Indian Banking Sector
Author: IPO Scenario; its Impact
Date: 2019-01-10T10:49:21.899010+00:00

Indian Banking Sector -

Initial Public Offering Scenario
and
its Impact

BACKGROUNDER

November 2017

Price : Rs. 100/- ( Excluding postage)

© THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

All rights reserved. No part of this book may be translated or copied in any
form or by any means without the prior written permission of The Institute of

Company Secretaries of India.

Published by :

THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

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New Delhi - 110 003

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Printed at Chandu Press /200/November 2017

(ii)

PREFACE

Banking sector plays a significant role in the functioning and
development of the economy. In India too, banking sector is contributing
immensely towards the objective of financial inclusion. In this regard,
banks need capital infusion for their organic growth. Further, there is a
curiosity to ascertain the future trend of IPO issues of both public and
private sector banks, as with the passage of time private sector banks
too have captured center stage in Indian economy.

This book attempts to delve deep into various facets of IPO issues and
its impact in the perspective of Indian banking sector. The impacts have
been studied on the crucial dimensions, namely, return on Assets; Initial

Return or Raw Return and Market Adjusted Excess Return on the selected
public and private sector banks from the date of their listing to certain
time horizons. Further, as it is an accepted truth that profit is the oxygen
for any form of business and so an analysis have been done to study
correlation between Reported Profit After Tax (PAT) and IPO values of
selected public and private sector banks to know whether there is a
positive or negative correlation between the two variables.

Initial Return and Market Adjusted Excess Return assist in ascertaining
the returns generated by the stock post listing. As the shareholders wealth
maximization has gained substantial significance, the aforesaid methods
help to know whether the shareholders of the selected banks stands
benefitted or not, after the listing of their IPOs. Return on Assets being
an important financial yardstick, have been applied to observe whether
there is a significant difference or not in the return on assets of selected
public and private sector banks. Another important area of focus is
correlation between IPO values of selected banks and non-performing
assets, to ascertain whether there exists a positive or negative correlation
between the aforesaid variables. In other words, through correlation
analysis an effort has been made to ascertain whether IPO issued do
exert any positive impact on meeting the loss due to non-performing
assets.

We are thankful to CS Shailashri Bhaskar, Former DGM, SEBI and Practicing

Company Secretary, Mumbai for reviewing the book and providing
valuable academics and research inputs

(ii )

I commend the dedicated efforts of Mr. Akinchan B. Sinha, Assistant

Director, ICSI for preparing the manuscript of this research publication
with the help of statistical and financial tools under the guidance of CS

Sonia Baijal, Director, ICSI.

I am certain that the book will be of immense academic and research
value to Company Secretaries both in practice and employment,
professionals representing professional bodies, industry and students
pursuing Company Secretaryship and other professional courses.

I wish readers a Happy Reading!

CS (Dr.) Shyam Agrawal

President

The Institute of Company Secretaries of India

Place: New Delhi

Date: November 02, 2017

(iv)

C O N T E N T S

Chapter 1

1

INTRODUCTION

Chapter 2

16

IPO TRAJECTORY OF BANKS & CRITICAL ASPECTS

Chapter 3

30

GAUGING IPO PERFORMANCE

Chapter 4

42

THE REGULATORY ECOSYSTEM

Chapter 5

75

GROWTH PROSPECTS FOR IPO

(v)

Chapter -1

Introduction

Banking Sector- Fulcrum of Indian Economy

Banking sector plays a crucial role in the functioning and economic development of an
economy. In al economic systems, banks play a leading role in planning and implementing
financial policy. The difference lies in prioritizing goals and methods embraced for their
attainment. Going by the neo-liberal approach, earning higher profits by utilizing all
resources is an end in itself, while in the socialistic systems bank operations also aims at
improving economy in general and at satisfying social needs.

Banks accepts deposits and provide loans and derive a profit from the difference in the
interest rates paid and charged to depositors and borrowers respectively. The process
undertaken by banks of taking in funds from a depositor and then lending them out to
a borrower is termed as financial intermediation. Banking sector flourish on the financial
intermediation capabilities that allow them to lend out money and receiving money on
deposit. The bank is the most significant financial intermediary in the economy as it
bridges the gap between surplus and deficit economic agents.

Banks contribute immensely towards the economic development of a nation by facilitating
business activities. Banks also facilitate the development of saving plans and hold a key
position in the determination of Government’s monetary strategies.

With reference to India, banking sector is substantially different from that of other

Asian nations because of country’s distinct geographic, social and economic facets.

India possess a gigantic land size, a diverse culture, and extreme income differences,
which are marked among its regions. There are high levels of il iteracy among a substantial
percentage of populace but at the same time, the country has a huge pool of managerial
and technologically advanced talents. Approximately 30 to 35 percent of the population
lives in metro and urban cities while the rest of population resides in semi-urban and
rural areas. The country’s economic policy structure is a combination of both socialistic
and capitalistic characteristics with a heavy bias towards public sector investment. India’s
emphasis on growth-led exports rather than “export led growth” of other Asian
economies, with thrust on self-reliance through import substitution and aforesaid features
are all reflected in the structure, size, diversity of the country’s banking and financial
services sector.

Towards the dawn of the 20th century, with the arrival of modern industry in our country,
the need for government regulated system was realised. The British Government began
to pay attention towards the requirement for an organized banking sector in the country
and the Reserve Bank of India was established to regulate the formal banking sector in
the country. Ever since the banks were nationalized in 1969, banks have been playing a

1

2

Indian Banking Sector - Initial Public Offering Scenario & its Impact
crucial role in the socio-economic life of the country. Their role was not only restricted
to suppliers of credit, but also as harbingers of social and economic development
through various enterprises, many of which were tiny but possess phenomenal
capabilities.

It is noteworthy that India is one of the emerging economies of the globe and paucity
of proper banking services wil jeopardize its economic growth. In past several decades,

Indian banking sector have attained numerous milestones. Its operations are no longer
shackled in big cities, rather they have expanded their wings to Tier-II & III towns and
far flung areas of India, thereby contributing immensely towards the objective of ‘Financial

Inclusion’.

Banks have diversified their activities and forayed into new products and services that
include opportunities in credit cards, consumer finance, wealth management, life and
general insurance, investment banking, mutual funds, pension fund regulation, stock
broking services, custodian services, private equity and so on and so forth. Further,
several leading Indian banks have forayed into offshore markets by establishing offices
in foreign countries, by themselves or through their subsidiaries.

Growth of Indian banking sector and the role it is playing in adding steam to the
economic growth is evident from the deposit and credit statistics (please refer exhibit

1 & 2). It can be observed from the exhibits that deposits have taken a giant leap from

US$ billion 495 in FY06 to US$ billion 1,466 in FY16, whereas, Credit soared from

US$ billion 428 in FY07 to US$ billion 1016 in FY16. Deposits under Pradhan Mantri

Jan Dhan Yojana (PMJDY) are rising. As on November 09, 2016, US$ 6,971.68 million
were deposited, while 255.1 million accounts were opened.

Exhibit 1

Healthy Growth of Banking Sector- Deposits

Indian Banking Sector - Initial Public Offering Scenario & its Impact

3

Exhibit 2

Healthy Growth of Banking Sector - Credit

Thus looking to the prodigious growth of Indian banking industry, it generates paramount
academic and research interests to delve deep into the sources of long term finance of
banking sector, especially through IPO. The study will cover IPO (Initial Public Offer),

FPO (Follow-on Public Offer) and OFS (Offer for Sale).

Contribution towards Financial Inclusion

India has nearly 600,000 villages and 640 districts. A substantial chunk of population,
particularly in rural areas, is excluded from the convenient access to finance

(Gounasegaran, Kuriakose & Iyer, 2013). Forty percent of the households having bank
accounts, but merely 38 percent of the 117,200 branches of scheduled commercial
banks are functioning in rural areas. Accessibility of financial services at affordable and
apposite prices has always been a global issue. Hence, a need of inclusive financial
system has been felt in a broader way not only in India, but has become a policy priority
in different countries. It is a well accepted fact that financial access can play a big role
in improving the financial conditions and living standard of the poor and the deprived
class. In view of this, RBI has been constantly fostering the banking sector to extend the
banking network both by establishing new branches and installation of new ATMs (Dangi

& Kumar, 2013).

Financial inclusion implies the delivery of financial services, including banking services
and credit, at a reasonable cost to the majority sections of the disadvantaged and low-
income groups, based on the magnitude of their access to financial services like savings
and payment account, credit insurance, pensions etc. (Singh et al., 2014).

The various financial services cover access to savings, loans, insurance, payments and
remittance facilities provided by the formal financial system. This facet of financial
inclusion is of big significance in offering economic security to individuals and families

(Kelkar, 2014). It is heartening to note that Financial Stability and Development Council

(FSDC) of India have a specific mandate for financial inclusion and financial literacy.

4

Indian Banking Sector - Initial Public Offering Scenario & its Impact

Providing fil ip to the concept of financial inclusion, a broad network of financial institutions has been set up over the years. The measures initiated by the Reserve Bank of India

(RBI) and the Government of India towards strengthening financial inclusion since the
late 1960s have significantly improved the access to the formal financial institutions.

RBI set up a commission (Khan Commission) in 2004 to look into Financial Inclusion
and the recommendations of the Commission were included into the Mid-term review
of the policy (2005-06). In the report RBI insisted upon “no-frills” banking account in
order to attain greater Financial Inclusion.

It can be said without an iota of doubt that efforts invested for stimulating financial
inclusion have delivered fruits and it is manifested in the number of households (as per

2001 and 2011 census) subscribing to banking services and growth in the number of
branches of public sector banks-Population Group Wise (please refer exhibits 3 and 4).

Exhibit 3

Comparative statement of number of households availing
banking services as per

Census 2001 & 2011

Source: Department of Financial Services, Ministry of Finance, Government of India

Exhibit 4

Number of functioning branches of Public Sector

Banks-Population Group Wise

As on

Rural

Semi Urban

Urban

Metropolitan

Total

31.03.2011

20658

16217

13450

12612

62937

31.03.2012

22379

17905

14322

13244

67850

31.03.2013

24243

19642

15055

13797

72737

31.03.2014

27547

21952

16319

14644

80462

31.03.2015

29634

23549

17387

15325

85895

Source: Department of Financial Services, Ministry of Finance, Government of India

Indian Banking Sector - Initial Public Offering Scenario & its Impact

5

Literature Review

Indian capital markets have displayed a prodigious growth in the post liberalization eon.

It remains one of the most pliant globally and poised to be one of the top destinations
for domestic and global businesses to expand and invest into. Procuring capital is a
strategic priority across India and role of Capital Markets has assumed far greater
importance and urgency. Much has happened in the Indian capital market in more than
a decade. With its foundations laid in socialist based economy of four decades, with
stringent government control over private sector participation, foreign trade and foreign
direct investment, India opened its doors to the globe in the early 1990s. Since then its
economy and financial markets witnessed drastic changes, largely in response to the
economic crisis of the late 1980s. The government control on foreign trade and investment
were relaxed and the blockades to entry in the days of licence raj were relaxed.

The birth of Securities and Exchange Board of India (SEBI) as the supreme capital market
regulator displayed India’s commitment to come across as a robust economic force,
through setting up of market best practices of increased corporate disclosure and enhanced
investor protection.

Important reforms were initiated in the regulation of the securities market since 1992 in
conjunction with the overall economic and financial reforms. A significant component
of the reform strategy was building a robust independent market regulator. The SEBI

Act, which was enacted in early 1992, established SEBI as an autonomous body. The
apex capital market regulator was empowered to regulate stock exchanges, brokers,
merchant bankers and market intermediaries. The Act provided SEBI the requisite powers
to ensure investor protection and orderly development of the capital markets.

The initiation of free pricing in the primary capital market has substantially deregulated
the pricing control instituted by the erstwhile CCI regime. While, the issuers of
securities can now procure capital without taking approval from any authority pertaining
to pricing, however the issuers are needed to adhere to the SEBI guidelines for

Disclosure and Investor Protection, which, in general, cover the eligibility norms for
making issues of capital (both public and rights) at par and at a premium by different
types of companies.

The freeing of the pricing issues resulted to an unprecedented increase of activity in the
primary capital market as the corporate mobilized mammoth resources. However, it did
expose the insufficiencies of the regulations. In order to address these inadequacies,

SEBI strengthened the rules for public issues in April 1996.

