The document discusses initial public offerings (IPO) which allows private companies to raise capital by selling shares to the public. It describes the different methods companies can use to go public such as Dutch auction, firm commitment, best efforts, and bought deal. The document also outlines who should consider pursuing an IPO such as any company looking to become publicly traded in order to access a wider pool of investors and raise additional capital for future growth.

1. INDIAN INSTITUTE OF PLANNING AND MANAGEMENT
BASIC FINANCIAL MANAGEMENT
PROJECT REPORT ON INITIAL PUBLIC OFFERING (IPO)
BATCH: PGP/SS/07-09
MENTOR: Mr. Sudhir Kumar
GROUP: FAS 9
PROJECT WORK DONE BY
TIRUPATHI
RAJAN
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2. PREFACE
This report is on initial public offering (IPO). The formation of organisation and
the various types of organisation are discussed.
Capital is essential for running business. Different methods of raising capital are
elaborated here.
Then we have concentrated on explaining about the methods in IPO.
We have also explained why IPO is essential for an organisation. The benefits
and drawbacks of IPO are explained so that the organisation going for IPO are
aware of the consequences.
This helps the organisation to establish in a better position by taking the suitable
decision.
The different types of markets are studied to have a deeper understanding of
market situations.
The difference between primary and secondary market is known.
The knowledge about the methodology of IPO helps us to understand the
pricing methods in IPO.
Studying Institutions involved in IPO makes us aware of the specific institutions
which were helping organisation in going for IPO.
The role of institutions in IPO is studied in depth.
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3. Advantages and disadvantages of going public are discussed in this topic. This
educates the organisations to do their business in deciding the efficient method
which enables them to earn maximum profit for the given constraints.
ACKNOWLEDGEMENT
We thank our Dean Mr. Krishnan for extending the full support in initiating
this project helping us through out the project.
We are indebted to thank Mr.Sudhir Kumar, our Mentor, for making
corrections and clarifications in the course of our project and also for directing
us towards the right path throughout the project.
We thank IIPM for providing the adequate infrastructure and helping us to get
the adequate information from the corporate.
We thank the people who helped to design the project report.
We acknowledge the contributions of the corporate as they provided the
valuable information.
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4. Table of Contents
EXECUTIVE SUMMARY...................................................................................................................5
AIM OF THE STUDY.........................................................................................................................6
ORGANISATION..............................................................................................................................7
FORMS OF ORGANISATION............................................................................................................8
FUND RAISING METHODS...............................................................................................................9
WHAT IS IPO?...............................................................................................................................10
WHY IPO? ....................................................................................................................................12
WHO SHOULD ADOPT THIS ROUTE?.............................................................................................13
FINANCIAL MARKETS ...................................................................................................................18
PRIMARY VS SECONDARY MARKET .............................................................................................21
IPO METHODOLOGY.....................................................................................................................24
DIFFERENT INSTITUTIONS INVOLVED ..........................................................................................27
ROLE OF INSTITUTIONS ...............................................................................................................33
ADVANTAGES& DISADVANTAGES OF GOING PUBLIC ..................................................................36
SUCCESSFUL IPO COMPANIES ......................................................................................................41
FAILURE IPO COMPANIES ............................................................................................................45
CONCLUSION................................................................................................................................50
BIBLIOGRAPHY.............................................................................................................................51
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5. EXECUTIVE SUMMARY
Organisations pursue collective goals. There are different types of
organisations.
Business organizations have four basic internal functions which they must
manage and control.
There are various fund raising methods.
Initial public offering (IPO), also referred to simply as a "public offering".
There are different methods of going public and there is risk involved in
investing in IPO.
Any company which wishes to become public limited can adopt the route.
A financial market is a mechanism that allows people to easily buy and sell
financial securities commodities.
The primary is that part of the capital markets that deals with the issuance of
new securities.
The secondary market is the financial market for trading of securities that have
already been issued in an initial private or public offering.
Financial institutions provide a service as intermediaries of the capital and debt
markets.
There are number of successful and failure companies in IPO.
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6. AIM OF THE STUDY
The purpose of this study is to have a thorough knowledge of IPO. So we are
also learning the types of organisation and their functions. The reasoning such
as why and what helps us to clear the doubts about IPO. The knowledge of
markets helps us to know where the IPO is possible.
The various institutions involved are known so that organisations going for IPO
are able to have easier access to these institutions.
The advantages and disadvantages of going for IPO are analysed.
Knowledge about successful and failure IPO are studied.
To have a overall understanding of the stock market in India.
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7. ORGANISATION
DEFINITION
An organization is a social arrangement which pursues collective goals, which
controls its own performance, and which has a boundary separating it from its
environment.
Groups of people work together in organizations to make a product or provide a
service. Organizations vary greatly in size from local businesses employing a
small number of people to large multinational corporations that operate
globally.
Types of organization or companies:
 On the basis of incorporation
• Statutory companies
• Registered companies
 On the basis of liability
• Companies with limited liability
• Companies with unlimited liability
 On the basis of number of members
• Private company
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8. • Public company
 On the basis of control
• Holding companies
• Subsidiary companies
 On the basis of ownership
• Government companies
• Non-government companies
Different types of organization:
• Multinational commercial companies: Multinational companies trade
globally. They may be organized with subsidiary or partner companies
trading in different countries or regions of the world
• Utility companies: These are the companies which works in order to meet
the necessary utility for the people and business
• Public service organizations: Public service organizations provide the
services and support we need in our everyday lives. They are financed
through national and local taxes.
• Retail outlets: Retail outlets are the places we use to buy goods. They
include Local shops ,High Street shops and Supermarkets
• Financial service providers: These are organizations that provide financial
services to their customers. They include: Banks, Insurance Companies
FUNCTIONS OF AN ORGANIZATION
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9. Business organizations have four basic internal functions which they must
manage and control:
• Production
• Sales and marketing
• Personnel (or human resources)
• Finance and Accounting
FUND RAISING METHODS
• Large corporations could not have grown to their present size without being
able to find innovative ways to raise capital to finance expansion.
Corporations have five primary methods for obtaining that money.
• IPO: Initial public offering also referred to simply as a "public offering," is
the first sale of stock by a private company to the public. IPOs are often
issued by smaller, younger companies seeking capital to expand, but can also
be done by large privately-owned companies looking to become publicly
traded
• Issuing Bonds: A bond is a written promise to pay back a specific amount of
money at a certain date or dates in the future. In the interim, bondholders
receive interest payments at fixed rates on specified dates. Holders can sell
bonds to someone else before they are due.
• Issuing Preferred Stock. A company may choose to issue new "preferred"
stock to raise capital. Buyers of these shares have special status in the event
the underlying company encounters financial trouble. If profits are limited,
preferred-stock owners will be paid their dividends after bondholders receive
their guaranteed interest payments but before any common stock dividends
are paid.
• Selling Common Stock. If a company is in good financial health, it can
raise capital by issuing common stock. Typically, investment banks help
9

