Initial public offering (IPO) is the sale of securities by an unlisted company for the first time to the general public. It is the process by which private companies go public. IPOs provide an opportunity to companies with future growth potential to raise capital for future expansion and growth. Companies looking to further their growth often use IPOs to raise capital required for their investment and expansion plans. Pricing of initial public offerings in India can be studied by taking two regimes separately, that is:

· Pre-reform period (before 1991) - The Controller of Capital Issues (CCI) era

· Post-reform period (1992 onwards)- Securities Exchange Board of India (SEBI) era

On the recommendations of the Y.H. Malegam Committee, SEBI introduced a new pricing mechanism called book building in 1995. In the SEBI era, the primary market witnessed a surge in the number of IPOs and amount of issues in comparison to the CCI regime.

The two periods can be studied from the viewpoint of the different pricing mechanisms-

1. Fixed Price Method:

In this method, the issuer and the merchant banker agree on the issue price before making the actual issue and investors are required to subscribe to the issue at this price.

2. Book Building Method:

Book building is a price discovery mechanism used by companies issuing securities. An indicative price range is given in advance and the offer price and quantum to be issued is decided on the basis of bids received. SEBI defines book building as “a process undertaken by which 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 memorandum or offer document”.

The contribution of the present paper lies in focusing the growth patterns of Indian IPO market since liberalization. The liberalization of the Indian economy has been acknowledged to be a milestone in the growth of the Indian securities market. Other key factors that contributed to the development of the IPO market in particular were the dismantling of CCI in 1991 and the establishment of SEBI in 1992. These capital market reforms reduced transaction costs and enabled the market to become more efficient. Liquidity improved and contributed to market efficiency. Thus, with liberalization taking place in early 1990’s, India’s financial markets began their transformation path. According to many, the maturity of the capital market owes a favour to the opening up of the Indian economy and financial liberalization. This paper discusses the trends in the IPO market in terms of the general trends and specific trends using graphical analysis and growth charts.

LITERATURE REVIEW:

Nagaraj (1996) documented India’s capital market boom, its proximate causes and its implications for the economy and the corporate sector. He analyzed the trends in resource mobilisation in primary market and share of equity in total capital mobilised along with trends in aggregate savings, its composition and the changing pattern of corporate finance. He witnessed financial disintermediation as domestic financial savings composition shifted from bank deposits to shares and debentures. The corporate sector securitized its debt. He found that there is no association between growth rates of the capital market mobilisation and aggregate saving rate, corporate physical investment and value added. Thus, he witnessed financial disintermediation with little effect on aggregate saving rate, corporate investment and output growth rates. The study shows that in the last two decades, corporate sector witnessed a long-term decline in the contribution of internal finance to corporate fixed investment despite a fall in corporate tax to gross profit ratio. The study concludes by raising some of these questions.

Biswal & Kamaiah (2001) examined stock market development in India in the context of financial liberalization under the New Economic Policy. To do so, they evaluated the behaviour of stock market development indicators, namely, market size, liquidity and volatility to see whether these indicators have exhibited any trend changes after financial liberalization. The findings of the study indicate that the stock market has become larger and more liquid after liberalization. However, in terms of volatility, the market does not exhibit any significant change. Overall, the study reveals that Indian stock market experienced phenomenal growth in the 90s as compared to the 80s, thus implying that greater liberalization must be undertaken to ensure more liquidity in Indian stock markets.

Saha (2012) studied the growth of Indian economy and its financial sector using different financial and economic indicators. He analyzed growth of GDP, service sector, agricultural sector, contributors to GDP, trade balance, foreign exchange reserves, sector-wise domestic savings, foreign investment inflow, total value of IPOs and assets under management of mutual funds. The financial sector, particularly the capital market arena has experienced tremendous progress during the last two decades. It is mostly believed that the maturity of the Indian economy with most social and economic indicators should be attributed to the opening up of the economy and financial liberalization. He concluded by saying that while the country has liberalized its economy, it is still too insulated from international competition. If the policymakers at the Centre and State level address these challenges, India will become one of the leading economic powerhouses in the near future.

