs 25 three months hence, an investor would lose Rs 25 (Rs 50-25) per share on his investment. A safety option, however, enables the investor to sell the stock to issuer at the strike price of Rs 50 per share. Next, suppose the stock moves up to Rs 60, the investor can sell it in the market and pocket the gains. He is under no compulsion to sell the share to issuer which is why the safety net is an option.

But there is a difference between the safety net and an option:. An option requires investors to pay an upfront premium to the option writer. This premium is compensation to the writer for the risk of having to buy the stock from you at a higher-than-market-price. Safety net does not require investors to pay such a premium which makes it more attractive.

The idea of safety net is that, should during this period the secondary market price fall below the offer price, the promoter or the merchant banker would stand guard and buy the shares from them without demur.

This arrangement is any day vastly superior to the Green shoe exercise which admittedly has but the trappings of real safety net and, hence, is superficial in offer of protection to individual investors because the exercise may come a cropper should the shares bought with the limited resources at the disposal of the stabilizing agent prove to be inadequate to lift its price to the desired level.

OBJECTIVE OF THE STUDY

The present research study has been undertaken in order to deepen the understanding of the investors problems and needs and their perception while investing money. During the last few months many new companies have entered the market but worrisome part has been the fact that many of their IPOS are trading below the issue price and this all has time and again shaken the confidence of the investors. While many companies {such as DLF} have shelved the plan of IPO, Some others have price stabilization mechanism such as safety net attached to their IPOS.

So prime motive of this research was to find how safety nets are perceived by the investors?

Sub objectives:

1. To find out the level of awareness about safety net among the investors so that this research would make a substantial contribution to those investors who are unaware about these safety nets.2. To find out investors confidence level (whether investors feel that they can make money in the stock market?)3. To find out the investors preference while investing money.REVIEW OF LITERATURE

In an IPO, or initial public offering, a company issues its shares to the public for the first time but Equity investments are risky. Ups and downs in the stock markets are an integral part of equity investing. The rising ratio of under-performers need not be a major cause of concern as it is a part and parcel of a very bullish market.

Still worse is the fact that it has time and again shaken the confidence of the retail investors. Retail investors form an integral part of the stock markets. The markets cannot survive without their participation. So the loss of wealth put off the retail investors.

Following case in newspaper fully justify this fact:S Ramachandra lost heavily in IBP's divestment issue. Allotted 300 shares at Rs 620, Ramachandra decided to cut his losses as price of the scrip started to plummet. He sold his shares at Rs 565, making a loss of about nine per cent. His elder son reacted much slower, and sold his 200 shares at a price of Rs 529, ending up with a loss of over 14 per cent against the allotment price. He had little option but to sell the shares since he had availed of a bank loan in order to subscribe to the issue. Banks today lending against shares charge an interest of about 10-12%.So this all bring in problem like.

Where does that leave retail investors?

The recent boom in the stock markets has again motivated many corporates to tap money from the market. During the past few months, the stock markets have scaled new heights.

As the secondary market has bounced back, the primary market is buzzing with activity once again. As the stock markets turn bullish once again, initial public offerings have become numerous just as little seeds sprout all over during the rainy season. Not all of these grow to become giant trees.

Companies with sound business models and good earnings potential would grow regardless of market conditions while the me-too IPOs which hit the market, essentially to capitalize on good weather, are bound to perish

When an IPO goes bad, there's never one thing that causes it. it takes bad timing, , bad luck, and the occasional stupid mistakes so Those that survive and prosper, are the ones that have found fertile soil, good sunshine and high resistance levels, which enables them to compete and spread out.

There has been confusion among the investors where they have to put their money in, either secondary markets or in primary markets. There has been a general perception that the secondary markets are too risky and primary markets are risk averse to some extent. But it was proved that both seem to be the peers in pushing the investors into the losses. The markets prove that both are equally bad.

Leading book managers of IPOs are tagging safety net options to make best use of the motives of such investors and get back scared retail investors to the market.

A `safety net' implies a commitment to buy shares from the original investors during a stipulated period at a price determined at the time of issue, irrespective of the prevailing market price. But most merchant bankers do not offer this option for public issues.