10. companies issue stock, agreeing to buy any new shares issued at a set price if
the public refuses to buy the stock at a certain minimum price
• Borrowing. Companies can also raise short-term capital -- usually to finance
inventories -- by getting loans from banks or other lenders.
• Using profits. As noted, companies also can finance their operations by
retaining their earnings. Strategies concerning retained earnings vary.
WHAT IS IPO
Initial public offering (IPO), also referred to simply as a "public offering," is
the first sale of stock by a private company to the public. IPOs are often issued
by smaller, younger companies seeking capital to expand, but can also be done
by large privately-owned companies looking to become publicly traded.
In an IPO, the issuer may obtain the assistance of an underwriting firm, which
helps it determine what type of security to issue (common or preferred), best
offering price and time to bring it to market.
IPOs can be a risky investment. For the individual investor, it is tough to predict
what the stock will do on its initial day of trading and in the near future since
there is often little historical data with which to analyze the company. Also,
most IPOs are of companies going through a transitory growth period, and they
are therefore subject to additional uncertainty regarding their future value.
An IPO stands for Initial Public Offering. Basically, an initial public offering
occurs when a company that was previously privately owned decides to sell
shares of stock in order to raise money. The company generally finds an
investment bank to help them carry out the procedure. Generally, the company
seeking an IPO is smaller and younger and needs capital, but large privately
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11. held firms have also been known to do this.
INVESTING IN AN IPO?
IPOs are inherently very risky business. As a result, there is potential for huge
gains and huge losses. Since the company is starting to be listed on an
exchange, there is no historical market data for it and very little to research. On
the first day, the stock could gain hundreds of percentage points or lose
hundreds of percentage points.
Initial Public Offerings (IPOs) are the first time a company sells its stock to the
public. Sometimes IPOs are associated with huge first-day gains; other times,
when the market is cold, they flop. It's often difficult for an individual investor
to realize the huge gains, since in most cases only institutional investors have
access to the stock at the offering price. By the time the general public can trade
the stock, most of its first-day gains have already been made. However, a savvy
and informed investor should still watch the IPO market, because this is the first
opportunity to buy these stocks.
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12. WHY IPO?
When a privately held corporation needs to raise additional capital, it
can either take on debt or sell partial ownership. If the corporation chooses to
sell ownership to the public, it engages in an IPO. Corporations choose to "go
public" instead of issuing debt securities for several reasons. The most common
reason is that capital raised through an IPO does not have to be repaid, whereas
debt securities such as bonds must be repaid with interest. Despite this apparent
benefit, there are also many drawbacks to an IPO. A large drawback to going
public is that the current owners of the privately held corporation lose a part of
their ownership. Corporations weigh the costs and benefits of an IPO carefully
before performing an IPO.
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13. IPO METHODS
GOING PUBLIC
If a corporation decides that it is going to perform an IPO, it will first
hire an investment bank to facilitate the sale of its shares to the public. This
process is commonly called "underwriting"; the bank's role as the underwriter
varies according to the method of underwriting agreed upon, but its primary
function remains the same.
In accordance with the Securities Act of 1933, the corporation will file a
registration statement with the SEBI. The registration statement must fully
disclose all material information to the SEBI, including a description of the
corporation, detailed financial statements, biographical information on insiders,
and the number of shares owned by each insider. After filing, the corporation
must wait for the SEBI to investigate the registration statement and approve of
the full disclosure.
During this period while the SEBI investigates the corporation's filings,
the underwriter will try to increase demand for the corporation's stock. Many
investment banks will print "tombstone" advertisements that offer "bare-bones"
information to prospective investors. The underwriter will also issue a
preliminary prospectus, or "red herring", to potential investors. These red
herrings include much of the information contained in the registration
statement, but are incomplete and subject to change. An official summary of the
corporation, or prospectus, must be issued either before or along with the actual
13

14. stock offering.
After the SEBI approves of the corporation's full disclosure, the
corporation and the underwriter decide on the price and date of the IPO; the IPO
is then conducted on the determined date. IPOs are sometimes postponed or
even withdrawn in poor market conditions.
COMMON METHODS INCLUDE:
Dutch auction
Firm commitment
Best efforts
Bought deal
Self Distribution of Stock
DUTCH AUCTION
Dutch auction is a type of auction where the auctioneer begins with a high
asking price which is lowered until some participant is willing to accept the
auctioneer's price, or a predetermined reserve price (the seller's minimum
acceptable price) is reached.
The winning participant pays the last announced price.
This type of auction is convenient when it is important to auction goods quickly,
since a sale never requires more than one bid.
Theoretically, the bidding strategy and results of this auction are equivalent to
those in a sealed first-price auction.
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15. A sealed first-price auction is a form of auction where bidders submit one bid in
a concealed fashion. The submitted bids are then compared and the person with
the highest bid wins the award, and pays the amount of his bid to the seller.
FIRM COMMITEMENT
A lending institution's promise to enter into a loan agreement with a specific
entity within a certain period of time is called firm commitment.
An underwriter's agreement to assume all inventory risk and purchase all
securities directly from the issuer for sale to the public at the price specified.
BEST EFFORT
An agreement an underwriter makes to act as an agent between an issuing
company and investors.
In a best efforts agreement, the underwriter agrees to use all efforts to sell as
much of an issue as possible to the public. The underwriter can purchase only
the amount required to fulfill its client's demand or the entire issue. However, if
the underwriter is unable to sell all securities, it is not responsible for any
unsold inventory.
Best effort agreements are used mainly for securities with higher risk, such as
unseasoned offerings.
BOUGHT DEAL
A bought deal occurs when an underwriter, such as an investment bank or a
syndicate, purchases securities from an issuer before selling them to the public.
The investment bank (or underwriter) acts as principal rather than agent and
15