Nanda (2015) discussed the performance of Indian financial sector in the past two decades along with the various measures taken to attract new capital into the country in the post-liberalization period. He studied the reforms in the financial sector in the pre and post liberalization period. The pre liberalization period saw many controls on the floatation of new issues by the Controller of Capital Issues (CCI). There was a need to liberalize the financial sector to put India on a high growth trajectory. Some of the important reforms that contributed to growth in the capital market were abolishment of CCI, market pricing of issues, creation of regulatory bodies like SEBI, introduction of Electronic Limit Order Book (ELOB) and screen-based trading, access to capital from abroad using ADRs and GDRs, dematerialization of securities, derivative trading and opening up to foreign portfolio investment. The successful implementation of these reforms led to increase in capital raised from the market, investor population and greater transparency and efficiency. Thus, India witnessed rapid growth in capital markets since 1991.

Bhanu Murthy and Singh (2008) argued that IPO pricing is mostly argued from the viewpoint of the individual investor and from the viewpoint of listing gains/losses rather than the capital market that is meant to mobilize and allocate capital. In the pre-liberalisation period, CCI used to have the sole authority to fix prices. It did not allow the market forces to operate. This led to misallocation of capital. When the actual price (fixed by CCI) is higher than the true price, the stock is overvalued and it results in under-subscription of shares. This under-subscription reflects the failure of the market to allow price and quantity to adjust. The misallocation is a social loss because market forces could have led to a conversion of the ‘market signal’ of excess supply into a lowered price which is the true price. It is a loss-loss situation because neither does the IPO gain fully (under-subscription), nor does the investor (pays a higher price) nor does the capital market (falls short of funds due to under-subscription). Similarly, when the actual price (fixed by CCI) is lower than the true price, it results in over-subscription of shares. There is a misallocation of demand. Under the CCI regime, the pricing of the issue mostly resulted in under pricing of the initial public offering. The book building mechanism was introduced to bring about rational pricing-a price that would reflect the intrinsic/fundamental value of the share. However, there are some distortions that operate in the process of price discovery in book building which lead to informational inefficiency. These are asymmetric information, insider information, moral hazard and adverse selection. On account of all these factors, the decision to invest which is prompted by listing gain, is based on asymmetric information and finally is fraught with the possibility of moral hazard. In order to push their own motives, interested parties involved in pricing the issue have an incentive to misprice the issue such that the listing price is not the true price.

Aggarwal and Rivoli (1990) suggested that IPOs are not priced at their intrinsic value in early aftermarket trading i.e. IPOs are subject to overvaluation or fads. A fad can be defined as a temporary overvaluation caused by investors’ over-optimism about the earning potential of IPO firms. On the basis of a sample of 1,598 IPOs issued during the period 1977-1987, they documented an abnormal return of 10.67 percentage points higher than the market index for an investor who purchases an IPO at the offering date and price and holds it for one day. The abnormal returns may be interpreted as the result of under pricing by underwriters only if it is shown that the after-market for IPOs is efficient. However, it is possible that the aftermarket is not immediately efficient in valuing newly issued securities and so, the abnormal returns accruing to IPO investors are the result of temporary overvaluation by investors in early trading. This explanation suggests that IPOs may be subject to fads. To evaluate the fads hypothesis, they examined the aftermarket returns for one year (250 days) following the offering. The results show an abnormal return of -13.73%, implying that investors purchasing all IPOs in the open market at the close of the first trading day and holding each for a period of 250 trading days underperform the market index. The underperformance is highly significant. This suggests that the initial aftermarket is not efficient and systematically overvalues IPOs.

Ritter (1991) also argued that the price behavior of IPOs is consistent with the presence of fads. Using a sample of 1526 IPOs that went public in the U.S in the 1975-1984 period, he found that issuing firms significantly underperformed a set of comparable firms matched by size and industry by as much as 29% in the three years after going public. The results of the study attribute the long-run underperformance of IPOs to the fads theory. Investors are periodically overoptimistic about the earning and growth potential of young growth companies. Hence, they overpay initially but mark down prices as more information becomes available. Moreover, firms take advantage of these ‘windows of opportunity’ by going public when investors are irrationally overoptimistic.

OBJECTIVE OF THE STUDY:

The objective of the paper is to study the growth performance of Indian IPO market since liberalization by taking into consideration the general trends and the historical trends.

DATA AND RESEARCH METHODOLOGY:

ü The general trends in the IPO market are given in the form of six phases starting from the pre-liberalization era to the post-liberalization era.

ü The specific trends in the IPO market are studied by taking the data of IPOs from Prime Database, a leading source of comprehensive information on the primary capital market. Data of IPOs is taken from the year 1991-1992 to 2014-2015.