In a circular the central bank said these schemes were often offered without any request from the company. There is also no income for the banks to correspond with the risk of loss built into these schemes, as the investor will take recourse to the safety net only when the market value of the shares falls below the pre-determined price. "Banks/their subsidiaries have, therefore, been advised that they should refrain from offering such `Safety Net' facilities by whatever name they are called.

A large number of investors look at IPOs as a vehicle for quick gains, for which market sentiment does matter .So better for an investor is to consider Growth visibility and do valuation of the company before investing.

problem is:

If we ever involved in an IPO, have to close eyes, grit teeth, and prepare to be blindsided? What these investors should do if such securities fall below issue price?

Safety net can help.

But how many investors are aware of these safety nets and how they actually perceive it?

So this research was being conducted to find out how many investors are really aware of these safety nets and how they see these options. So that this research could eventually help those, who are unaware about the benefits of safety net.

RESEARCH METHODOLOGY

Research methodology stands for the ways and means we adopt for conducting the research. It gives a fair idea about the steps generally followed by researcher in pursuing the research right from defining the problem to the final conclusion and summary. This is how this research is going to be focused towards those steps

Problem:Stock markets movements are integral part of equity investing. Worse is the fact that Market has time and again shaken the confidence of the investors. Safety net does help investors to sustain their faith in IPOS at least for some time.

But problem is

How many investors are aware of these safety nets and how they actually perceive it?

Research Design and Tools:A cross sectional descriptive research was conducted to know the perception about safety nets among the investors with the help structured, questionnaire. The questions started with an investor profile, followed by questions that helped to determine the confidence level. Additional questions allow us to ascertain whether investors feel that they can make money in the stock market, and also to find out their perception especially when instruments tends to have some safety mechanism attached to them.

Research Approach:The investors problems and needs can be best known from the investors themselves. So for this research surveys were conducted to fulfill the purpose , covering a variety of interrelated aspects, such as the investors past experiences, types of investments held currently, future investment intentions, the important combination of decisions taken by the investors while investing.

Sampling technique and size: Random Sample of 50 investors was drawn from the universe of potential investors Those having no voluntary savings for financial investments or no ability to understand investments, like shares and bonds, were excluded, because they were irrelevant for the purpose of the present survey. And to ensure near-randomness and cross-sectional representation, relevant data was collected by primary sources with the help of questionnaire.

Data Analysis and Interpretation:To make the project understandable to the readers the various data, information is being edited and tabulated using SPSS and other simple statistical tools ,which is depicted by diagrams such as charts, graphs , pie charts, histograms and percentages so as to make interpretations at a glance. Relevant summary and conclusions is also being drawn from the available data with the use of SPSS.

TENTATIVE CHAPTERSCHAPTER 1 -

Investment Options Available For Investors

Traditional Products

Safety Products

Convenience Products

Risky Products

CHAPTER 2

How You Can Invest in Shares in Primary Market

Different kind of issues

Initial Public Offer & Further Public Offering

Undertaking an IPOEligibility norms for making an IPO

CHAPTER 3

Reason For The IPO Failures

CHAPTER 4

What Can Help is Safety Net

Safety Nets How it works?

An Options

Green Shoe Option

CHAPTER 5

Analysis And Interpretation

Conclusion & Recommendations

Limitations

Bibliography

1. http://www1.economictimes.indiatimes.com/articleshow/msid-1993419,curpg-2.cms

2. http://www.businessline.in/cgibirn/print.pl?file=2006101104220100.htm&date=2006/10/11/&prd=bl&

3. http://www.rediff.com/money/2004/apr/02perfin1.htm4. http://www.blonnet.com/2006/09/04/stories/2006090402360100.htm5. http://www.financialexpress.com/fe_full_story.php?content_id=143727

6. http://www.wisegeek.com/what-is-an-ipo.htm

7. http://nseindia.com/content/ipo/ipo_introduction.

8. Fundamentals of investments by Gorden J. Alexander, william F. sharpe

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