16. thus actually "goes long" in the security. The bank negotiates a price with the
issuer (usually at a discount to the current market price, if applicable).
The advantage of the bought deal from the issuer's perspective is that they do
not have to worry about financing risk (the risk that the financing can only be
done at a discount too steep to market price.) This is in contrast to a fully-
marketed offering, where the underwriters have to "market" the offering to
prospective buyers, only after which the price is set.
The advantages of the bought deal from the underwriter's perspective include:
Bought deals are usually priced at a larger discount to market than fully
marketed deals, and thus may be easier to sell; and
The issuer/client may only be willing to do a deal if it is bought (as it eliminates
execution or market risk.)
The disadvantage of the bought deal from the underwriter's perspective is that if
it cannot sell the securities, it must hold them. This is usually the result of the
market price falling below the issue price, which means the underwriter loses
money. The underwriter also uses up its capital, which would probably
otherwise be put to better use (given sell-side investment banks are not usually
in the business of buying new issues of securities.)
SELF DISTRIBUTION OF STOCK
Self distribution of stock is a type of IPO, or initial public offering. In this
offering, the company selling stocks will offer its shares directly to the public
and cut out the need for an underwriter. These types of IPOs save the company
money because it doesn't have to sell stock at a discounted price to the
underwriters. This can be a difficult way to purchase shares in IPOs.
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17. WHO SHOULD ADOPT THIS ROUTE
Any company which wishes to become public limited can adopt this route.
When a company lists its shares on a public exchange, it will almost invariably
look to issue additional new shares in order to raise extra capital at the same
time. The money paid by investors for the newly-issued shares goes directly to
the company (in contrast to a later trade of shares on the exchange, where the
money passes between investors). An IPO, therefore, allows a company to tap a
wide pool of stock market investors to provide it with large volumes of capital
for future growth. The company is never required to repay the capital, but
instead the new shareholders have a right to future profits distributed by the
company.
The existing shareholders will see their shareholdings diluted as a proportion of
the company's shares. However, they hope that the capital investment will make
their shareholdings more valuable in absolute terms.
In addition, once a company is listed, it will be able to issue further shares via a
rights issue, thereby again providing itself with capital for expansion without
incurring any debt. This regular ability to raise large amounts of capital from the
general market, rather than having to seek and negotiate with individual
investors, is a key incentive for many companies seeking to list.
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18. FINANCIAL MARKET
In economics, a financial market is a mechanism that allows people to easily
buy and sell (trade) financial securities (such as stocks and bonds), commodities
(such as precious metals or agricultural goods), and other fungible items of
value at low transaction costs and at prices that reflect the efficient market
hypothesis.
Financial markets have evolved significantly over several hundred years and are
undergoing constant innovation to improve liquidity.
Both general markets (where many commodities are traded) and specialized
markets (where only one commodity is traded) exist. Markets work by placing
many interested sellers in one "place", thus making them easier to find for
prospective buyers. An economy which relies primarily on interactions between
buyers and sellers to allocate resources is known as a market economy in
contrast either to a command economy or to a non-market economy that is
based, such as a gift economy.
In Finance, Financial markets facilitate:
The raising of capital (in the capital markets);
The transfer of risk (in the derivatives markets); and
International trade (in the currency markets).
They are used to match those who want capital to those who have it.
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19. Typically a borrower issues a receipt to the lender promising to pay back the
capital. These receipts are securities which may be freely bought or sold. In
return for lending money to the borrower, the lender will expect some
compensation in the form of interest or dividends.
DEFINITION
Financial markets means:
1. Organizations that facilitate the trade in financial products. I.e. Stock
exchanges facilitate the trade in stocks, bonds and warrants.
2. The coming together of buyers and sellers to trade financial products. I.e.
stocks and shares are traded between buyers and sellers in a number of ways
including: the use of stock exchanges; directly between buyers and sellers etc.
Types of financial markets
The financial markets can be divided into different subtypes:
Capital markets which consist of
• Stock markets: which provide financing through the issuance of shares or
common stock, and enable the subsequent trading thereof.
• Bond markets: which provide financing through the issuance of Bonds, and
enable the subsequent trading thereof.
Commodity markets: which facilitate the trading of commodities
Money markets: which provide short term debt financing and investment.
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20. Derivatives markets: which provide instruments for the management of
financial risk.
• Futures markets: which provide standardized forward contracts for trading
products at some future date.
Insurance markets: which facilitate the redistribution of various risks.
Foreign exchange markets: which facilitate the trading of foreign exchange.
The capital markets consist of
• Primary markets and secondary markets. Newly formed (issued)
securities are bought or sold in primary market.
Raising capital
To understand financial markets, let us look at what they are used for, i.e. what
is their purpose?
Without financial markets, borrowers would have difficulty finding lenders
themselves. Intermediaries such as banks help in this process. Banks take
deposits from those who have money to save. They can then lend money from
this pool of deposited money to those who seek to borrow. Banks popularly lend
money in the form of loans and mortgages.
More complex transactions than a simple bank deposit require markets where
lenders and their agents can meet borrowers and their agents, and where
existing borrowing or lending commitments can be sold on to other parties. A
good example of a financial market is a stock exchange. A company can raise
money by selling shares to investors and its existing shares can be bought or
sold.
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21. PRIMARY MARKET
The primary is that part of the capital markets that deals with the issuance of
new securities. Companies, governments or public sector institutions can obtain
funding through the sale of a new stock or bond issue. This is typically done
through a syndicate of securities dealers. The process of selling new issues to
investors is called underwriting. In the case of a new stock issue, this sale is an
initial public offering (IPO). Dealers earn a commission that is built into the
price of the security offering, though it can be found in the prospectus. Features
Of Primary Market are:-
1. This is the market for new long term capital. The primary market is the
market where the securities are sold for the first time. Therefore it is also called
New Issue Market (NIM).
2. In a primary issue, the securities are issued by the company directly to
investors.
3. The company receives the money and issue new security certificates to the
investors.
4. Primary issues are used by companies for the purpose of setting up new
business or for expanding or modernizing the existing business.
5. The primary market performs the crucial function of facilitating capital
formation in the economy.
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22. 6. The new issue market does not include certain other sources of new long term
external finance, such as loans from financial institutions. Borrowers in the new
issue market may be raising capital for converting private capital into public
capital; this is known as ‘going public’.
Methods of issuing securities in the Primary Market
1. Initial Public Offer;
2. Rights Issue (For existing Companies); and
3. Preferential Issue.
SECONDARY MARKET
The secondary market is the financial market for trading of securities that have
already been issued in an initial private or public offering. Alternatively,
secondary market can refer to the market for any kind of used goods. The
market that exists in a new security just after the new issue is often referred to
as the aftermarket. Once a newly issued stock is listed on a stock exchange,
investors and speculators can easily trade on the exchange, as market makers
provide bids and offers in the new stock.
FUNCTION
In the secondary market, securities are sold by and transferred from one investor
or speculator to another. It is therefore important that the secondary market be
highly liquid (Originally, the only way to create this liquidity was for investors
and speculators to meet at a fixed place regularly.
Secondary marketing is vital to an efficient and modern capital market. For
example, a traditional loan allows the borrower to pay back the loan, with
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23. interest, over a certain period. For the length of that period of time, the bulk of
the lender's investment is inaccessible to the lender, even in cases of
emergencies.
Secondary Market participants
Major secondary investment firms include: Alp Invest Partners, Coller Capital,
HarbourVest Partners, Landmark Partners, Lexington Partners and Paul Capital
Partners as well as smaller firms including Adams Street Partners, Newbury
Partners, Pantheon Ventures, Partners Group, Pomona Capital and VCFA
Group.
Additionally major investment banking firms, including Credit Suisse, Deutsche
Bank, Goldman Sachs, Lehman Brothers and Morgan Stanley have active
secondary investment programs and other institutional investors typically have
appetite for secondary interests.
Advisors to secondary market sellers include investments banks (Credit Suisse,
Lehman Brothers, Morgan Stanley, and UBS), dedicated boutique firms
(Cogent Partners and Fid equity), electronic exchanges (NYPPE), as well as
established fund placement agents (Campbell Lutyens, Probitas Partners and
Triago).
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24. IPO METHODOLOGY
IPOs generally involve one or more investment banks as "underwriters." The
company offering its shares, called the "issuer," enters a contract with a lead
underwriter to sell its shares to the public. The underwriter then approaches
investors with offers to sell these shares. Investment banks help companies and
governments raise money by issuing and selling securities in the capital markets
(both equity and debt), as well as providing advice on transactions such as
mergers and acquisitions.
A majority of investment banks also offer strategic advisory services for
mergers, acquisitions, divestiture or other financial services for clients, such as
the trading of derivatives, fixed income, foreign exchange, commodity, and
equity securities.
When a company wants to go public, the first thing it does is hire an investment
bank.
A company could theoretically sell its shares on its own, but realistically, an
investment bank is required. Underwriting is the process of raising money by
either debt or equity (in this case we are referring to equity). Underwriters are
middlemen between companies and the investing public. The biggest
underwriters are Goldman Sachs, Merrill Lynch, Credit Suisse First Boston,
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25. Lehman Brothers and Morgan Stanley. The company and the investment bank
will first meet to negotiate the deal.
Items usually discussed include the amount of money a company will raise, the
type of securities to be issued and all the details in the underwriting agreement.
The deal can be structured in a variety of ways. For example, in a firm
commitment, the underwriter guarantees that a certain amount will be raised by
buying the entire offer and then reselling to the public.
In a best efforts agreement, however, the underwriter sells securities for the
company but doesn't guarantee the amount raised. Also, investment banks are
hesitant to shoulder all the risk of an offering. Instead, they form a syndicate of
underwriters. One underwriter leads the syndicate and the others sell a part of
the issue. Once all sides agree to a deal, the investment bank puts together a
registration statement to be filed with the SEBI. This document contains
information about the offering as well as company info such as financial
statements, management background, any legal problems, where the money is
to be used and insider holdings. The SEBI then requires a cooling off period, in
which they investigate and make sure all material information has been
disclosed. Once the SEBI approves the offering, a date (the effective date) is set
when the stock will be offered to the public.
During the cooling off period the underwriter puts together what is known as
the red herring. This is an initial prospectus containing all the information about
the company except for the offer price and the effective date, which aren't
known at that time. With the red herring in hand, the underwriter and company
attempt to hype and build up interest for the issue. As the effective date
approaches, the underwriter and company sit down and decide on the price. This
isn't an easy decision: it depends on the company, most importantly, current
25