SEBI introduced the theory of IPO grading, done by a credit rating agency registered
with SEBI, for all primary market issues, who file their draft Red Herring Prospectus, on
after 1st May, 2007. The grading is done after taking into account governance structure
and financial strength.

Numerous studies have observed the performance of initial public offerings (IPOs) in
several markets. These studies document that the initial under-pricing is a common
phenomenon in every stock market, with the amount of under-pricing varying from one
market to another. The majority of studies include the equity markets of US (Ibbotson

1975), (Ritter 1984), (Ritter 1991), (Aggarwal and Dahiya 2000), (Tinic, 1989), (Peavy

1990), (Loughran, Ritter et al. 1994), UK (Keasey and H. 1992; Levis 1993), Germany

6

Indian Banking Sector - Initial Public Offering Scenario & its Impact

(Uhlir 1989; Ljungqvist 1997), Canada (Jog and L. 1987) (Suret, Cormier and Lemay,

1990), (Falk and Thornton 1992), (Jog and Siristrava 1994; Jog 1997; Kooli and Suret

2001), China (Dongwei and Fleisher, 1999), Switzerland (Kunz and Aggarwal 1994),

Australia (Lee, Taylor et al. 1996). There are relatively lesser studies on IPOs in the
equity markets of non-European countries. Among them, (Lee, 1996) investigates IPOs
in Singapore; (Kim, 1995) in Korea, (Aggarwal, Leal et al. 1993) in Chile, Mexico and

Brazil; (Firth and Liau-Tan 1997) in New Zealand, (Laiw, Liu et al. 2000) for Taiwan.

These studies also report the existence of the initial under-pricing in these markets.

Ajay Shah (1995) studied the basic time-series properties of the number and value of

Indian IPOs per month, variation in issue and listed price, factors leading to delay in
listing, and modelling the cross-sectional variation of issue and listed price. 2056 IPOs
traded and listed during 1991 – 1995 were chosen by the researcher in which 1819

(88.5%) provided positive returns from issue date to listing date and aggregate variation
between issue price and listed price was 105.6%. Time series analysis showed a
remarkable rise in the number of IPOs per month from 20 a month before the abolition
of Controller of Capital Issues in May 1992 to the region of 80 a month from the later
part of 1993 onwards due to the commencement of free pricing of securities.

Arwah Arjun Madan (2003) assessed the long run performance of IPOs in the Indian
primary market during the pre and post liberalization eon. A sample of 1597 companies
having made IPOs during 1989 to 1995 at Bombay Stock Exchange, now BSE Ltd. were
studied. Considering the net return, 79.4% of the total 1597 IPOs recorded a positive
return on the listing day and 20.6% of IPOs registered negative returns.

Ajay Pandey (2005) studied initial returns (difference between issue price and listing
price) and long run performance of IPOs. The researcher considered 84 IPOs from the
period 1992-2002, coming out with fixed price and book building trajectory from the

Indian capital market. The study revealed that the IPOs offered through fixed price
method raised only a small amount of capital. On the contrary, IPOs offered through
book building approach mobilized. It was further observed that IPOs offered through
both fixed price and book building approach under performed in the first two years
subsequent to listing.

Kumar (2007) analyzed the short-run and long-run performance of IPOs issued through
book building method. For the analysis, offer to close return, open to close return, buy
and hold market adjusted return and monthly market adjusted returns were computed
for 156 IPOs listed from 1999 to 2007. It was found that in the short-run, IPO listing
didn’t provide economically significant trading opportunities for day traders and in the
long-run, IPOs beat the market after two years of listing.

Shikha Sehgal & Balwinder Singh (2007) investigated the initial and long-run performance
of 438 IPOs listed on the BSE from 1992 to 2006. To observe the long-run performance
of Indian IPOs, Buy-and-Hold Abnormal Returns (BHAR) and Cumulative Abnormal

Returns (CARs) were computed for 120 months. Buy-and-hold returns were found to
be negative between 18 and 40 months of holding. After 40 months, the
underperformance of IPOs has vanished, i.e. in India, underperformance persists for
nearly one-and-a-half years to a little above three years.

Priyanka Singh & Brajesh Kumar (2008) conducted an investigation on the short as well

Indian Banking Sector - Initial Public Offering Scenario & its Impact

7
as long-run performance of the Initial Public Offerings in the Indian Capital Market.

The study proposed an approach taking oversubscription variables along with age and
issue size to explain the performance of IPOs in India. Since various sectors have varied
level of private and public information, the researchers performed industry wise analysis.

The period for the study was 22 months (Jan, 2006- Oct, 2007) considering 116 IPOs.

It was observed that both short and long run return of IPOs are positive for this period.

In the short run, only 18% of IPOs lisited price was more than offer price and in the
long run, it was only 11.5%. Oversubscription variables, namely, total oversubscription,
institutional investors and retail investors oversubscription, were found to be the main
determinants for listing and offer price performance of Indian IPOs. Infrastructure,
financial and entertainment sectors with positive long run return fell under this category
for the period of study. On the contrary, IT sector gave higher initial return but negative
return in the long run.

Seshadev Sahoo and Prabina Rajib (2010) attempted to specify the relationship between
post-issue promoter groups’ retention and IPO performance on listing . The researchers
investigated the impact of financial variables,i.e., offer size, times subscribed, age of
the firm, book value, leverage, market volatility, ex-ante uncertainty and the post issue
promoter group holding on listing performance of an IPO. 92 IPOs from manufacturing
and non manufacturing sectors were used as sample and found that in 46.55% of IPOs,
lisiting price was more than the offer price during 2002 - 2006. The study documented
a positive relationship between post-issue promoter group holding and IPO performance
on listing . The results further indicated that offer size, times subscribed and post-issue
promoter group holding were statistically significant in influencing the performance of
listing.

Bandgar & Atul Rawal (2012) studied the impact of pricing of Banks IPOs in long and
short run. The researchers also evaluated the effect of size and issue nature (par, premium
or at discount) of IPOs on its pricing. A sample of 10 banks were selected randomly
which issued their equities through initial public offering (IPO) during the period 2000

– 2010.It was found that the average return in short run was at - 8% and long run was
at - 53%. Further findings from the study revealed that big issue size IPOs got listed
with a higher listing price and the small issue size IPOs got listed with a lower listing
price. IPOs with lower issue price gave more returns on the listing day than the IPOs
with higher issue price. Private sector banks IPO’s gave higher return than the public
sector banks IPOs during the study period.

Ganesamoorthy & Shankar(2012) attempted to study the price behaviour of IPOs and its
persistent effect after listing . For this purpose a standard event study methodology by
taking market adjusted return model was used. As per the methodology, Annual average
abnormal return (AAR) and cumulative average abnormal return (CAAR) were calculated
along with the t-statistics for testing significance. The study covered a ten years period from 2001 to 2010. 219 initial public offerings made by Indian companies during the period were
selected as sample for the study. The overal result indicated that the issue price was more
than listed price for the Indian IPOs during 2001 to 2010. Even though the AAR on the first
trading day was more than one per cent, in the subsequent days the price was adjusted by
the market. CAAR at the end of the event window (75th day) stood at -10.7 per cent. The
negative CAAR of 68 days out of 75 days were found to be significant, which strongly
indicate the underperformance of Indian IPOs during the period.

8

Indian Banking Sector - Initial Public Offering Scenario & its Impact

Baluja Garima(2013) observed the efficiency of IPO grading mechanism by using a
sample of 50 graded IPOs listed with BSE from 2007 to 2010. The researcher identified
that the IPO grading is not an effective mechanism in reducing information asymmetry.

The One Way ANOVA result exhibits no significant difference in listing price performance
of the different graded IPOs. Hence, listing price performance of different graded IPOs
varies due to chance or due to some other factors such as subscription level, Issue size,
age of the firm etc. but it was irrespective of level of grades obtained by IPOs.

Equity Scenario of Public and Private Sector Banks

Before proceeding to the capital raising scenario of public and private sector banks in

India by espousing the IPO trajectory it is pertinent to have a brief discussion on Primary

Market in India and Initial Public Offering. A sound capital market is an important prerequisite for the industrial and commercial development of a country. Capital market is
a central coordinating and directing mechanism for free and balanced flow of financial
resources into the economic system functioning in a country. It assist the corporate houses
in need of capital to expand, modernize or diversify their business. To obtain the capital
that is needed by the company it usually embrace the primary market for issue of shares
and the process of issuing shares is done in the primary market. The primary market in a
simple way can be defined as a market where the securities are issued to procure funds or
capital require by the company. It is a market for new issues, i.e. a market for fresh
capital. It provides the medium for sale of new securities. The securities can take different
forms, such as, equity shares, preference shares, debt instruments, bonds etc.

A company may raise capital in the primary market with the help of IPO, rights issue or
private placement. An Initial Public Offer (IPO) is the selling of securities to the public
in the primary market. It is the biggest source of funds with long or indefinite maturity
for the company. “An initial public offering (IPO), referred to simply as an "offering" or

"flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time.”

The Reserve Bank of India in 2010 stated that private sector banks should take its
approval before espousing the IPO route, preferential issues, or qualified institutional
placement. It was mandatory for private sector banks to approach RBI for prior ‘in
principle’ approval in case of qualified institutional placements. Banks required to approach

RBI along with details of the issue once the bank’s board gave nod to the raising of
capital through IPO route.

Public sector banks were permitted to procure capital from the capital market to fortify
their capital adequacy ratios and bring down the government holdings. The Banking

Companies (Acquisition and Transfer of Undertakings) Act, 1970/ 1980 and State Bank
of India Act, 1955 were amended to permit banks to raise capital not more than 49
percent of their equity.

The State Bank was the first public sector bank to tap the equity market in December

1993. In October 1996, it once again knocked the doors of the capital market through
a GDR issue of INR 1,270 crores. With these two issues, the holdings of the RBI slashed
to 59.7 percent in State Bank of India. Over the years 1993 to 2001, 12 PSBs procured
capital through IPO trajectory to the extent of INR 6,501 crore. The market responded
positively to public sector banks IPOs. The year 2002 witnessed the IPO market dominated

Indian Banking Sector - Initial Public Offering Scenario & its Impact

9
by public sector banks. During the year ended March 2002, Punjab National Bank
col ected INR 390 crore through IPO path. Consequent upon this issue, the shareholding
of the Central Government declined to 80 percent. During 2002-03, three PSBs namely,

Union Bank of India, Allahabad Bank, and Canara Bank collected INR 288 crore, INR

100 crore, and INR 385 crore in August, October, and November 2002 respectively. In

Union Bank of India and Allahabad Bank, the holding of Central Government was reduced
to 60.9 percent and 71.2 percent respectively. During 2003-04, four public sector
banks, namely, UCO Bank, Indian Overseas Bank, Vijaya Bank and Bank of Maharashtra,
issued equity worth INR 950 crore. With these, the total amount of capital procured by

PSBs through equity issues touched INR 8224 crore till end March 2004. During 2005-

06, six public sector banks and five private sector banks procured INR 11067 crore
through public issues of equity shares. Both the public and private sector banks raised

INR 30151 crore through private placements.

By referring Exhibit 6, issue of IPO by Banking / Financial Institutions during the period

2001-01 to 2014-15 can be observed. IPO issue (value-wise) was highest in the year

2011-2012- INR 35,611 crore, whereas the IPO issue (value-wise) was at its lowest
during April1st 2014 to December 2014- INR 427 crore. Volume wise, IPO issue was
highest in the year 2010-11, i.e. 18, whereas it was nil during two periods, i.e. 2008-

09 and April 1st 2015 to December 2015. Volume wise a huge dip in IPO issue can be
observed during the periods 2006-2009. In 2005-06, IPO issue was 12, which went
down to 05 in 2006-07 and further it reached nil during 2008-09. However, a substantial
improvement can be observed in 2010-11 with IPO issue reaching 18.

Exhibit 5

IPO Issues of Banking / Financial Institutions

Years

No. of IPOs

Amount (INR Crore)

2003-04

19

3191.10

2004-05

23

14662.32

2005-06

76

10797.88

2006-07

76

23706.16

2007-08

84

41323.45

2008-09

21

2033.99

2009-10

39

24948.31

2010-11

52

33097.77

2011-12

34

5892.92

2012-13

33

6497.03

2013-14

38

1204.82

2014-15

46

3019.46

2015-16 (till 30th

November 2015)

44

9631.76

Source: SEBI Handbook of Statistics, 2015.