ü The variables studied include the number of IPOs, the amount raised through IPOs and the average size of IPOs. The average size of IPOs is calculated by dividing the amount raised through IPOs by the number of IPOs.

ü The growth of IPOs in terms of number of IPOs, the amount of IPOs and the average size of IPOs is calculated by applying a semi-log equation. With the help of regression analysis using Microsoft Office Excel 2007, the growth rate per annum are calculated for number of IPOs, the amount of IPOs and the average size of IPOs. The calculated growth rates are tested for significance by observing the p-values. On the basis of this specific trend analysis, growth charts have been constructed for actual and predicted values.

GENERAL TRENDS:

The general trends of Indian IPOs are explained with the help of phases in IPO market starting from the pre-liberalisation (CCI) era to the post-liberalisation (SEBI) era. The development of Indian IPO market can be segregated into the following phases:

Phase 1:1989-1991 (CCI era):

In the pre- liberalisation period, it was mandatory to get the approval for all aspects of an issue from the office of Controller of Capital issues (CCI). CCI determined the issue size and the price (using the ‘CCI’ formula). Thus, the IPO market was highly regulated and controlled by the CCI. From 1989 to 1991, around 525 companies approached the IPO market and raised Rs. 1860 crores through the IPO route. Later, the abolition of CCI and the establishment of SEBI in 1992 transformed the entire facet of the IPO market.

Phase 2: 1991-1996:

The Narasimham Committee, in 1991 initiated a reform process in the Indian capital market which led to the dismantling of Controller of Capital Issues (CCI) and introduction of free pricing. This regime removed all kinds of controls and restrictions on pricing, timing and designing of capital issues. Free pricing mechanism allowed good companies to raise money from the primary market at the right price, which was not permitted earlier. The government felt the need for a regulated environment and this resulted in the establishment of the Securities and Exchange Board of India (SEBI) in 1992. SEBI was assigned the role of regulating and monitoring the functioning of the securities market, keeping a check on malpractices and protecting the interests of investors. In 1991-1992, 195 public issues came to the market. The number of issues increased to 526 in 1992-1993 and 764 in 1993-1994. In 1994-1995, the number of IPOs increased to 1336 amounting to Rs. 12,928 crores. The number of IPOs reached to a maximum level in 1995-1996, with the number increasing to 1402.

Thus, in the SEBI era, the primary market witnessed a surge in the number of IPOs and amount of issues in comparison to the CCI regime. It marked a paradigm shift in the structure and functioning of the Indian stock market by allowing market forces to determine the pricing of issues. On the recommendations of the Y.H. Malegam Committee, SEBI introduced a new pricing mechanism called book building in 1995.

Phase 3: 1997-2001:

During this five-year period, there was a marked decline in number of IPOs and the amount raised through them. This largely, resulted from the stricter eligibility criteria for public issues imposed by SEBI. During 1996-1997 the number of IPOs declined to 684 amounting to Rs.4372 crores. The number of IPOs further declined to 58 public issues in 1997-1998. The decline can be partly attributed to weakening of industrial activity in the country and partly to strict entry point norms, which restricted green field projects without track record from accessing the IPO market. During 1998-1999, only 22 IPOs amounting to Rs.504 crores were floated in the market. Lack of investor confidence in new issues, absence of good quality issues and depressed secondary markets were some reasons for the reduced growth of IPOs.

During 1999-2000, there was a significant increase in number of IPOs to 56 issues. This can be attributed to the boom in the information technology (IT) sector and the willingness and confidence of investors to invest in knowledge based industries, especially in IT and healthcare IPOs. This was also a worldwide trend. Many companies successfully raised money and many IPOs were mispriced during the 1999-2000 internet bubble. This trend continued in the next year 2000-2001 where the number of IPOs almost doubled to 110 amounting to Rs. 2380 crores.

Phase 4: 2002-2005:

After the IT sector boom, the Indian IPO market once again entered into a sluggish phase. During this period, the Ketan Parekh scam shook investor’s confidence in the capital market. In 2001-2002, the number of IPOs fell sharply to 6 amounting to Rs. 1082 crores. The number remained same in 2002-2003. The period from 2001-2003 was worst in terms of investor’s optimism. After 2003, there has been an upturn in the IPO market with some of the biggest companies going public. For instance, the public issue of Maruti Udyog Ltd. opened to an overwhelming response on June 12, 2003. The issue was over-subscribed by more than ten times and thus, marked the revival of investor sentiment and confidence in the IPO market. The revival of the primary market, which started in 2003-2004, gathered momentum in 2004-2005 and was further strengthened in 2005-2006. Buoyant secondary market conditions, positive investment climate and strong macro-economic fundamentals were major contributors to the growing IPO market.

