1

SYNOPSIS
ON
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:CA DR. ASHISH AGRAWAL

(Ph.D., MBA, FCA, DISA, M.Com., NET,
LL.B.)

SUBMITTED BY: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

3
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 Offering
There 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 5025) 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.

8
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.

9
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.

10

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,

11
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.

12

TENTATIVE CHAPTERS
CHAPTER 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 IPO
Eligibility 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&

13

3. http://www.rediff.com/money/2004/apr/02perfin1.htm
4. http://www.blonnet.com/2006/09/04/stories/2006090402360100.htm
5. 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
9. ICFAI journal of Applied Finance VOL 11
10. FIN 311 Introduction to Finance by Dr. Sharon Garrison
11. Financial Accounting: A Business perspective 9th edition by Roger H. Hermanson
& James Don Edwards.
12. Corporate Finance & Financial Management