26. market conditions. Of course, it's in both parties' interest to get as much as
possible.
Finally, the securities are sold on the stock market and the money is collected
from investors.
STEPS
While many investment banks and brokerage firms reserve IPOs for their
richest clients, self distribution IPO transactions are done by the company
selling stock and are available to anyone who has knowledge of them. Broker
should keep you aware of any self distribution IPOs.
Build contacts and relationships with local businesses. Often we can only
participate in self distribution of stock IPOs if you have insider knowledge of
the company. It's true that IPOs are listed on small stock exchanges, but that
only tells you about the stock's price, not about its availability.
Help out these businesses when they are looking for venture capital. Before a
company goes public, it often has to do several rounds of fund-raising through
venture capitalists. If you can invest in companies this way, you'll likely have
advance knowledge of a self distribution IPO, should one happen.
Find out who to talk to about buying these stocks. In a self distribution IPO, you
have to buy the stock directly from the company, not from an underwriter. The
company's financial officers should be able to tell you how many stocks are
available and for what price.
Buy stocks through the company and then hold on to them for the required time.
In addition to the federal law that prohibits disclosing IPO gains for 40 days,
most IPOs require that you hold on to the stocks for 60 to 90 days. This rule
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27. stops investors from selling stocks shortly after the company goes public and
the stock price rises.
DIFFERENT INSTITUTION INVOLVED IN IPO
CENTRAL BANK
COMMERCIAL BANKS
CREDIT RATING AGENCIES
CREDIT REPORTING AND DEBT COLLECTION
FINANCIAL AUTHORITIES
INSURANCE COMPANIES
MERCHANT BANKS
MUTUAL FUNDS
SPECIALISED FINANCIAL INSTITUTIONS
VENTURE CAPITALISTS
INTERMEDIARIES
The role of intermediary is very crucial for connecting with the public issue. But
there are norms which are set by SEBI for the intermediaries. The pre-requisite
of the following intermediaries are possession of a valid certificate and
registration with SEBI.
27