10

Indian Banking Sector - Initial Public Offering Scenario & its Impact

However, as per Annual Report 2016-17 of SEBI, bank/financial institutions/ finance
industry raised the largest amount in the industry-wise classification of resource
mobilization and contributed 65.2 per cent to the total resources mobilized through 26
issues, as compared to a contribution of 32.4 per cent through 22 issues in 2015-16.

Now it will be interesting to observe the IPO issue trend of Indian banking sector till

2030. In order to ascertain the forecasted values of IPO based upon the above
mentioned IPO issue statistics, parabolic trend equation is used.

Presuming the period 2015-16 (till 30th November, 2015) as complete period

Applying Parabolic Trend Equation

Yc = a +bX +cX²

The values of a, b and c can be obtained by solving the following equations:

 Y = Na + b  X +c  X² (i)

 XY = a  X + b  X² + c  X3 (ii)

 X²Y = a  X² + b  X3 + c  X4 (iii)

Years

IPO issues

X

X²

X3

X4

XY

X²Y

(Y)

2003-04

19

-6

36

-216

1296

-114

684

2004-05

23

-5

25

-125

625

-115

575

2005-06

76

-4

16

-64

256

-304

1216

2006-07

76

-3

9

-27

81

-228

684

2007-08

84

-2

4

-8

16

-168

336

2008-09

21

-1

1

-1

1

-21

21

2009-10

39

0

0

0

0

0

0

2010-11

52

1

1

1

1

52

52

2011-12

34

2

4

8

16

68

136

2012-13

33

3

9

27

81

99

297

2013-14

38

4

16

64

256

152

608

2014-15

46

5

25

125

625

230

1150

2015-16

(till 30th

Nov. 2015)

44

6

36

216

1296

264

1584

 Y=

 X=

 X²=

 X3=

 X4=

 XY=  X²Y

585

0

182

0

4550

-85

= 7343

Note: The IPO issue till November 2016 have been considered to be a complete
financial year.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

11

Forecasting of IPO values using Parabolic Trend Equation

Applying Parabolic Trend Equation

Yc = a +bX +cX²

The values of a, b and c can be obtained by solving the following equations:

 Y = Na + b  X +c  X² (i)

 XY = a  X + b  X² + c  X3 (ii)

 X²Y = a  X² + b  X3 + c  X4 (iii)

Years

IPO Values

X

X²

X3

X4

XY

X²Y

(INR

Crore) Y

2003-04

3191.10

-6

36

-216

1296

-19147

114880

2004-05

14662.32

-5

25

-125

625

-73312

366558

2005-06

10797.88

-4

16

-64

256

-43192

172766

2006-07

23706.16

-3

9

-27

81

-71118

213355

2007-08

41323.45

-2

4

-8

16

-82647

165294

2008-09

2033.99

-1

1

-1

1

-2034

2034

2009-10

24948.31

0

0

0

0

0

0

2010-11

33097.77

1

1

1

1

33098

33098

2011-12

5892.92

2

4

8

16

11786

23572

2012-13

6497.03

3

9

27

81

19491

58473

2013-14

1204.82

4

16

64

256

4819

19277

2014-15

3019.46

5

25

125

625

15097

75487

2015-16

9631.76

6

36

216

1296

57791

346743

(till 30th

November

2015)

 Y =

 X

 X²=

 X3=

 X4=

 XY =

 X²Y

180006.97

= 0

182

0

4550

-149368

=

1591537

1,80,007 = 13a + 182c (i)

-1,49,368 = 182b (ii)

1591537 = 182a + 4550c (iii)

Solving equation (ii), we get;
b = -821

Solving equations (i) and (iii), we get:

1,80,007 = 13a + 182c (i)

12

Indian Banking Sector - Initial Public Offering Scenario & its Impact

1591537 = 182a + 4550c (iii)

Multiplying equation (i) by 14

25,20,098 = 182a + 2548c (iv)

Now solving equations (iii) and (iv):

15,91,537 = 182a + 4550c (iii)

25,20,098 = 182a + 2548c (iv)

-------------------------------------

-928561 = 2002c
c = -464

Substituting the value of c in equation (i):

180,007 = 13a + 182 (-464)

a = 264,455

Therefore, the parabolic trend equation is:

Yc= 264,455 – 821X – 464X²

Forecasting IPO issue (value wise) till 2030

Years

Computation

IPO Values (INR Crore)

2017

264,455 – 821 (7) – 464 (49)

235,972

2018

264,455 – 821 (8) – 464 (64)

228,192

2019

264,455 – 821 (9) – 464 (81)

219,482

2020

264,455 – 821 (10) – 464 (100)

209,845

2021

264,455 – 821 (11) – 464 (121)

199,280

2022

264,455 – 821 (12) – 464 (144)

187,787

2023

264,455 – 821 (13) – 464 (169)

175,366

2024

264, 455 – 821 (14) – 464 (196)

162,017

2025

264,455 – 821 (15) – 464 (225)

147,740

2026

264,455 – 821 (16) – 464 (256)

132,535

2027

264,455 – 821 (17) – 464 (289)

116,402

2028

264,455 – 821 (18) – 464 (324)

99,341

2029

264,455 – 821 (19) – 464 (361)

81,352

2030

264,455 – 821 (20) – 464 (400)

62,435

Note: a) Figures are rounded off to nearest decimals.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

13

Deciphering IPO Performance

It can be observed that the fiscal 2006-07 have witnessed an upsurge in public equity
offerings compared to the periods, 2003-04, 2004-05 and 2006-07. In fact, the equity
mobilization of 2006-07 was the highest ever in the history of Indian capital market.

The highest in the 90s was INR 13,443 crore that was raised in 1994-95. The mobilization
in the year could have been higher but due to two secondary market crashes during the
year which compelled temporary shelving of IPOs as well as absence of divestments.

Significantly, the year witnessed the largest equity IPO ever that of Cairn India (INR

5789 crore). It is essential to note that 2006-07 marked the quality offerings. The
quality factor was evident through the total domination of existing companies, in majority
of cases with renowned promoters. There was no market for IPOs from greenfield
projects or new promoters. The response from the public Moreover, strict entry norms
and better vetting by stock exchanges, SEBI and QIBs have played a crucial role in
improving the quality of issues. The response from the public to the equity issues of
the year was excellent. The important factor responsible for the good performance of
the primary market can be accorded to buoyant secondary market almost throughout
the year. Further economic renaissance and stable political climate By applying parabolic
trend equation for forecasting both IPO volume and value til 2020 and 2030 respectively,
it can be seen that there may be a drastic fall in IPO issues in the near future.

Now looking into IPO issue trend of 2008, it can be said that “History surely repeats
itself”. Every time the secondary market tanks, the primary market goes for a catnap.

Since end- January 2008, when the Sensex first tumbled, the IPO market got hit badly.

Between February and August, merely 25 IPOs, all small ones, which hit the market,
raised a paltry INR 4,345 crore. In 2007 between February and August there were 65

IPOs raising INR 32,993 crore. During good times, the last bottleneck is SEBI approval
and a company would typically launch the IPO as soon as it receives the approval.

However, in 2008 as many as 22 renowned companies which were planning to raise

INR 16,539 crore, have allowed their IPO approvals to lapse. This included big names
such as, Jaiprakash Ventures (INR 4000 crore), Reliance Infratel (INR 4000 crore), UTI

Asset Management (INR 2000 crore), Acme Telepower (INR 1200), MCX (INR 600
crore) and Vascon Engineers (INR 350 crore). Further, the withdrawal of IPOs by 8

14

Indian Banking Sector - Initial Public Offering Scenario & its Impact
companies which planned to raise collectively INR 4,772 crore, added to the list of
withdrawal of IPOs .

Bookbuilding issues continued to dominate. Of the 38 issues, 33 issues (87 percent)

were made through this trajectory, collectively mobilizing over than 99 percent of the
year’s amount. On another front, according to PRIME DATABSE (Information

Management Specialist), there was a continued dominance of fresh capital, which typical y
goes into productive assets as against offers for sale where the proceeds goes to the
seller- promoters, funds and other investors- and not to the company. Fresh capital
took a 94 percent share at INR 15,941 crore, though down by 63 percent from INR

43,065 crore in 2007. Offers for sale raised a meagre INR 968 crore in 2008, in
comparison to INR 2077 crore in 2007.

According to PRIME DATABASE, the mobilization in 2008 could have been assisted by

PSU divestments. In 2004, an impressive INR 16,819 crore was accounted by PSU
disinvestments, which dropped to nil both in 2005 and 2006 and was INR 995 crore in

2007. In 2008, Rural Electrification Corporation (REC) witnessed an insignificant
divestment of INR 820 crore.

Exploring equity issues in 2009, mobilization of resources through rights issue registered
a substantial decline in fiscal 2008-2009. According to Mr.Prithivi Haldea of PRIME, the
country’s renowned database on the primary capital market, by amount, the year
witnessed merely INR 12,622 crore being raised, which was lower by 61 percent than

INR 32,518 crore was raised in 2007-08. However, it is to be noted that more than half
of the 2007 mobilization came through SBI rights issue while another 28 percent was
taken up by Tata Steel.

By number, according to PRIME DATABASE, the year saw merely 23 companies using
the rights route. This was lower by 23 percent over the previous year that had witnessed

30 issues (2006-07: 38 issues).

The largest issue of 2009 came from Hindalco (INR 5,048 crore). The other INR 1000
crore plus issues came from Tata Motors (4146) and Dish TV (1140). The response to
the two biggest issues, i.e. Hindalco and Tata Motors was dismal, leading to devolvement.

The fiscal 2009-10 promised some action on the rights front. 20 companies applied for
or obtained SEBI approval for raising INR 4198 crore. Some of the important ones
include, Fortis Healthcare (INR 1000 crore), Magnum Ventures (INR 60 crore), Ramco

Systems (INR 131 crore), Religare Enterprises (INR 1850 crore), SGN Telecoms (INR 50
crore), Syncom Formulations (INR 100 crore), Tebma Shipyards (INR 350 crore) and

Wire and Wireless India (INR 450 crore). In addition, there were nearly 45 companies
who were all set to tap the rights market. These include Bharat Forge (INR 400 crore),

Birla Power Solutions, Chettinad Cement (INR 250 crore), DCW, Dewan Housing Finance

(INR 105 crore), ECE Industries (INR 50 crore), Gremach Infrastructure Equipments,

Gujarat NRE Coke, Horizon Infrastructure (INR 669 crore), Infomedia 18, Jaiprakash

Associates (INR 1800 crore), JSL (INR 500 crore), Max India (INR 650 crore), Sadbav

Engineering (INR 125 crore), Shopper’s Stop (INR 300 crore), Suzlon Energy (INR 1800
crore), Swaraj Mazda (INR 80 crore) and Tata Communications (INR 1000 crore).

Now taking the case of 2010-11, i.e. when the said financial year was nearing end, it

Indian Banking Sector - Initial Public Offering Scenario & its Impact

15
witnessed raising of INR 46,267 crore through public equity issues. The public issue in
the mentioned fiscal year could have been higher but for the deferment of some giant

PSU offerings and the continuing volatility in the secondary market, especially in the last
quarter of the 2010-11, compared to INR 29,514 crore raised in the 3rd quarter, the 4th
quarter witnessed mobilization of paltry amount of INR 4,468 crore. The year also fell
short of INR 52,219 crore, the highest amount that had ever been raised, being in

2007-08. PSUs and PSU banks dominated the year with a total raising of INR 27,537
crore or 60 percent of the total amount. This was, however, lower than INR 31,082
crore that had been raised by them in 2009-10, which was the highest ever. Of the
total amount of INR 27,537 crore, INR 22,763 crore was through divestments and INR

4,774 crore through fresh capital. A total of 7 PSUs forayed into the market during the
year, led by the largest ever IPO in the Indian market that of Coal India (INR 15199
crore) which solely accounted for 33 percent of the year’s mobilization. The other IPOs
were from MOIL (INR 1,238 crore), SJVN (INR 1,063 crore), and PSB (INR 471 crore).

The balance 3 were FPOs- PGCIL (INR 7442 crore), SCIL (INR 1165 crore) and EIL (INR

960 crore).

