Topic: Some Insights into IPO Underpricing in India.

Authors: Soumya Guha Deb Source: Vilakshan: The XIMB Journal of Management; Sep2009 Volume: 6 , Issue: 2 Reviewed By: Suneesh l (B5-29) Abstract: This article is mainly concentrating on the price performance of the IPOs in the Indian market. It is necessary because knowing the pattern of the price movement of the stocks in initial performance as well as aftermarket performance will help the investors in making their investment decisions. It has been noticed that stocks offered significant positive excess returns at the initial stages after the IPO issue which is clearly evident of the underpricing of the issues by the underwriters. The investors who purchase stocks in the aftermarket are unable to get good returns in the market. Keeping in view of these issues, Mr. Soumya Guha Deb has conducted this research for the fulfillment of the following three objectives. First, is to measure the quantum of underpricing measured by first day return. Second, to measure the performance of the securities in terms of holding period return and third, to check if there is any observable relationship between underpricing of securities and the corresponding uncertainty related to it. For conducting the study, data was collected from the websites of NSE and BSE. 187 companies which had issued IPOs (with no further Public Offerings) were selected which had a daily trade volume data for the next 30 days of the public issues. The closing prices of these companies stocks were collected for the specified period. In order to analyze the first and second objective, percentage average net returns, standard deviation, minimum, maximum and median returns were calculated for the total sample, underpriced stocks and overpriced stocks as well for a period of 30 days after the issue of IPO (staring from the date of the issue). The results clearly indicated that the effect of the mispricing gets adjusted within the first day of trading itself. The average return of the issue day for the total sample is 32.92%. Whereas for the underpriced stocks it is 51.04% and for overpriced stocks it is -13.26%. The positive

returns of first day gets reversed as days passes. The return then stabilizes and becomes positive again by the end of the 6th week. This clearly indicates that those investors who buy shares from secondary market after the issue has very less scope of making profits through the stocks. For checking the relationship between underpricing of issues and the uncertainty involved in it Regression analysis has been used. In this both ex-ante and ex-post uncertainty has been analyzed and it is found that there exists a significant positive relationship between underpricing and ex-ante and underpricing and ex-post both.