Phase 5: 2006-2010:

The year 2005-2006 was good in terms of investor’s response to IPO market. During this year, 102 companies accessed the primary market to raise funds from the public and mobilised Rs. 23,676 crores compared to 29 companies raising Rs.21,432 crores in 2004-2005. The Golden Era of Indian IPO market started in the year 2006. The momentum witnessed in 2005-2006 further increased in 2006-2007.According to the Global IPO Trends Report 2007 by Ernst and Young report, Indian companies raised US$7.23 billion from domestic capital markets in 2006, making India the world’s eighth largest issuer of equity capital. During 2006-2007, 94.7 per cent of total fund mobilisation was from private sector companies as compared to 73.8 per cent in the previous year. This implied the domination of private sector in resource mobilisation from the IPO market in 2006-2007. There were 20 mega issues during the year, the largest being that of Reliance Petroleum Ltd. that raised a whopping Rs. 8100 crores from the market. The upward trend in primary market continued in 2007-2008 with 90 companies accessing the primary market. While there was not much difference in the number of issues from the previous year, the amount mobilised was more than twice in 2007-2008 as compared to 2006-2007. Reliance Power, DLF, ICICI Bank and State Bank of India were some of the mega issues during this year.

The beginning of year 2008 was good for Indian stock market. Both Sensex and Nifty recorded their all time heights in that month with BSE Sensex rising to a record 21,207 points on 10^th January. However, the bull phase did not last long. Towards the end of the month, Sensex plummeted 7.4% (its biggest single-day decline ever) as concerns over the financial meltdown in the US overwhelmed the market. It was said that the stock market crash was due to profit booking, particularly by FIIs and hedge funds. The downward trend in stock market continued and Sensex plunged to 7000 range in October, 2008.The downturn in domestic equity markets was in consonance with the plunge in global equity markets triggered by the international financial crisis. There was a substantial decline in resource mobilisation by companies in primary market in 2008-2009 as compared to the previous years. In 2009-2010, Indian stock market witnessed a sharp turnaround and a period of stability got initiated. There was a substantial improvement in resource mobilisation by companies in the IPO market with 44 issues coming to the market that amounted to Rs.46,941 crores. There were 30 mega issues in 2009-2010 compared to only 9 mega issues in 2008-2009. Some of these were IPOs of NHPC, Oil India, Adani Power and JSW Energy.

Phase 6: 2011-2015:

During this five year period, there was a mixed trend as the IPO market went through many ups and downs. In 2010-2011, the primary market witnessed a positive trend. The Indian IPO market created history, when Coal India Limited, the largest coal producing company in the world and one of India’s largest public sector enterprises, came out with the biggest ever IPO of Rs.15,199.4 crores. In 2011-2012, the primary market activities were subdued due to turmoil in global macroeconomic environment. The unfolding of the Eurozone sovereign debt crisis, the US downgrade, the deadlock over fiscal and debt problems in US, high oil and commodity prices and the Middle East crisis were the major events that derailed global growth prospects and eroded business and consumer sentiments. As a result, Indian equity markets witnessed a bearish trend for a major part of the year. The primary market for equity issues was sluggish in 2011-2012 from both the demand as well as supply side. On the supply side, companies abstained from resource mobilisation as they were cautious of signs of slowdown in global and domestic economy. From the demand perspective, there was lukewarm investor’s response to issues due to low risk appetite ensuing from the negative returns of previously listed IPOs and a volatile secondary market. Due to the weak investment climate, there was a substantial decline in resource mobilisation by companies in 2011-2012 compared to previous years. During 2012-2013, the primary market continued to remain depressed due to slack in investor demand, inflationary pressure and incessantly high fiscal and current account deficits. In this year, Bharti Infratel Ltd IPO was a big hit and the issue mobilised Rs.4155.8 (4173) crores. SEBI permitted setting up of a separate dedicated platform for listing and trading of SME securities. This was intended to provide an impetus to small and medium sized companies having high growth potential and post issue paid up capital of less than or equal to Rs. 25 crores.