Thus, a total of 57 public issues forayed into the market during the year, compared to

44 issues in the preceding year, thereby registering a 30 percent increase.

During 2016-17, Rs.62,067 crore was mobilized through 122 public and 12 rights issues
as against Rs. 57,866 crore raised in 2015-16 through 94 public and 13 rights issues. In

2016-17 was the year of the IPO market as there was a quantum jump in the number
of IPOs and the amount mobilized by them.

IPOs in 2017(until October 27, 2017) a record 80% or Rs. 37,089 crore has gone
towards offer for sale in these public issues with just Rs. 9150 crore going to the
companies in the form of fresh capital issued.

***

16

Indian Banking Sector - Initial Public Offering Scenario & its Impact

Chapter -2

IPO Trajectory of Banks & Critical Aspects

Prologue

There are various types of IPOs describing the different management and owner
compensation contracts in firms

(a) Plain Vanilla IPO : It is issued by a privately held company, mostly owned by
management, who want to procure additional funding and ascertain the
company’s fair market value.

(b) Venture Capital backed IPO : A venture capital backed IPO refers to a company
in which management has sold its shares to one or more groups of private
investors in return for funding and advice. This offers an effective incentive
scheme for venture capitalists to implement their exit stratagem after they
have successful y transformed a firm in which they invested so that it is financial y
feasible in the market.

(c) Reversed-leveraged buyout : In a reversed-leveraged buyout, the proceeds of
the IPO are utilized to pay off the debt accumulated when a company was
privatized after a previous listing on an exchange. This process assist owners
who hold majority of shares to privatize their publicly trading firms, which are
undervalued in the market, therefore realizing financial gains after the public
was informed of the high intrinsic value of the private firm.

(d) Spin-off IPO : A Spin-off IPO indicates the process whereby a huge company
carves out a stand-alone subsidiary and sells it to the public. A spin-off may
also offer owners of the parent firm and hedge funds the opportunity to capitalize
mispricing in both the subsidiary and parent if the market is not efficient. For
instance, in United States the spin-off of Bid by Creative Computers in 1998,
which enabled arbitragers to capitalize the mispricing between the two listed
companies.

The other important kinds of IPO issues are- i) Fixed Price Issues and ii) Book Building

Issues

(i) Fixed Price Issues : In Fixed Price issues, the price at which the securities are
offered and would be allotted is made known in advance to the investors. The
demand for the securities offered is known only after the closure of the issue.

Hundred percent payment is needed to be made by the investors at the time
of application. Fifty percent of the shares offered are reserved for applications
below INR must be Rs. 2 lakh and the balance for higher amount applications.

Fixed price offerings were the preferred mechanism until 2003 in Indian Capital

Market. After 2003, Book Building has dominated IPOs.

16

Indian Banking Sector - Initial Public Offering Scenario & its Impact

17

(ii) Book Building Issues : Book Building is essentially a process embraced by the
companies procuring capital through Public Offerings- both Initial Public Offers

(IPOs) and Follow-on Public Offers (FPOs) to assist in price and demand
discovery. It is a mechanism where, during the period for which the book for
the offer is open, the bids are collated from investors at various prices, which
are within the price band specified by the issuer. The process is directed towards
both the institutional as well as the retail investors. The issue price is ascertained
after the bid closure based on the demand generated in the process.

The steps involved in the process are as follows-

(i) The issuer who is planning an offer nominates lead merchant banker (s) as

“book runners”.

(ii) The issue specifies the number of securities to be issued and the price band for
the bids.

(ii ) The issue also appoints syndicate members with whom orders are to be placed
by the investors.

(iv) The syndicate members input the orders into an ‘electronic book’. This process
is termed as “bidding” and is similar to open auction.

(v) The book normally remains open for a period of normally for 3 working days
and can be kept open for a maximum of 10 working days.

(vi) Bids have to be entered within the specified price band.

(vi ) Bids can be reversed by the bidders before the book closes.

(vii ) On the close of the book building period, the book runners assess the bids on
the basis of the demand at various price levels.

(ix) The book runners and the issuer decide the final price at which the securities
shall be issued.

(x) General y, the numbers of shares are fixed, the issue size gets frozen based on
the final price per share.

(xi) Allocation of securities is made to the successful bidders. The rest receive
refund orders.

India’s Experience with IPO Mechanisms

India has experimented with numerous IPO mechanisms. Commencing in September

1999, issuers could select between the fixed price and book building methods. Over
the years, there have been variants of book building in the Indian capital market. For
example, in November 2005, the underwriters power over IPO al ocations were rescinded
even in “book-built” IPOs. In 2009, book building came with the alternative of having

“anchor1” investors in the first stage prior to the public offer. Quite recently, an SME
platform was launched for small firms wishing to issue IPOs. Fixed price offerings were
the preferred trajectory until 2003. Post 2003, book building has dominated IPOs. This
is not unusual; the dominance of book building is observed in all the markets where it
is permitted.

18

Indian Banking Sector - Initial Public Offering Scenario & its Impact

IPO Grading

In 2007, the Securities and Exchange Board of India (SEBI) made it mandatory for corporate
houses to receive IPO “grades” from independent rating companies. In December

2013, IPO grading was made optional keeping in view the recommendations of the

Financial Stability Board to decrease dependency on credit rating agencies. IPO grading
act as a summary of the voluminous disclosures needed in IPOs. Alternatively, such
grades can generate additional information because of the new entities involved in
assigning grades.

Investment decisions for IPOs currently demands analyzing complex documents, which
is a challenge for investors, particularly retail investors. IPO grading aims to offer an
independent, unbiased view of the company’s fundamentals, enabling the investor to
benchmark new issues with their peers in the equity universe.

SEBI’s Regulations suggest that the grading of IPOs is a service targeted at facilitating
evaluation of equity issues offered to the public. The Grade allocated to any individual

IPO is an assessment of the “fundamentals” of the issuer concerned on a relative
grading scale, in relation to the other listed securities in India. The grading is assigned
on a five-point scale with a higher score signifying robust fundamentals and vice-versa
as mentioned below-

(a) IPO grade 1: Poor fundamentals

(b) IPO grade 2: Below average fundamentals

(c) IPO grade 3: Average fundamentals

(d) IPO grade 4: Above average fundamentals

(e) IPO grade 5: Strong fundamentals

The grading exercise lay stress on assessing the prospects of the industry in which the
company functions, and the company’s competitive strengths that would permit it to
address the risks inherent in the business(es). In case the IPO proceeds are planned to
be utilized for initiating a project, either Greenfield or Brownfield, the grading evaluates
the risks innate in such projects, the capacity of the company’s management to execute
the same, and the potential advantages accruing from the successful completion of the
projects in terms of profitability and return to shareholders.

Accordingly, IPO Grading approach observes the following key elements:

(i) Business and Competitive Position : The alignment between industry
opportunities, the company’s strategy and objectives.

(ii) Financial Position and Prospects : Forward looking evaluation of significant
financial indicators like, Return on Equity (ROE), Earnings per Share (EPS), P/E

Multiple, Growth in Profit, relevant for an equity investor.

(ii ) Management Quality : An assessment of the capability of the management to
tackle uncertainty in terms of capitalizing on future business opportunity and
alleviating the impact of contingencies.

(iv) Corporate Governance Practices : An assessment of the company’s governance

Indian Banking Sector - Initial Public Offering Scenario & its Impact

19
framework to determine if it is structured such that the risks and rewards of
business are equally available to all shareholders.

IPO grading is one time evaluation conducted before the IPO issue and depends heavily
on the draft prospectus filed with SEBI. Generally, grading is conducted looking at
roughly a three year time horizon and involve a detailed appraisal of the different
quantitative and qualitative yardsticks of the issuer. While growth prospects of the industry
and financial robustness are some of the quantitative measures, qualitative parameters
like, management capabilities also provide critical input in deciding a grade. For instance,

ICRA assigned “IPO Grade 3” to the IPO of United Bank of India, meaning ‘average
fundamentals’ and CARE Ratings assigned “IPO Grade 4” to the IPO of Punjab & Sind

Bank, implying ‘above average fundamentals’.

IPO Route - The Case of Public Sector Banks

Banks were nationalized in 1969 with an objective that the banking sector needs to
reach the poor sections of society, and that farmers in India will get access to financial
services. More specifically, loans sure enough, over the years, RBI has set priority sector
lending targets that even private sector banks have to fol ow. Banks were used as a tool
to drive national policy and, in some cases, political agendas – with the explicit expectation that GoI would infuse capital regularly to support any loan losses.

But, perspectives are changing now. While the GoI continues to promise capital infusion,
it also requires banks to raise money from the market. The GoI’s newfound thinking of
letting PSBs raise their own capital, and thereby compelling them operate under market
challenges, is directionally correct. A wave of bank IPOs leads to series of pertinent
impacts to the financial system. The proceeds of IPOs are significant source of capital
for banks that allows the expansion of bank deposits and assets. Initial public offers
engender development of banks.

According to Indradhanush scheme banks were required to inject INR 1.80 trillion in
near future to become well capitalized, of which the budgetary allocation for support is
only Rs.700 bn – banks will need to raise the remaining INR 1.10 trillion from the
market by FY 2019. Of the promised INR 700 bn, the GoI had already infused INR 200
bn into PSB by 31 December 2015 – therefore, GoI will infuse only an incremental INR

500 bn in PSBs will FY 2019.

In the past, the capital infusion process of Government of India to an extent have
been circular flow of money, i.e. Government of India increased its stake in public
sector banks by reinvesting dividends received. Till recently, Government of India
have invested INR 678.3 billion in public sector banks (please refer exhibit 9).

Approximately half of that was financed by public sector banks themselves through
dividends (to the extent of Government of India shareholding) and dividend distribution
tax. Now the pertinent point is if public sector banks have to grow then they are left
with two alternatives, i.e. either go for stopping of dividends or raising additional
capital. Now stemming dividends may result into dissention among shareholders who
invest their hard earned money with the aim of wealth maximization and being the
owners of the company embrace maximum risks. So in view of this, the best option
will be to espouse IPO trajectory.

20

Indian Banking Sector - Initial Public Offering Scenario & its Impact

However, capital raising for public sector banks poses two challenges- Government of

India needs to ensure that its stake does not enhance beyond 75% post the capital
infusion and if banks procure capital from the market, Government of India’s share
cannot get diluted below 50%. Regulations require Government of India to reduce its
stake in listed banks to 75% or less by August 2017. This results in seven PSBs being
automatically excluded (Government of India stake in these banks was greater than

75% on 31 December 2015) from the incremental INR 500 bn Government of India
infusion, and another three where the infusion will have to be limited (Bank of India,

UCO Bank and Vijaya Bank, where GoI stake was in between 70% and 75% on 31

December 2015) unless these banks are able to dilute the Government of India
shareholding by raising a large amount of capital from the market. Therefore, the proposed
capital infusion under Indhradhanush scheme will directly benefit only 11 of the 21
listed PSBs not including SBI subsidiaries.

Impact of Global Economic Crisis on IPO Issues

About more than three decades, globalization has largely ensued based on the belief in
the self-regulatory capacity of markets without sufficient structures and systems in place
to govern the process. By mid-2007, this has resulted into appearance of large fissures
threatening the stability of the global economy on two fronts: the sharp increase of
primary commodity prices and the global financial crisis. The latter is the outcome of
the global savings superfluity and the associated global macroeconomic imbalances,
which evolved since the financial crisis in the 1990s that seriously disrupted economic
growth and development in large number of emerging economies in Asia, Latin America
and transitional economies. The flow of large savings into the United States economy,
facilitated by the easy monetary condition, resulted into housing and credit boom,
which ultimately ended in the sub-prime mortgage. Unsurprisingly, in the context of
contemporary financial globalization, this seemingly localized process could not be
contained within the United States financial system and rapidly spread to other important
financial centres.

For a year or so since mid-summer 2007, the financial mayhem, with its severe liquidity
and credit crunch, seemed to be limited more or less to financial markets and institutions
in the United States and Western Europe. On the whole, the global economy managed
to maintain its momentum on the back of the buoyant economic growth posted by
emerging market economies as well as resource-rich developing economies that enjoyed
a commodity boom. However, a series of events that hit important financial institutions
on Wall Street in mid-September 2008 created tremors that shook the world and altered
drastically the serendipity and the course of the globalized economies.