28. Merchant Bankers
Registrar and Share Transfer Agents
Bankers to the Issue
Underwriters
Stock Brokers and Sub Brokers
Depositories
Merchant Bankers
They play the most vital role amongst all intermediaries. They assist the
company right from preparing prospectus to the listing of securities at the stock
exchanges. Merchant Bankers have to satisfy themselves about the correctness
and propriety of all the information provided in the prospectus. It is mandatory
for them to carry due diligence for all the information provided in the
prospectus and they must issue a certificate to this effect to SEBI.A Company
may appoint more than one Merchant Banker provided Inter-Se Allocation of
Responsibilities between the Merchant Bankers are properly structured.
Underwriters
Underwriters are those intermediaries who underwrite the securities offered to
the public. In case there is under subscription (in short, the company does not
receive good response from public and amount received from is less than the
issue size), underwriters subscribe to the unsubscribed amount so that the issue
is successful.
Registrar & Share Transfer Agents
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29. They are the person who processes and prepares the basis of allotment of shares
to public based on the applications received from the public. They are the
persons who handle dispatches of shares certificates and refund orders to the
public.
Bankers to the Issue
They are bank who accept application and application money from the public on
behalf of the company and transfer it the registrar and share transfer agent. Any
refund that has to be made is done through this bank only.
Stock Brokers & Sub-Brokers
Brokers are the intermediaries who use their contact / sources to invite the
public to subscribe for shares issued by the company. These brokers get a
commission for inviting the public.
Depositories
Depositories are persons who hold the share in the dematerialized form for the
public. This makes it easier for the share holder to trade in the secondary
market. It also reduces the burden of carrying to deliver it after every
transaction
SPECIALISED FINANCIAL INSTITUTIONS
ICICI (Industrial Credit and Investment Corporation of India)
The World Bank, the Government of India and representatives of Indian
industry formed ICICI Limited as a development finance institution to provide
medium-term and long-term project financing to Indian businesses in 1955.
29

30. 1994 ICICI establishes ICICI Banking Corporation as a banking subsidiary.
ICICI Banking Corporation is renamed as 'ICICI Bank Limited
1999 ICICI becomes the first Indian company and the first bank or financial
institution from non-Japan Asia to list on the NYSE.
IDBI (Industrial Development Bank of India Limited)
The Industrial Development Bank of India (IDBI) was established on July 1,
1964 under an Act of Parliament as a wholly owned subsidiary of the Reserve
Bank of India. In February 1976, the ownership of IDBI was transferred to the
Government of India and it was made the principal financial institution for
coordinating the activities of institutions engaged in financing, promoting and
developing industry in the country. Although Government shareholding in the
Bank came down below 100% following IDBI’s public issue in July 1995, the
former continues to be the major shareholder (current shareholding: 58.47%).
During the four decades of its existence, IDBI has been instrumental not only in
establishing a well-developed, diversified and efficient industrial and
institutional structure but also adding a qualitative dimension to the process of
industrial development in the country. IDBI has played a pioneering role in
fulfilling its mission of promoting industrial growth through financing of
medium and long-term projects, in consonance with national plans and
priorities. Over the years, IDBI has enlarged its basket of products and services,
covering almost the entire spectrum of industrial activities, including
manufacturing and services. IDBI provides financial assistance, both in rupee
and foreign currencies, for green-field projects as also for expansion,
modernization and diversification purposes. In the wake of financial sector
reforms unveiled by the Government since 1992, IDBI evolved an array of fund
and fee-based services with a view to providing an integrated solution to meet
the entire demand of financial and corporate advisory requirements of its
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31. clients. IDBI also provides indirect financial assistance by way of refinancing of
loans extended by State-level financial institutions and banks and by way of
rediscounting of bills of exchange arising out of sale of indigenous machinery
on deferred payment terms.
IFCI (Industrial Finance Corporation of India)
IFCI Venture Capital Funds Ltd. (IVCF) was originally set up by IFCI as a
Society by the name of Risk Capital Foundation (RCF) in 1975 to provide
institutional support to first generation professionals and technocrats setting up
their own ventures in the medium scale sector, under the Risk Capital Scheme.
In 1988, RCF was converted into a company, Risk Capital and Technology
Finance Corporation Ltd. (RCTC), when it also introduced the Technology
Finance and Development Scheme for financing development and
commercialisation of indigenous technology. To reflect the shift in the
company’s activities, the name of RCTC was changed to IFCI Venture Capital
Funds Ltd. (IVCF) in February 2000.
Over the years, IVCF has provided financial assistance to new ventures,
supported commercialisation of new technologies, helped in widening
entrepreneurial base in the country. It is IVCF who has catalysed introduction of
concept of venture capital activity in India.
IIBI (Industrial Investment Bank of India)
The "Industrial Investment Bank of India Ltd ", is India’s only all-India public
financial institution headquartered in Kolkata.
They acquire and/or trade in varied financial instruments from term loans,
equity or debentures and bonds, structured products besides providing various
services like deferred payment guarantee, Loan Syndication, Merchant Banking
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32. services such as Issue management, underwriting and guarantees, Project /
reconstruction / one-time-settlement consultancy/appraisal.
They have a track record of profitability since inception in 1997 till
2002-03.However we have serviced our outstanding debt till date.
SIDBI (Small Industries Development Bank)
SIDBI Venture Capital Limited (SVCL) is a wholly owned subsidiary of SIDBI,
incorporated in July 1999 to act as an umbrella organisation to oversee the
Venture Capital operation of SIDBI. SVCL will manage the various Venture
Capital Funds launched/ being launched by SIDBI. Current fund managed by
SVCL is:
National Venture Fund for Software and Information Technology (NFSIT)
NABARD (National Bank for Agriculture and Rural Development)
National Bank for Agriculture and Rural Development is established as a
Development Bank for providing and regulating credit and other facilities for
the promotion and development of agriculture, small industries, cottage and
village industries, handicrafts and other rural crafts and other allied economic
activities in rural areas with a view to promoting integrated rural development
and securing prosperity of rural areas and for matters connected therewith or
incidental thereto.
HDFC (Housing Development Finance Corporation)
HDFC Securities, a trusted financial service provider promoted by HDFC Bank
and JP Morgan Partners and their associates, is a leading stock broking
company in the country, serving a diverse customer base of institutional and
retail investors.
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33. ROLE OF ALL INSTITUTIONS
Financial institutions provide a service as intermediaries of the capital and debt
markets.
They are responsible for transferring funds from investors to companies, in need
of those funds. The presence of financial institutions facilitates the flow of
monies through the economy.
To do so, savings accounts are pooled to mitigate the risk brought by individual
account holders (see adverse selection) in order to provide funds for loans. Such
is the primary means for depository institutions to develop revenue. Should the
yield curve become inverse, firms in this arena will offer additional fee-
generating services including securities underwriting, and prime brokerage.
Entity with large amounts to invest, such as investment companies, mutual
funds, brokerages, insurance companies, pension funds, investment banks and
endowment funds. Institutional investors are covered by fewer protective
regulations because it is assumed that they are more knowledgeable and better
able to protect themselves. They account for a majority of overall volume.
A bank, insurance company, registered investment company (generally
speaking, a mutual fund), business development company, or small business
investment company;
33