The next year 2013-2014, witnessed a resurgence in primary market activity. 83 companies mobilised funds through the primary market during this period as against 44 companies in 2012-2013. A host of factors like improvement in domestic macroeconomic environment, adjustment of rupee exchange rate, containment of twin deficits and fall in interest rates bolstered stock market activity. In 2014-2015 primary market activities were subdued. Revisiting norms on minimum offer to public, review of minimum public shareholding requirement in public sector companies, review of corporate governance norms for listed companies, increase of anchor investor’s investment bucket and notification of SEBI (Share Based Employee Benefits) Regulations, 2014 were some important policy measures introduced by SEBI in 2014-2015. 39 IPOs amounting to Rs.29,716 crores came to the market this year. After the first quarter of 2015, there were signs of moderate growth in the primary market. During this period, six issues were oversubscribed by more than 20 times. Three IPOs were oversubscribed by 30-40 times. VRL Logistics Ltd was oversubscribed by almost 74 times while Alkem Laboratories Ltd. was oversubscribed by almost 44 times. These IPOs have received an overwhelming response from the market and investors and have given a huge listing as well as short-term gain to the investors.

SPECIFIC TRENDS:

The specific trends in IPO market are studied by taking data of IPOs from the year 1991-92 to 2014-15. The variables under study include number of IPOs, the amount raised through IPOs and the average size of IPOs. On the basis of this specific trend analysis we have constructed growth charts for actual and predicted figures. The average size of IPOs is calculated by dividing amount raised through IPOs by number of IPOs. The growth of IPOs in terms of number of IPOs, amount of IPOs and average size of IPOs is calculated by applying the following semi-log equation:

Log Y= a + bt + ut

Where,

Y= Number of IPOs/ Amount of IPOs/ Average size of IPOs

a= Intercept term

b= Growth rate

t= Time (years)

u= Error term

The following table represents the dataset related to number of IPOs and the amount raised through IPOs from the year 1992 till 2015. We have calculated the average size of IPOs by dividing the amount of issue with number of issue. At a glance the table shows that the amount raised through IPOs has increased while the number of IPOs has reduced over the period 1992-2015. From this dataset, further analysis of IPOs has been done.

Table 1.1: Trend of IPOs in India

Year	Market Capitalisation (Amount of issue)	No: of issues	Average Size
1992	1400	195	7.1795
1993	5651	526	10.7433
1994	10821	764	14.1636
1995	12928	1336	9.6766
1996	8723	1402	6.2218
1997	4372	684	6.3918
1998	1132	58	19.5172
1999	504	22	22.9091
2000	2975	56	53.1250
2001	2380	110	21.6364
2002	1082	6	180.3333
2003	1039	6	173.1667
2004	17807	28	635.9643
2005	21432	29	739.0345
2006	23676	102	232.1176
2007	24993	85	294.0353
2008	52219	90	580.2111
2009	2034	21	96.8571
2010	46941	44	1066.8409
2011	46182	57	810.2105
2012	23982	36	666.1667
2013	34313	44	779.8409
2014	15234	83	183.5422
2015	29716	39	761.9487

Source: Prime database

Regression Statistics
Multiple R	0.571102786
R Square	0.326158392
Adjusted R Square	0.295529228
Standard Error	1.200873879
Observations	24

ANOVA
	Df	SS	MS	F	Significance F
Regression	1	15.35635737	15.35636	10.64862	0.003559069
Residual	22	31.72615761	1.442098
Total	23	47.08251499
	Coefficients	Standard Error	t Stat	P-value	Lower 95%
Intercept	-222.540701	70.94804243	-3.13667	0.004795	-369.6779347
Year	0.115556714	0.035411839	3.263223	0.003559	0.042117056
	Growth Rate of Amount raised through IPOs			Significant at 5% level

Regression Statistics
Multiple R	0.543822071
R Square	0.295742445
Adjusted R Square	0.263730737
Standard Error	1.284779956
Observations	24

ANOVA
	df	SS	MS	F	Significance F
Regression	1	15.24973614	15.2497361	9.238571	0.006016738
Residual	22	36.31450978	1.65065954
Total	23	51.56424592
	Coefficients	Standard Error	t Stat	P-value
Intercept	235.0959793	75.90524236	3.09722981	0.005259
Year	-0.11515485	0.037886094	-3.0395019	0.006017
	Growth Rate of Number of IPO Issues			Significant at 5% level

Regression Statistics
Multiple R	0.878185416
R Square	0.771209624
Adjusted R Square	0.760810062
Standard Error	0.908530694
Observations	24

Dr. Amit Kumar Singh