The commencement of 21st century can best be described as the period of economic
and financial uncertainty. This period witnessed the first crisis with the burse of dot com
bubble in 2000 followed by US sub-prime crisis in 2007-08 and then European debt
crisis in 2011. After the dot com bubble burst in the US, monetary policy in US and
other developed economies was considerably eased. Policy rates in the US touched one
percent in June 2003 and were held constant around that levels for an extended period
up to June 2004. In the subsequent period, the rescission of monetary accommodation
was quite gradual. An empirical assessment of the US monetary policy reveals that the
actual policy during the period 2002-06, particularly during 2002-04, was substantially

Indian Banking Sector - Initial Public Offering Scenario & its Impact

21
looser than what a simple Taylor rule would have required. This was a huge deviation
from the Taylor Rule. In the post dot com period excessively liberal monetary policy
pushed up the consumption and investment in the US. With such low nominal and real
interest rates, asset prices registered robust gains, especially in housing and real estate,
which gave further stimulus to consumption and investment through wealth effects.

Therefore, aggregate demand consistently surpassed domestic output in the US and,
given the macroeconomic identity, this was reflected in large and rising current account
deficits in the US over the period.

The gargantuan domestic demand of the US was fulfilled by the rest of the world,
particularly China and other East Asian economies, which offered goods and services at
relatively low costs resulting into growing surpluses in these countries. Sustained current
account surpluses in some of these Emerging Market Economies (EMEs) also reflected
the lessons learnt from the Asian financial crisis.

Having the set the tone of global economic turmoil, it is important to understand its
impact on Indian capital market and on IPO issues.

During the bul rally (2003-2007) there was considerable enthusiasm. This was the time
when interest rates were low. Credit was available and that too cheaply. Not just that,
corporate profits were growing at a robust rate. Stock markets were registering impressive
gains. Indian capital markets in 2007-08, thus featured a developed regulatory framework,
a modern market infrastructure, a steadily rising market capitalization and liquidity,
better allocation and mobilization of resources, a fast developing derivatives market, a
sound mutual fund industry, and enhanced issuer transparency.

But the global economic crisis of 2008-09 created tremors. The colossal liquidity, not
astonishingly, resulted into asset bubbles that finally burst. Indian capital market has
witnessed its worst time with the global financial crisis. The renowned stock index, i.e.,

Sensex declined to its levels achieved in December 2005. Similar decline was also
observed for S&P CNX Nifty index. With the volatility in portfolio flows having been
large during 2007 and 2008, the effect of global financial turmoil has been felt particularly
in the equity market. Indian stock prices got badly affected by foreign institutional
investors (FII) withdrawals. FIIs had invested more than INR 10,00,000 crore between

January 2006 and January 2008, driving the Sensex 20,000 over the period. But from

January, 2008 to January 2009, FIIs exited from the equity market partial y as a flight to
safety and partly to meet their redemption obligations at home. These withdrawals
drove the Sensex down from over 20,000 to less than 9,000 in a year. It seriously
crippled the liquidity in the stock market. Stock prices tanked to more than 70 percent
from their peaks in January 2008 and some have even lost to approximately 90 percent
of their value. This abysmal performance at Dalal Street wiped out the primary market
decreased by 63%. In 2007, 106 initial public offerings (IPO) were issued and raised a
total amount of nearly US$11 billion. On the contrary, merely 38 IPOs were issued in

2008 and resulted in accumulations of only US$3.8 billion.

Now given the presence of unutilized liquidity in the global market, and India being
one of the few countries with positive growth, FIIs once again started flowing back to

India (please refer exhibit 8). During the first two months of the financial year 2009,
i.e. April and May, Indian equity markets received net FII inflows of more than US$5
billion. Consequently, equity markets partially gained their lost value. However, due to

22

Indian Banking Sector - Initial Public Offering Scenario & its Impact
prevailing uncertainties, the primary market still not shown any sign of recovery. Most
of the corporate houses put their IPOs on hold and merely one IPO was issued in 2009.

The years 2003-2004 witnessed an active market for IPOs. Though the number of IPOs
was small, the amounts being raised were increasing. However, due to the global
meltdown and its deleterious impacts on our economy, the amount mobilized in 2008-

09 nosedived to a paltry INR 2034 crore, through just 21 small IPOs.

In the secondary market too, Indian stock prices were severely battered by foreign
institutional investors (FIIs) withdrawals. FIIs had invested more than INR 10,00,000
crore between January 2006 and January 2008, driving the Sensex 20,000 over the
period. But from January, 2008 to January, 2009, FIIs withdrew from the equity market
partially as a flight to safety and partly to address their redemption obligations at home.

These withdrawals drove the Sensex from over 20,000 to below 9000 in a year. It
seriously crippled the liquidity in the stock market. The stock prices have tanked to
more than 70 percent from the peaks in January 2008 and some have even lost to
approximately 90 percent of their value. This event left with no safe haven for both
retail and institutional investors. Consequently, the primary got derailed and the secondary
market was in the deep abyss.

Equity values were at very low levels and numerous established corporate houses were
unable to compete their rights issues even after fixing offer prices below related market
quotations at the time of announcement. Subsequently, market took a nose dive, i.e.

below issue prices and shareholders were considering purchases from the cheaper
open market or deferring fresh investments. This scenario disturbed the plans of
companies to raise resources in various forms for their ambitious projects involving
heavy expenditures.

Despite the scale down of popular capital market indices up to the first quarter of 2009,

Indian stock markets then provide the proofs of robust resistance to global financial
contagion. The year 2009-10 witnessed an upsurge in turnover on the exchanges,
mainly on account of recovery of the global financial markets. The turnover on the NSE
shot up by 50.36% in 2009-10 compared with 2008-09 and that on the BSE it enhanced
by 25.34% over the same period. The average daily turnover on the NSE stood at US$

3.5 billion in 2009-10 compared to US$ 2.0 billion in 2008-09. Though the average
daily turnover on the BSE rose to US$ 1.1 bil ion in 2009-10 compared to US$ 2.0 bil ion
in 2008-09. In 2009, market was in a recovery mode; but 2010 it consolidated. The
fundamentals were strong. With average 8.9% growth in the first three quarters of

2010 the economy was well poised to rush into 2011 with good performance. By this
time, consumer demand was robust, exports were moving north and investment was
building up. The year 2010-11 has been another record year for the Indian capital
markets with 124 IPOs (Initial Public Offerings) and FPOs (Follow on Public Offerings)

and 41 QIPs (Qualified Institutional Placements). According to Bloomberg data, proceeds
from fresh issues (IPOs) by Indian corporate houses in 2010 surpassed even the levels
touched in 2007. The Government made a strong mark on the markets, raising substantial
capital with string of IPOs and FPOs. Till March 2011, 124 IPOs had accounted for INR

51000 crore (US$11.3 billion) in capital raised, averaging close to a billion dollar every
month. This along with 41 QIPs that raised approximately INR 19,722 crore (US$4.3
billion) implied that Indian companies rose more than INR 70,000 crore (US$15.5

Indian Banking Sector - Initial Public Offering Scenario & its Impact

23
billion) in the 2010-11 financial year. Thus, it can be opined that India’s capital market
has displayed good resilience and rapid recovery from the global financial meltdown.

At this juncture, it is also essential to have a look on the global IPO issue scenario across
various countries and their respective sectors, as well as the Indian scenario. During

2009, the year of global meltdown at its zenith, China dominated the largest IPO list,
representing seven of the ten initial public offerings. Top five IPOs in 2009 includes two
construction firms from China and three financial companies, two from Brazil and one
from China.

Banco Santander Brasil SA’s $8.1 billion was the biggest IPO of the year across the
globe in 2009, followed by $7.3 billion IPO of China State Construction. The largest

IPO of 2009 (Banco Santander Brasil SA, Brazil, $1.8 bil ion) was merely 45% (in terms
of value) of the largest IPO of 2008, i.e. Visa amounting to US$ 17.86 billion, but
equivalent to largest IPO of 2007- VTB Bank, Russia $8 billion. Financial sector was the
pick with 4 largest IPOs in top 10, contributing 47% of the top 10 IPO proceeds.

According to the report of OECD, globally, the average annual amount of equity raised
through initial public offerings (IPOs) by non-financial companies has declined in the
last 20 years. Also the average number of companies who make an IPO has declined.

As for advanced economies shows the annual average number of companies that made
an IPO in the period 1994-2000 was 1,152. That number fell to 853 in the period

2001-2007 and to just 432 per year in the period 2008-2014. This decrease in the
number of companies has been accompanied by a significant decline also in the real
value of money raised through IPOs over the three periods; from USD 145 billion in the
period 1994-2000, to USD 87 billion in the period 2001-2007 to USD 63 billion in the
period 2008-2014.

During the same period however, non-financial companies in emerging markets
significantly increased their use of public equity markets. The total amount of capital
raised almost doubled in real terms from USD 24 billion in the period 1994-2000 to 45
billion in the period 2001-2007. In the period 2008-2014 it increased another 40%,
reaching an annual average of USD 65. The number of emerging market companies
that made an IPO has also considerably increased in the same period.

Now taking the case of India most of IPOs in 2009 were subscribed at higher band.

Among the different sectors that issued IPOs, apart from Banking and Financial Services
sector are: Education, Industrial, Hospitality, Outsourcing, Energy & Power etc. Energy

& Power registered a substantial hike.

The Litmus Test

Kruskal-Wallis Test or H-Test

This non-parametric test will assist to know whether there is a significant difference in
the quantum of IPO issues of Banking/ Financial Institutions sector vis-a-vi with other
key sectors of the economy pre and post Global Economic Crisis.

In total three sectors being considered for the test, the first being Banking/ Financial

Institutions sector and other two are: Cement & Construction and Engineering. The

24

Indian Banking Sector - Initial Public Offering Scenario & its Impact
raison d'être for selecting Cement & Construction and Engineering sectors along with
the Banking/Financial Institutions sector (the sector under study) are:

(a) The mentioned sectors play a crucial role in engendering development of
infrastructure

(b) In other sectors, the IPO activity was not much prominent.

Null Hypothesis (H0) : The Global Economic Crisis does not impacted IPO issue of Banking/

Financial Institutions sector vis-a-vis Cement & Construction and Engineering sectors.

Alternative Hypothesis (H1) : The Global Economic Crisis had impacted IPO issue of

Banking/Financial Institutions sector vis-a-vis Cement & Construction and Engineering sectors.

Note : The demarcating period considered for pre and post Global Economic Crisis is

2008-09, as in this year neither there have been IPO issue in Banking/Financial Institutions
sector and Engineering sector and 03 IPO issue in Cement & Construction sector.

Moreover, based upon various articles and research papers, it can be said that during
the mentioned period, the Global Economic Crisis was at its pinnacle.

Years

Banking/Financial

Cement &

Engineering

Institutions sector

Construction sector sector

2000-01

13

02

02

2001-02

14

02

04

2002-03

13

01

02

2003-04

11

01

01

2004-05

12

02

03

2005-06

12

11

06

2006-07

05

13

02

2007-08

06

27

05

2009-10

06

08

01

2010-11

18

03

05

2011-12

20

02

01

2012-13

07

01

02

2013-14

14

04

05

April 1st

2013-

December 2013

01

03

02

April 1st 2014-

December 2014

04

03

01

Indian Banking Sector - Initial Public Offering Scenario & its Impact

25

IPO issues

Ranks

1

1

1

1.5

1

2.5

1

3.5

1

4.5

1

5.5

1

6.5

1

7.5

2

9

2

9.5

2

10.5

2

11.5

2

12.5

2

13.5

2

14.5

2

15.5

2

16.5

3

18

3

18.5

3

19.5

3

20.5

4

22

4

22.5

4

23.5

5

25

5

25.5

5

26.5

5

27.5

6

29

6

29.5

6

30.5

7

32

8

33

11

34

11

34.5

26

Indian Banking Sector - Initial Public Offering Scenario & its Impact

IPO issues

Ranks

12

36

12

36.5

13

38

13

38.5

13

39.5

14

41

14

41.5

18

43

20

44

27

45

Banking/Financial Institutions

Cement & Construction Engineering sector
sector Ranks
sector Ranks
ranks

38

9

12.5

41

9.5

23.5

38.5

1.5

13.5

34

2.5

4.5

36

10.5

20.5

36.5

34.5

30.5

25

39.5

14.5

29

45

25.5

29.5

33

5.5

43

18

26.5

44

11.5

6.5

32

3.5

15.5

41.5

22.5

27.5

01

18.5

16.5

22

19.5

7.5

R1 = 491

R2= 278.5

R3= 250.5

Here N1= 15, N2=15 and N3=15

Indian Banking Sector - Initial Public Offering Scenario & its Impact

27

Therefore, N= N1+N2+N3 = 15+15+15 = 45

Also R1 =491, R2 = 278.5 and R3= 250.5

12

H =

[R1²/N1 + R2²/N2 + R3²/N3] – 3 (N +1)

N(N  1)

12

H =

[(491)²/15 + (278.5)²/15 + (250.5)²/15] – 3 x 46

45 x

46

12

H =

[16072 + 5171 + 4183] - 138

2070

H = 9.39

Degrees of freedom = k-1 = 3-1=2

Also level of significance : a = 0.05

Therefore ψ² (for 2 degrees of freedom and α = 0.05) = ψ 0.05, 2 = 5.991

Decision : Reject H0 if H> ψ²0.95

Now 9.39 > 5.991

Thus, the null hypothesis H0 is rejected and the alternative hypothesis H1 is
accepted. It can be concluded that the Global Economic Crisis had impacted IPO
issue of Banking/Financial Institutions sector vis-a-vis Cement & Construction
and Engineering sectors.