34. An employee benefit plan, within the meaning of the Employee Retirement
Income Security Act, if a bank, insurance company, or registered investment
adviser makes the investment decisions, or if the plan has total assets in excess
of $5 million;
In essence institutional investor, an accredited investor is defined in the rule as:
A charitable organization, corporation, or partnership with assets exceeding $5
million;
A director, executive officer, or general partner of the company selling the
securities;
A business in which all the equity owners are accredited investors;
a natural person who has individual net worth, or joint net worth with the
person’s spouse, that exceeds $1 million at the time of the purchase;
a natural person with income exceeding $200,000 in each of the two most recent
years or joint income with a spouse exceeding $300,000 for those years and a
reasonable expectation of the same income level in the current year; or
a trust with assets in excess of $5 million, not formed to acquire the securities
offered, whose purchases a sophisticated person makes.
A non-bank person or organization that trades securities in large enough share
quantities or dollar amounts that they qualify for preferential treatment and
lower commissions is called financial institutions.
Institutional investors face fewer protective regulations because it is assumed
that they are more knowledgeable and better able to protect themselves.
34

35. Watching what the big money is buying can sometimes be a good indicator, as
they (supposedly) know what they are doing. Some examples of institutional
investors are pension funds and life insurance companies.
An institutional investor is an investor, such as a bank, insurance company,
retirement fund, hedge fund, or mutual fund that is financially sophisticated and
makes large investments, often held in very large portfolios of investments.
Because of their sophistication, institutional investors may often participate in
private placements of securities, in which certain aspects of the securities laws
may be inapplicable. For example, in the United States, a private placement
under Rule 506 of Regulation D may be made to an "accredited investor"
without registering the offering of securities with the Securities and Exchange
Commission.
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36. ADVANTAGES AND DISADVANTAGES FOR A COMPANY GOING
PUBLIC
INTRODUCTION
An initial public offering (IPO) is the first sale of stock by a company. Small
companies looking to further the growth of their company often use an IPO as a
way to generate the capital needed to expand. Although further expansion is a
benefit to the company, there are both advantages and disadvantages that arise
when a company goes public.
Before deciding whether or not to go public, companies must evaluate all of the
potential advantages and disadvantages that will arise. This usually will happen
during the underwriting process as the company works with an investment bank
to weigh the pros and cons of a public offering and determine if it is in the best
interest of the company.
ADVANTAGES
There are many advantages for a company going public. As said earlier, the
financial benefit in the form of raising capital is the most distinct advantage.
Capital can be used to fund research and development, fund capital expenditure
or even used to pay off existing debt. Another advantage is an increased
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37. public awareness of the company because IPOs often generate publicity by
making their products known to a new group of potential customers.
Subsequently this may lead to an increase in market share for the company. An
IPO also may be used by founding individuals as an exit strategy. Many venture
capitalists have used IPOs to cash in on successful companies that they helped
start-up
Reverse Merger With a Public Shell:
A "reverse merger" is a method by which a private company goes public. In a
reverse merger, a private company merges with a public company with no
assets or liabilities. The publicly traded corporation is called a "public shell"
since all that exists is its corporate structure. By merging into such an entity, a
private company becomes public.
The Private company merges into a public company and obtains the majority of
its stock (usually 90% or more). The private company normally will change the
name of the public corporation (often to its own name) and will appoint and
elect its management and board directors.
The advantages of public trading status, which are outlined in greater detail
below, include the possibility of commanding a higher price for a later offering
of the company's securities. Going public through either a reverse merger or a
registered spin-off (described below) allows a private company to go public,
typically at a lesser cost and with less stock dilution than through an initial
public offering (IPO).
In an IPO, the process of going public and raising capital is combined. In a
registered spin-off or reverse merger, these two functions are unbundled - a
37

38. company can go public without raising additional captial. Through this
unbundling operation, the process of going public is simplified greatly.
The Private Company which has gone public obtains the benefits of public
trading of its securities, namely:
Increased liquidity of the ownership shares of the company.
Higher share price and thus higher company valuation.
Greater access to the capital markets through the possibility of future stock
offerings.
The ability of the company to make acquisitions of other companies using the
company's stock.
The ability to use stock incentive plans to attract and retain key employees.
Going public can be a part of a retirement strategy for business owners.
Simply by merging into a public company, a private corporation can increase its
value by three to five times. .
The newly created value can become part of an estate providing value not only
for the founders, but for generations to come.
It is essential that public companies, especially newly public companies,
actively maintain and manage a financial communications program.
A newly formed public company would be well-advised to invest in consulting
services, to plan and execute a strategy for building and maintaining an active
interest in your company within the financial community.
38