MANN - WHITNEY U-TEST

This non-parametric test will help to comprehend that whether there is a significant
difference or not in quantum of IPO issue of Banking/ Financial Institutions sector pre
and post Global Economic Crisis.

Null Hypothesis : H0: µ1 = µ2, i.e., there is no significant difference between the

IPO issues (in numbers) of Banking/Financial Institutions sector pre and post Global

Economic Crisis.

Alternative Hypothesis : H1: µ1  µ2, i.e., there is a significant difference between
the IPO issues (in numbers) of Banking/Financial Institutions sector pre and post Global

Economic Crisis.

Level of significance : Here a = 0.05

Note : The demarcating year for comprehending the impact on IPO issues pre and post

Global Economic Crisis is 2008-09, as from the Handbook of Statistics of Securities &

Exchange Board of India, the Capital Market Regulator of India, it can be observed that
in the above mentioned period the IPO issues are nil and going by various reports or

28

Indian Banking Sector - Initial Public Offering Scenario & its Impact
articles, it can be said that the economic turmoil was at its acme during the said period

(please refer the website: http://www.sebi.gov.in/sebiweb/home/list/4/32/0/0/

Handbook-of-Statistics )

Pre-Crisis

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

2006-07 2007-

Periods

08

IPO Issue

13

14

13

11

12

12

05

06

Post Crisis

2009-

2010-

2011-

2012-

2013-

April

April

–

Periods

10

11

12

13

14

2013 –

2014-

December

December

2013

2014

IPO Issue

06

18

20

07

14

01

04

–

The observations are arranged in ascending order and ranks from 1 to 14 are assigned.

Original Data

Rank

1

1

4

2

5

3

6

4

6

4.5

7

6

11

7

12

8

12

8.5

13

10

13

10.5

14

11

14

11.5

18

13

20

14

The ranks of the observations belonging to the smaller samples are underscored (put in
bold form).

R1 = 3+4+7+8+8.5+10+10.5+11 = 62

R2 = 1+2+4.5+6+11.5+13+14 =52

Also n1 = 8; n2 =7

1 1

Therefore, U-Statistic: U = n1n2 + n (n 1) - R1

2

Indian Banking Sector - Initial Public Offering Scenario & its Impact

29

9

x

8

= 8x7 +

- 62

2

72

= 56 +

- 62

2

U = 56+36 - 62 = 30

Mean of U = µu = n1n2/2 = 8 x 7/2 = 28

(n1 n

x

2 (

) n

1  n

2  1

)

Variance of U =  ²u =

12

(8

7

x

) (

8 

7

 1

)

=

12

= 75

 u = 75 = 8.6

As one of the rule in MANN WHITNEY U-Test suggest that if n1 and n2 are both atleast
equal to 8, it turns out that the distribution of U is nearly normal and one could use the
statistic Z, where

-

U
u

μ

Z=
σu
is normally distributed with mean 0 and variance 1.

Since, in this case, the total of n1 and n2 equals to 14 (8+6), i.e. greater than 8, the
above mentioned statistic Z can be applied

30  28

Z =

8.6

Z = 0.2325

The table value Za at a= 0.05 is 1.96

Decision: The null hypothesis is accepted as the calculated value of ¦Z¦is less than the
tabled value of ¦Z α¦. Therefore, there is no significant difference in the IPO issues

(quantum wise) of Banking / Financial Institutions sector pre and post Global Economic

Crisis.

***

30

Indian Banking Sector - Initial Public Offering Scenario & its Impact

Chapter -3

Gauging IPO Performance

Prelude

This chapter aims to study the impact of issue of initial public offers by the banks
considered for the analysis on their key financials, i.e. Reported Net Profit After Tax

(PAT); Return on Assets and also to judge the IPO performance in terms of returns
generated post listing of IPO. The trigger to delve deep into the IPO performance of
selected banks emerge from the fact that banks are fulcrum of an economy and their
well being determines economic development. Second, equity shareholders who are
the owners of the business and embrace the maximum risks needs to be assured that
their investments are secured and there will be maximization of wealth. Third, it is also
to be ascertained that whether the capital raised through equity trajectory or any other
source is fruitful or not, as procurement of capital entails cost in terms of its impact on
a key financial of a business organization, i.e. Reported Net Profit After Tax (PAT) and
another important financial parameter- Return on Assets (ROA).

As mentioned above that equity shareholders being the maximum risk bearer expect
gainful returns on their investments. In this regard, it is essential to find out whether
post IPO listing returns are contributing towards wealth maximization of
shareholders.

Keeping these vital points in view, the ensuing paragraphs focus upon the correlation
between value of IPOs issued by various public and private sector banks and their
impact on the Reported Net Profit After Tax (PAT). Similarly, an endeavour has been
made to ascertain whether there is a significant difference or not on another key financial
parameter, i.e. Return on Assets (ROA) of public and private sector banks. Finally, with
the assistance of raw return or initial return and market adjusted excess return an attempt
have been made to comprehend the returns generated on the stocks of the selected
public and private sector banks considered for the study.

Statistical and Financial Tools

(a) Karl Pearson’s Co-efficient of Correlation - Correlation refers to sympathetic
movement of variables either in the same or in the opposite directions. Simple
correlation deals with co-variation of two variables while multiple and partial
correlations involve a study of co-variation between more than two variables.

The relationship between variable is established and measured quantitatively
with a view to making estimates based on them.

The usage of this statistical tool wil assist us to ascertain the correlation between

30

Indian Banking Sector - Initial Public Offering Scenario & its Impact

31
the quantum of IPOs issued in the Banking and industry and its resultant effect
on Reported Net Profit After Tax (PAT).

(b) F-test (One Factor Model) - F-tests are named after its test statistic, F which
was named in honour of Sir Ronald Fisher. The F-statistic is simply a ratio of two
variances. Variances are a measure of dispersion, or how far the data are scattered
from the mean. Larger values represent greater dispersion. Variance is the
square of the standard deviation.

For us humans, standard deviations are easier to understand than variances
because they’re in the same units as the data rather than squared units.

However, many analyses actually use variances in the calculations.

F-statistics are based on the ratio of mean squares. The term “mean squares”

may sound confusing but it is simply an estimate of population variance that
accounts for the degrees of freedom (DF) used to calculate that estimate.

Despite being a ratio of variances, one can use F-tests in a wide variety of
situations. Unsurprisingly, the F-test can assess the equality of variances.

However, by changing the variances that are included in the ratio, the F-test
becomes a very flexible test.

For example, you can use F-statistics and F-tests to test the overall significance
for a regression model, to compare the fits of different models, to test specific
regression terms, and to test the equality of means.

This test will help us to ascertain the IPO performance of Banking sector in
terms of Return on Assets (ROA) of selected public and private sector banks,
i.e. whether there is a significant difference or not on the mentioned variables
of selected public and private sector banks due to issuance of IPOs.

(c) Initial Return or Raw Return for the Stock : This will assist in ascertaining the
immediate return on stocks of the four banks, considered for the study, i.e. A

Bank, B Bank, C Bank and D Bank. A and B are listed public sector banks,
whereas, C and D are listed private sector banks.

(d) Market Adjusted Excess Return : At times, there is a time lag between the
offer and trading of stock, in such a scenario, the mentioned approach is useful.

Thus, in order to have more clarity regarding return on stocks assuming there
might have been delay or time lag between the trading of stocks of the aforesaid
banks, Market Adjusted Excess Return (MAER) is used.

For the calculation of market adjusted excess return the same four banks have
been considered for the study which have been considered for computation of
initial return or raw return for the stock.

32

Indian Banking Sector - Initial Public Offering Scenario & its Impact

(a) Karl Pearson’s Coefficient of Correlation and Co-efficient of Determination

IPO values of

Reported Net
dx =
dy =
dx²
dy²
dxdy

Public & Private

Profit After Tax

X - X¯

Y - Y¯

Sector Banks
of Public & Private

(INR Crore)

Sector Banks

(X)

(INR Crore)

(Y)

111.20

40.34

-1961

-1535

3845521

2356225

3010135

150

121.19

-1922

-1454

3694084

2114116

2794588

385+164.49+

741.40+562.39

-1135

123

1288225

15129

-139605

288+100 =

+ 314.13+80.21

937.49

= 1698.13

240+ 240= 480

416.10+196.55=

-1592

-962

2534464

925444

1531504

612.65

230+3349= 3579 222.02+

1507

284

2271049

80656

427988

1,637.11= 1859.13

250+315+820+

2,005.20+ 438.06+

3120+2497+

-3.76 +541.79+

1450= 8452

1,410.12+726.07=

5117.48

6380

3542

40704400

12545764 22597960

185.9+495+165

-85.26 + 675.18 +

1172

668

1373584

446224

782896

+765+1633=

50.90 + 552.02 +

3243.9

1,050.07= 2242.91

816+782.145 =

503.79 + 759.77 = -474

-311

224676

96721

147414

1598.145

1263.56

1359.81

1,960.28

-712

385

506944

148225

-274120

480+330 = 810

508.80 + 322.36

= 831.16

-1262

-744

1592644

553536

938928

ΣX= 20721.545

ΣY = 15746.83

Σdx = 1

Σdy = -4

Σdx² =

Σdy² =

Σdxdy =

58035591

19282040 31817688

Notes:

(1) IPO values comprises of the IPO issued by Al ahabad Bank, Andhra Bank, Bank
of India, Bank of Maharashtra, Canara Bank, Indian Overseas Bank, Punjab

National Bank, UCO Bank, Union Bank of India, Vijaya Bank, ICICI Bank Limited,

Syndicate Bank, Yes Bank Limited, Oriental Bank of Commerce, Development

Credit Bank Limited, The South Indian Bank, Bank of Baroda, Central Bank of

India, Indian Bank, Punjab & Sind Bank.

(2) For calculation purpose, the IPO values of the Banks and their Reported Net

Profit after tax have been summed up.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

33

Coefficient of correlation: r = Σdxdy / Σdx² x Σdy²

X¯ = 20721.545 / 10 = 2072 (Rounded off)

Y¯ = 15746.83 / 10 = 1575 (Rounded off)

r = 31817688 / 58035591 x 19282040
r = 31817688 / 33452124 = 0.95

Therefore, Karl Pearson’s coefficient of correlation = 0.95

Coefficient of Determination = r² = (0.95)² = 0.90

Decision: There is a strong correlation between IPO issues by banks and its impact
on their Reported Net Profit After Tax. Similarly the change in Reported Net Profit

After Tax (dependent variable) is highly influenced by the change in IPO issues, in
value terms (independent variable), as the coefficient of determination is 0.90.

(b) F-Test (One Factor Model)

This statistical tool will assist in ascertaining the impact of issue of IPO on key
financials of Banking and Financial Services sector. The key financial considered for
the study is Return on Assets.

First the F-test (One Factor Model) is applied on the above mentioned variables of
selected public and private sector banks. In order to maintain anonymity the real
names of banking companies are not disclosed. However, the figures referred for
analysis have been obtained from authentic sources. The banks considered for the
study are leading public and private sectors banks of India.

The banks considered for the study are-

(1) A Bank

(2) B Bank

(3) C Bank

(4) D Bank

(5) E Bank

(6) F Bank

(7) G Bank

(8) H Bank

(9) I Bank

(10) J Bank

Note : The period considered for the analysis is 2000-2015. Further, different banks

34

Indian Banking Sector - Initial Public Offering Scenario & its Impact
have come up with IPOs and FPOs at different years of the above period. Now the
analysis will be done on the aforesaid three important financial parameters on six
selected public sector banks and four private sector banks which embraced the IPO
route to ascertain whether there exists a significant difference or not on Return on

Assets, Return on Equity and Non-Performance Assets of the banks considered for
the analysis. Since the banks considered for the analysis have came out with IPOs

/ FPOs mostly during 2002 – 2010, but to ascertain the extended impact on Return
on Assets, the termination year considered is 2015.

Further, it is to be noted that in order to maintain anonymity of the selected banks
considered for the study they have been given pseudo names. However, the figures
considered for the analysis are true and have taken from authentic sources. Banks
listed from serial number 1 to 6 are listed public sector banks and those listed from

7 to 10 are listed private sector banks.

Return on Assets

Nul Hypothesis (H0) : There is no significant difference on the Return on Assets of
selected Public and Private Sector Banks due to IPO issue during the period 2002-2015.

Alternative Hypothesis (H1) : There is a significant difference on the Return on

Assets of selected Public and Private Sector Banks due to IPO issue during the
period 2002-2015.

Years

A Bank

B Bank

C Bank

D Bank

(Sample 1-X1)

(Sample 2-X2)

(Sample 3-X3)

(Sample 4-X4)

2002

0.32

0.97

1.029

0.77

2003

0.59

1.99

1.24

0.98

2004

1.03

1.71

1.34

1.08

2005

1.23

1.58

1.00

1.11

2006

1.29

1.19

1.01

0.99

2007

1.11

1.13

0.85

0.94

2008

1.19

1.01

0.86

1.02

2009

0.80

0.95

0.94

1.25

2010

1.00

1.15

1.14

1.31

2011

0.95

0.00

1.19

1.17

2012

1.02

0.00

0.87

1.06

2013

0.57

0.88

0.69

0.99

2014

0.53

0.26

0.49

0.60

2015

0.27

0.34

0.49

0.50

11.9

13.16

13.14

13.77

X¯ (Mean)

0.85

0.94

0.94

0.98

Indian Banking Sector - Initial Public Offering Scenario & its Impact

35

E Bank

F Bank

G Bank

H Bank

I Bank

J Bank

(Sample

(Sample

(Sample

(Sample

(Sample

(Sample

5-X5)

6-X6)

7-X7)

8-X8)

9-X9)

10- X10)

0.52

0.77

0.26

-

0.78

0.95

1.05

1.01

1.13

-

-2.05

0.95

-0.22

1.13

1.30

-

0.00

0.91

1.04

0.71

1.19

-0.29

-3.49

0.09

-0.22

0.72

1.01

1.32

-2.27

0.47

0.63

0.71

0.90

0.84

0.14

0.76

0.58

0.79

1.03

1.17

0.44

0.88

0.29

0.97

0.99

1.32

-1.48

0.95

0.41

1.09

1.10

1.31

-1.27

0.91

0.58

1.18

1.26

1.23

0.28

0.89

0.62

1.11

1.36

1.32

0.63

0.99

0.34

0.81

1.55

1.31

0.90

1.00

-0.96

0.68

1.64

1.48

1.17

0.92

0.20

0.47

1.72

1.47

1.18

0.51

Total

4.86

12.15

16.44

11.01

-5.04

11.18

X¯ (Mean) 0.35

0.87

1.17

1.10

-0.36

0.80

Grand Mean (X¯¯) = 0.85+ 0.94+ 0.94+ 0.98+ 0.35+ 0.87+ 1.17+ 1.10 -0.36+

0.80 / 10 = 7.64.

Variance Between Samples

Sample 1 Sample 2 Sample 3 Sample 4 Sample 5 Sample 6 Sample 7 Sample 8 Sample 9 Sample 10

(X¯1 -

(X¯2 -

(X¯3 -

(X¯4-

X¯5-

(X¯6 -

(X¯7-

(X¯8 -

(X¯9 -

(X¯10 -

X¯ ¯)

X¯¯)²

X¯¯)²

X¯¯)²

(X¯¯ )²

X¯¯)²

X¯¯)²

X¯¯)²

X¯¯)²

X¯¯)²

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

36

Indian Banking Sector - Initial Public Offering Scenario & its Impact

Sample 1 Sample 2 Sample 3 Sample 4 Sample 5 Sample 6 Sample 7 Sample 8 Sample 9 Sample 10

(X¯1 -

(X¯2 -

(X¯3 -

(X¯4-

X¯5-

(X¯6 -

(X¯7-

(X¯8 -

(X¯9 -

(X¯10 -

X¯ ¯)

X¯¯)²

X¯¯)²

X¯¯)²

(X¯¯ )²

X¯¯)²

X¯¯)²

X¯¯)²

X¯¯)²

X¯¯)²

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

46.10

45

45

45

53.14 45.83

41.86

42.77

64

46.79

645

630

630

630

744

642

586

599

896

655

Sum of the squares between the samples = 645 + 630 + 630 + 630 + 744 + 642

+ 586 + 599 + 896 + 655 = 6657.

Mean sum of squares between the samples = 6657 / 9 = 740 (because there are

10 samples and the degrees of freedom are 10 – 1 = 9).

Variance Within the Samples

Sample 1

Sample 2

Sample 3

Sample 4

Sample 5

X1

(X1 -

X2

(X2 -

X3

(X3 -

X4

(X4 -

X5

(X5 -

X¯1)²

X¯2)²

X¯3)²

X¯4)²

X¯5)²

0.32

0.28

0.97

0.0009

1.029

0.008

0.77

0.044

0.52

0.029

0.59

0.07

1.99

1.10

1.24

0.09

0.98

0

1.05

0.49

1.03

0.03

1.71

0.59

1.34

0.16

1.08

0.01

-0.22

-0.325

1.23

0.14

1.58

0.41

1.00

0.0036

1.11

0.017

1.04

0.48

1.29

0.19

1.19

0.06

1.01

0.0049

0.99

0.0001

-0.22

0.325

1.11

0.07

1.13

0.04

0.85

0.0081

0.94

0.0016

0.63

0.0784

1.19

0.12

1.01

0.005

0.86

0.0064

1.02

0.0016

0.58

0.053

0.80

0.0025

0.95

0.0001

0.94

0

1.25

0.073

0.29

0.0036

1.00

0.0225

1.15

0.044

1.14

0.04

1.31

0.11

0.41

0.0036

0.95

0.01

0.00

0.88

1.19

0.062

1.17

0.0361

0.58

0.053

1.02

0.03

0.00

0.88

0.87

0.005

1.06

0.0064

0.62

0.073

0.57

0.08

0.88

0.004

0.69

0.063

0.99

0.0001

0.34

0.0001

0.53

0.10

0.26

0.46

0.49

0.0203

0.60

0.144

-0.96

1.72

0.27

0.34

0.34

0.36

0.49

0.203

0.50

0.2304

0.20

0.0225

Σ(X1 - X¯1)² =

Σ(X2 - X¯2)²

Σ(X3 - X¯3)² =

Σ(X4 - X¯4)² =

Σ(X5 - X¯5)²=

1.485

= 4.834

0.6743

0.6745

3.0062

Indian Banking Sector - Initial Public Offering Scenario & its Impact

37

Sample 6

Sample 7

Sample 8

Sample 9

Sample 10

X6

(X6 -

X7

(X7 -

X8

(X8 -

X9

(X9-

X10

(X10 -

X¯6)²

X¯7)²

X¯8)²

X¯9)²

X¯10)²

0.77

0.01

0.26

0.828

-

-

0.78

1.2996

0.95

0.0225

1.01

0.0196

1.13

0.0016

-

-

-2.05

2.8561

0.95

0.0225

1.13

0.0676

1.30

0.0169

-

-

0.00

0.1296

0.91

0.0121

0.71

0.0256

1.19

0.0004

-0.29

1.9321

-3.49

9.7969

0.09

0.5041

0.72

0.0225

1.01

0.0256

1.32

0.0484

-2.27

3.6481

0.47

0.1089

0.71

0.0256

0.90

0.0729

0.84

0.0676

0.14

0.25

0.76

0.0016

0.79

0.0064

1.03

0.0196

1.17

0.0049

0.44

0.64

0.88

0.0064

0.97

0.01

0.99

0.0324

1.32

0.0484

-1.48

1.2544

0.95

0.0225

1.09

0.0484

1.10

0.0049

1.31

0.0441

-1.27

0.8281

0.91

0.0121

1.18

0.0961

1.26

0.0081

1.23

0.0169

0.28

0.4096

0.89

0.0081

1.11

0.0576

1.36

0.0361

1.32

5.856

0.63

0.9801

0.99

0.0361

0.81

0.0036

1.55

0.1444

1.31

0.0441

0.90

1.5876

1.00

0.04

0.68

0.0361

1.64

0.2209

1.48

0.1444

1.17

2.3409

0.92

0.0144

0.47

0.16

1.72

0.3025

1.47

0.1369

1.18

2.3716

0.51

0.0841

Σ(X6 - X¯6)²

Σ(X7 - X¯7)²

Σ(X8 - X¯8)² =

Σ(X9 - X¯9)² =

Σ(X10 - X¯10)² =

= 0.5891

= 1.7143

8.3438

28.3926

0.8954

Total sum of squares within the samples = 1.485 + 4.834 + 0.6743 + 0.6743 +

3.0062 + 0.5891 + 1.7143 + 8.3438 + 28.3926 + 0.8954 = 50.609

Source of variation

Sum of squares

Degrees of freedom

Mean square

Between samples

6657

9

740

Within samples

50.609

127

0.40

6704.55

136

F = Variance between samples / Variance within samples = 740 / 0.40 = 1850.

Decision : The table value of F for 5% level of significance, i.e. a =0.05 for v1 =

9 and v2 = 127 at 5% level of significance = 1.88. The calculated value of F is
more than the table value and hence the null hypothesis is not accepted and there
is a significant difference in the impact of IPO issues on the Return on Assets of the
banks considered for the analysis.

(c) Initial Return or Raw Return

For computation of initial return or raw return four banks have been considered, i.e.

two public sector and two private sector banks. Public sector banks have been
named as A Bank and B Bank, whereas, private sector banks have been named as C

Bank and D Bank.

38

Indian Banking Sector - Initial Public Offering Scenario & its Impact

A Bank

A Bank IPO was issued on October 2002 and was listed on BSE Ltd. (erstwhile

Bombay Stock Exchange) on 29th of November, 2002. The closing price of A Bank
stock on 29th of November, 2002 was INR 10.10.

Applying the formula of Initial Return or Raw Return on A Bank Stock, the returns
will be computed for 1 month, 3months, 6 months, 1 year, 2 years and 3 years
from the date of listing. For this purpose, the closing prices of the last day or the
day closer to the end of the concerned month will be considered. For instance,
while computing the return on stock after 1 month of listing, the closing price of
the last day of December 2002 will be considered and in case the last day was a
non-working day or holiday of the stock exchange than the day immediately prior
to the last day will be considered.

The formula for calculating Initial or Raw Return on Stock is

R_Ret = [Pt – P0 / P0] x 100

Where,

R_Ret. = Initial Return or Raw Return for stock

P = Closing price at time t
t

P = Closing price on listing day

0

Initial or Raw Return on Stock of A Bank for the period 2007-2012

Listed on November

[P – P /P ] x 100

Initial Return or Raw
t

0

0

29th, 2002

Return on Stock

5 years from listing

30.64 – 10.10 / 10.10 x 100

203.4%

6 years from listing

31.49 – 10.10 / 10.10 x 100

212%

7 years from listing

31.49 – 10.10 / 10.10 x 100

212%

8 years from listing

30.64 – 10.10 / 10.10 x 100

203.4%

9 years from listing

33.21 – 10.10 / 10.10 x 100

229%

10 years from listing

30.64 – 10.10 / 10.10 x 100

203.4%

Initial or Raw Return on Stock of B Bank for the period 2007-2012

The IPO of B Bank was listed on 26th of April, 2002. The offer price of the IPO was INR

390 (Face Value- INR 10 and Premium- INR 380).