39. Consultants are available to assist the public corporation in providing corporate
relations services intended to increase awareness of your company on Wall
Street.
For most people, recapitalization and stock value appreciation would seem
reasons enough to be publicly owned, but there are other advantages that a
company can gain. A public company has a broader equity base, thus increasing
it's opportunities for obtaining financing for future projects. Increasing the
bottom line net worth of a company, as well as its debt to equity ratio, enables it
to borrow at lower interest rates from traditional institutions.
DISADVANTAGES
Profit-sharing
If the firm is sitting on a highly successful venture, future success (and profit)
has to be shared with outsiders. After the typical IPO, about 40% of the
company remains with insiders, but this can vary from 1% to 88%, with 20% to
60% being comfortably normal.
Loss of Confidentiality
A major reason for firms to resist going public is the loss of confidentiality in
company operations and policies. For example, a company could be destroyed if
the company were to disclose its technology or profitability to its competitors.
Reporting and Fiduciary Responsibilities
Public companies must continuously file reports with the SEC and the exchange
they list on. They must comply with certain state securities laws ("blue sky"),
NASD and exchange guidelines. This disclosure costs money and provides
information to competitors.
39

40. Loss of Control
Outsiders are often in a position to take control of corporate management and
might even fire the entrepreneur/company founder. While there are effective
anti-takeover measures, investors are not willing to pay a high price for a
company in which poor management could not be replaced.
IPO Expenses
An IPO is a costly undertaking. A typical firm may spend about 15-25% of the
money raised on direct expenses. Even more resources are spent indirectly
(management time, disruption of business).
Immediate Cash-out usually not permitted
Typically, IPO entrepreneurs face various restrictions that do not permit them to
cash out for many months after the IPO.
Liability
The company, its management, and other participants may be subject to liability
for false or misleading statements and omissions in the registration documents
or in the reports filed by the company after it becomes public. In addition
management may be subject to law suits by the stockholders for breaches of
fiduciary duty, self dealing and other claims, whether or not true.
40

41. FAILURE COMPANIES IN IPO
EMAAR MGF
MGF Land (EMLL), a joint venture (JV) between Properties PJSC of Dubai
and MGF Development of India (MGF), develops properties in the residential,
commercial, retail and hospitality sectors across India. Properties PJSC of
Dubai, one of the promoters, is among the worlds leading real-estate companies,
with development of about 50 million square feet (sq ft) of residential,
commercial and other business segments and operations in 16 countries end
December 2007. Over the last 10 years, MGF has become one of the key
players in retail real-estate development in north India.
REASON FOR IPO FAILURE
Emaar MGF's third largest IPO issue after Reliance Power and DLF that was to
close on a particular day, has been extended by six days due to the poor
response it has elicited.
The move has ostensibly been compelled by volatility in markets resulting in
poor investor response.
According to Bombay Stock Exchange (BSE) statistics, the IPO has been
subscribed only by a negligible 0.74 percent.
The UAE-based real estate conglomerate was also forced to lower its price band
from Rs.540-630 to Rs.530-630.
For the second time within a week the company has slashed its price band.
41

42. When the much-hyped issue opened Feb 1, the company had reduced the price
band from Rs.610-690 to Rs.540-630.
MGF has offered 102.57 million shares, or 10.4 percent of the promoters' stake,
through the IPO.
The company had hoped to raise Rs. 70.78 billion through the share sale - the
third largest issue in the country after Reliance Power and DLF.
This is the second important IPO that has come under the onslaught of the
volatility in the Indian markets.
POWERSOFT GLOBAL SOLUTIONS
Powersoft Global Solutions Ltd. (PGSL) was originally incorporated in
November 1992 as Bhandari Food Flavours Ltd. Its name was changed to the
present in March 2000.
PGSL provides IT solutions and services like application development,
maintenance and integration, software product development, engineering
outsourcing, Radio Frequency Identification (RFID) solutions, research and
development services and Business Process Outsourcing.
It provides business solutions to manufacturing, logistics, retail, consumer
electronics, pharmaceuticals, aerospace, defense and utilities industries in North
America, Europe and the Asia-Pacific.
PGSL is a subsidiary of Nirvann Corp, North America and has also entered into
the agreement with Nirvann Corp. to market and promote the services and
solutions developed by the company.
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43. OBJECTS OF IPO ISSUE
• To upgrade existing infrastructure facilities with an investment of
Rs. 262 lakhs.
• To set-up an R&D center, an investment of Rs. 80 lakhs
• To meet the expenses of Overseas Marketing with an investment of
Rs. 251 lakhs.
• To meet the costs of strategic acquisitions with an investment of Rs.
3 lakhs.
• To meet the Working Capital requirement of Rs.222 lakhs and the
issue expenses of Rs.75 lakhs.
REASON FOR IPO FAILURE
The company had made a public issue during 1996 but did not receive the
money due on calls and that project failed badly. Against a projected income of
Rs. 1300 lakhs in 1999 the company could only earn 7.34 lakhs. The
profitability was hit and the company made losses in 1998 and 1999.
The ‘Objects of the Issue’ for which the funds are being raised has not been
appraised by any Bank or Financial Institution. Fund requirement is the
company estimates and the funds received from the issue will be deployed at the
sole discretion of the Management.
PGSL, a small player in the IT space with only 70 professionals on rolls, is
exposed to intense competition from existing large players as well as global
players like IBM and Accenture deciding to enter the Indian market and emulate
the Indian business model.
43

44. Compared to its competitors like 3i InfoTech Ltd., Geodesic Information
Systems Ltd., Hinduja TMT Ltd. iGATE Global Solutions Ltd., Logix
Microsystems Ltd., Onward Technologies Ltd. PGSL’s pre issue EPS is the
lowest at 1.85 For FY05. Its return on net worth (RONW) as on FY05 is
amongst the lowest at 6.05%. Its select peer group RONW ranges from 4% to
66.57% and EPS ranges from Rs.4- Rs.10 for FY05.
44

45. SUCCESSFUL COMPANIES IN IPO
OMAXE
Omaxe Limited, an ISO 9001:2000 certified real estate development and
Construction Company with operations in 30 cities and 9 states in India. New
Delhi-based Omaxe has a land bank of over 3,000 acre and at present 47
projects are under development.
Omaxe, which commenced operations in 1989, is engaged in real estate
development and construction with operations in 30 cities and 9 states in India.
Since the inception of the company, it has completed 120 construction projects.
In 2001, Omaxe diversified into the real estate development business with a
focus on residential and commercial properties. As of Mar. 31, 2007 Omaxe has
completed 8 residential projects covering nearly 5.13 million sq. ft. of area.
Omaxe holds 3,255 acres of land reserve including joint ventures and
collaborations as of Mar. 31, 2007.
Omaxe Ltd. has appointed DSP Merrill Lynch Limited, Citigroup Global
Markets India Private Limited, & UBS Securities India Private Limited as the
Global Coordinators and Joint Book Running Lead Managers (“JBRLMs”). JM
Morgan Stanley Private Limited is the Book Running Lead Manager (“BRLM”)
and ICICI Securities Limited is the Co-Book Running Lead Manager
(“CBRLM”).
New Delhi-based Omaxe has a land bank of over 3,000 acre and at present 47
projects are under development.
REASON FOR IPO SUCCESS
45

46. Real estate firm Omaxe, which received a robust response for its initial public
offer, has fixed the issue price at Rs 310 a share - upper end of the price band.
The issue price of Rs 310 had taken the total proceeds raised by the firm to Rs
551.69 cr, excluding a green-shoe option. The issue price was fixed at the upper
end of the price band of Rs 265-310 a share, the company said in a statement.
They have taken the advice of merchant bankers of whether to exercise green
shoes option or not. In all probability the option was exercised. After including
the green shoe option of 17.50 lakh equity shares to the total issue, the company
was to raise up to Rs 605.94 cr.
The IPO of the construction firm consisting of 1,77,96,520 equity shares got
subscribed by over 68 times. The portion reserved for qualified institutional
buyers received an overwhelming response getting subscribed 95 times, while
the non-institutional buyer’s part witnessed a demand for over 80 times. Retail
investor’s portion was oversubscribed around 13 times.
The issue constitutes 11.20 per cent of the fully diluted post-issue paid-up
capital of the company, if the green shoe option is exercised, and 10.30 per cent
if the option is not exercised. The proceeds of the issue was utilised for
payments related to land, repayment of loan and to fund the development and
construction costs of some of the company's projects.
SUN TV
46

47. Sun TV Network is a Rs 16000-crore (4 Billion $) Indian cable television
network based in Chennai, Tamil Nadu, India. Established in 1992, it offers a
plethora of television channels in 4 languages covering the whole of southern
India. It was the first fully privately owned Tamil channel in India when it
emerged in 1992. Its serials and soaps have generated the maximum TRP for
viewership all over India, making it the most popular network of channels in
India. Till 2007 coupled with the DMK-backed Karunanidhi family, it was the
largest political-media family in India till the split in November 2005.
All its channels occupy the top spots in their respective languages. Sun TV, in
Tamil is the Network's flagship and most popular channel. Being the premier
channel, Sun TV is often used to refer to the Sun TV Network in general.
Kalanithi Maran is the Chairman and Managing Director of media giant Sun
Network and has been given various awards including the CNBC "Business
Excellence Award" in 2005.
Sun Network also offers FM Radio Stations (93.5 FM) and has recently forayed
into the print business. In addition, it has also recently launched a DTH satellite
television service entitled Sun Direct.
Sun TV entered the capital market with the public issue of 6,889,000 equity
shares of face value of Rs 10 to be issued at a premium. The price band of Rs
730-Rs 875, implies a market capitalisation of Rs 5,037-Rs 6,037 crore.
After issue, Sun TV's CMD Kalanithi Maran will continue to retain 90 per cent
of the equity stake in the company. While 60 per cent of the shares on offer
have been reserved for QIBs, 10 per cent has been earmarked for non-
institutional investors. The remaining 30 per cent is for retail investors.
Issue opened on: April 3, 2006
47

48. Issue closed on: April 7, 2006
Price Band: Rs 730-875
REASON FOR IPO SUCCESS
Sun TV Network, for instance, got oversubscribed by 47 times and listed at a
68% premium.
The Sun conglomerate, which started out with a single Tamil channel has
steadily branched out into various other media ventures over the past decade. It
picked up Kungumam, a weekly magazine, and then bought and turned around
Dinakaran, a Tamil daily.
Since Kalanithi Maran started his media business 13 years back, he has been
fighting against one rival: himself. Now, after years of staying almost
unchallenged in the southern region, he is setting himself up for battle in newer
markets.
He has an expanded war chest of Rs 6.03 billion which he raised through an
initial public offering (IPO) of Sun TV Ltd (STL) to pledge his new bet on
private FM broadcasting. Also in the pipeline is a direct-to-home (DTH) service
through Sun Direct TV, a privately held company.
Holding 90 per cent stake in STL, Maran is worth Rs 78.28 billion. And the
market cap of STL has hit Rs 86.98 billion in a brief span of two weeks,
enjoying a 44 per cent premium over its IPO price. In media business, only
Subhash Chandra's Zee Telefilms has a higher market cap with Rs 110.9 billion.
Advertising income was up 24.7 per cent to Rs 889 million in the first half of
the fiscal, as against Rs 713 million a year ago. This was the period when Sun's
combined audience share for all its Tamil channels (Sun TV, Sun News, KTV
48

49. and Sun Music) went up from 60 per cent in FY05 to 70 per cent in the first half
of FY06. In Kerala, the company's aggregate audience from its Malayalam
channels (Surya TV and Kiran TV) rose from 29 per cent to 34 per cent during
this period.
Analysts also expect Surya TV to put up a better show in FY06, estimating its
revenues to touch Rs 450 million. The Malayalam channel, facing stiff
competition from Asianet, was raking in close to Rs 300 million. Other channels
like KTV have also the potential to stimulate marginal growth.
CONCLUSION
49

50. Thus we have studied about the organisation and various forms of organisations.
How the funds can be raised is studied so as to know the effective way of
accessing capital for the organisation.
The study about IPO and its methods helped us to know the different ways of
going for an IPO.
Analysis of financial markets helped to know about the various types of
markets.
The advantages and disadvantages of going for an IPO are studied.
Thus the overall knowledge about IPO is gathered.
BIBLOIGRAPHY
www.capitalmarkets.com
50

51. www.moneycontrol.com
www.yahoofinance.com
www.wikipedia.org
www.indiaipo.com
www.sebi.gov.in
money.rediff.com
books.google.com
Basic Financial Management by I.M. Pandey
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