Listed on April 26th,

[P – P /P ] x 100

Initial Return or Raw
t

0

0

2002

Return on Stock

5 years from listing

99.81 – 40.00 / 40.00 x 100

149.53%

6 years from listing

112.96 – 40.00 / 40.00 x 100

182.4%

7 years from listing

95.62 – 40.00 / 40.00 x 100

139.05%

8 years from listing

206.18 – 40.00 / 40.00 x 100

415.45%

9 years from listing

237.17 – 40.00 / 40.00 x 100

492.93%

10 years from listing

167.84 – 40.00 / 40.00 x 100

319.6%

Indian Banking Sector - Initial Public Offering Scenario & its Impact

39

Initial or Raw Return on Stock of C Bank for the period 2007-2012

C Bank issued IPO on 14th of March, 1995 and the IPO got listed at BSE Ltd. (erstwhile

Bombay Stock Exchange) on 19th of May, 1995. Since the data pertaining to the closing
stock price of C Bank on 19th of May, 1995 is not available, in view of this, the closing
price of the next nearest date is considered that is 1st of January, 1996 for computing

Initial or Raw Return on Stock. Further, in order to be in synchronization with the
periods of other banks, since the periods considered for calculation under both the
methods- Initial or Raw Return and Market Adjusted Excess Return are same, i.e. 2007,

2008, 2009, 2010, 2011 and 2012. In view of this, the periods considered for C Bank
since January 1st 1996 have been mentioned as 11 years from Jan 1st 1996, i.e. 2007;

12 years from Jan 2nd, 1996, i.e. 2008; 13 years from Jan 1st 1996, i.e. 2009; 14 years
from Jan 1st 1996, i.e. 2010; 15 years from Jan 1st, 1996 i.e. 2011 and 16 years from

Jan 1st, 1996, i.e. 2012.

Listed on May 19th, 1995

[P – P /P ] x 100

Initial Return or Raw
t

0

0
but date considered- January

Return on Stock

1st, 1996

11 years from Jan 1st, 1996

1070.00 – 5.18 / 5.18 x 100

20,556.37%

12 years from Jan 1st, 1996

1729.50 – 5.18 / 5.18 x 100

33288%

13 years from Jan 1st, 1996

1013.75 – 5.18 / 5.18 x 100

19470.46%

14 years from Jan 1st, 1996

1705.20 – 5.18 / 5.18 x 100

32818.92%

15 years from Jan 1st, 1996

2390.50 – 5.18 / 5.18 x 100

46048.65%

16 years from Jan 1st, 1996

426.85 – 5.18 / 5.18 x 100

8140.35%

Initial or Raw Return on Stock of D Bank for the period 2007-2012

The IPO issue of D bank opened on 15th of June, 2005 and closed on 21st of June,

2005. The IPO was listed on 12th of July, 2005 and were issued at the offer price range
of INR 38.00 to 45.00.

Listed on July 12th, 2005

[P – P /P ] x 100

Initial Return or Raw
t

0

0

Return on Stock

2 years from listing

184.50 – 60.80 / 60.80 x 100

203.45%

3 years from listing

116 – 60.80 / 60.80 x 100

90.79%

4 years from listing

127.25 – 60.80 / 60.80 x 100

109.29%

5 years from listing

287.40 – 60.80 / 60.80 x 100

372.70%

6 years from listing

314.80 – 60.80 / 60.80 x 100

417.76%

7 years from listing

353.40 – 60.80 / 60.80 x 100

481.25%

40

Indian Banking Sector - Initial Public Offering Scenario & its Impact

The formula for Market Adjusted Excess Return is

MAER = [ P – P / P – M – M / M ] x 100
t

0

0
t

0

0

MAER = Market Adjust Excess Return

M = Closing value of Market Index at time period t
t

M = Closing value of Market Index on listing date

0

MAER for A Bank for the period 2007 to 2012

Listed on November 29th, 2002

[ P – P / P – M – M / M ] x 100
t

0

0
t

0

0

5 years from listing

[2.04 – 4.89] x 100 = -285%

6 years from listing

[2.12 – 1.82] x 100= 30%

7 years from listing

[2.12 – 4.15] x100 = -203%

8 years from listing

[2.04 – 5.0] x 100 = -296%

9 years from listing

[2.29 – 3.96] x 100 = - 167%

10 years from listing

[2.03 – 4.94] x 100 = - 291%

MAER for B Bank for the period 2007 to 2012

Listed on April 26th, 2002

[ P – P / P – M – M / M ] x 100
t

0

0
t

0

0

5 years from listing

[ 1.50 – 3.21] x 100 = -171%

6 years from listing

[ 1.82 – 4.26] x 100 = -244%

7 years from listing

[1.39 – 2.45] x 100 = - 106%

8 years from listing

[4.15 – 4.30] x 100 = -15%

9 years from listing

[4.93 – 4.80] x 100 = 13%

10 years from listing

[3.20 – 4.21] x 100 = - 101%

MAER for C Bank for the period 2007 to 2012

Listed on May 19th, 1995

[ P – P / P – M – M / M ] x 100
t

0

0
t

0

0

(Date considered Jan 01, 1996)

11 years from listing

[ 205.56 – 3.46] x 100 = 20210%

12 years from listing

[332.88 – 5.49] x 100 = 32739%

13 years from listing

[194.70 – 2.17] x 100 = 19253%

14 years from listing

[328.19 – 4.61] x 100 = 32358%

15 years from listing

[460.49 – 5.57] x 100 = 45492%

16 years from listing

[81.40 – 3.96 ] x 100 = 7744%

Indian Banking Sector - Initial Public Offering Scenario & its Impact

41

MAER for D Bank for the period 2010 to 2015

Listed on July 12th, 2005

[ P – P / P – M – M / M ] x 100
t

0

0
t

0

0

5 years from listing

[2.03 – 1.07] x 100 = 96%

6 years from listing

[0.91 – 0.84] x 100= 7%

7 years from listing

[1.09 – 0.85] x100 = 24%

8 years from listing

[3.73 – 1.46] x 100 = 227%

9 years from listing

[4.18 – 1.52] x 100 =266%

10 years from listing

[4.81 - 1.36] x 100= 345%

Data Analysis & Findings

The above data analysis shows that in terms of Initial or Raw Return on Stock, the
performance of C Bank is excellent, where as performance of D Bank, A Bank and B

Bank is quite impressive. The stocks of all the banks have generated positive returns.

However, by applying Market Adjusted Excess Return it can be observed that stocks of

A bank and B Bank have provided negative returns, whereas C Bank have gained top
position by generating a high positive returns. D Bank’s stocks on an average have
generated positive return.

Thus, it can be concluded that the overall performance of both public and private sector
banks in terms of return on stocks, post listing of their IPOs are impressive and they
hold the potential of providing higher returns to the investors. But looking to the above
analysis the investors may opt for private sector bank stocks, since both raw return and
market adjusted excess return are on the higher side, thereby adding to the wealth of
the investors. However, there are other economic and regulatory factors which need to
be taken into consideration also before taking investment decisions.

***

42

Indian Banking Sector - Initial Public Offering Scenario & its Impact

Chapter - 4

The Regulatory Ecosystem

With reference to the regulatory framework governing issue of initial public offers it is
essential to discuss the following regulations as they are pertinent for all IPOs issue by
various sectors including banking sector.

(a) Issue of Capital and Disclosure Requirements Regulations .

(b) Listing Obligations and Disclosure Requirements Regulations

Issue of Capital and Disclosure Requirements Regulations

The year 2009 was a landmark in the journey of regulations governing issue of capital in

Indian capital market. The birth of ‘Issue of Capital and Disclosure Requirements

Regulations, 2009 (ICDR Regulations)’ is considered to be a significant initiative taken
by the Capital Market Regulator, SEBI as it aimed to bring clarity and resolve identified
lacunae in the securities and investor protection laws.

SEBI (Disclosure and Investor Protection or DIP Guidelines, 2000) were to regulate the
issue of securities of a company to public, shareholders and institutional investors through
the primary market. Over the years, subsequent amendments to DIP Guidelines coupled
with several SEBI notifications and issue-specific SEBI observations added to confusion
and disorganized piece of legislation.

The dependability of the guidelines was compromised by their dependence on SEBI’s
informal guidance, which constituted an indicative viewpoint and not a binding
interpretation.

With the objective of offering a statutory support, SEBI notified the SEBI (Issue of

Capital and Disclosure Requirements) Regulations, 2009 (“ICDR Regulations”) rescinding
the erstwhile DIP Guidelines. The ICDR Regulations is an endeavour to streamline the
structure for public issues by removing unnecessary clauses, introducing market-driven
processes and simplifying the clutter of legality.

It is to be noted that ICDR Regulations is not a new law altogether regulating the public
issue of securities. However, the certain changes incorporated in the said regulation are
worth to discuss-

(a) Eligibility to Access public money- Uniform Applicability : The exemptions that
were available under DIP Guidelines to certain banking and infrastructure
companies from eligibility norms for making initial public offers (IPOs) was
done away with under ICDR Regulations, and thus eligibility norms were made
applicable uniformly to all forms of issuers. It was a logical step since these
companies enjoyed competitiveness and there was no need for giving them

42

Indian Banking Sector - Initial Public Offering Scenario & its Impact

43
any kind of privilege. Further, it appeared that debarment from accessing capital
markets pursuant to any order or direction of SEBI was only applicable to public
or rights issue of specified securities i.e. equity shares / convertible securities,
unlike under the DIP Guidelines where it applied to issue all securities for all
forms of issues. This qualification was required as ICDR no longer governed
the issue of debt securities.

(b) No More Firm Allotments : The DIP Guidelines provided for pre-IPO placements
on firm basis to maximum percentage of 10% shares, a maximum of 10% of
the issue amount for employees and a maximum of 10% of the issue amount
to the shareholders. The eligible subscribers for allotment on firm basis under
the DIP Guidelines included Indian Mutual Funds, Foreign Institutional Investors

(including non-resident Indians and overseas corporate bodies), Indian and

Multilateral Development Institutions and Scheduled Banks. Firm allotment,
which was frequently used by companies, was removed in the ICDR Regulations,
thereby, providing a level playing field to the subscribers of a public issue.

Often such firm allotments are bundled with numerous financial rights and
privileges in favour of a single investor, which carried the hazard of hampering
management decisions of a company having public money, post IPO. Further,
launching of alternatives such as, anchor investors portion, wherein, a company
going for a public is permitted to al ot up to amount reserved for Anchor Investors
changed to 60% of the amount reserved for QIBs of which of the issue reserved
for Qualified Institutional Buyers (QIBs) to anchor investors may serve the
same purpose as firm allotment, without hacking the issue size available to
general public. An anchor investor is a QIB, who is required to apply for a
minimum issue of Rs 10 crores and hold the securities for a minimum period of

30 days after allotment. The concept of anchor investors seems to have the
same objective as of the firm al otment, i.e. to give initial stability to the issue.

(c) Minimum Promoters Contribution : Under the erstwhile DIP Guidelines,
minimum promoter’s contribution to a public issue could be invested by
promoters / persons belonging to promoter group / friend / friends, relatives
and the associates of the promoters. Under the ICDR Regulations, only promoters
are al owed to contribute minimum promoters’ contribution. It was contemplated
that ICDR Regulations may compromise the ability of a promoter in a company,
engaged in procuring funds from the public.

(d) Underwriting : The ICDR Regulations unequivocally provided that the
underwriting obligations would not be limited to the minimum subscription
level but to the whole issue, where applicable. The justification to such change
appears to be that while minimum subscription clause is valid for determining
the success of any issue from legal point of view, an issuer may agree to have
the issue underwritten with an understanding to get the full amount of
funds.Thus, where 100% of the offer through offer document is underwritten,
the underwriting obligations shal be for the entire amount underwritten, except
cases where compulsory al otment to QIBs is prescribed. This provision gives a
public issue greater reliability.

(e) Preferential Allotment : Though the ICDR Regulations introduced a new

44

Indian Banking Sector - Initial Public Offering Scenario & its Impact
exception for preferential issue of equity shares pursuant to convertible debt
instruments under sub sections (3) and (4) of section 62 of the Companies Act,

2013. This exemption recognises the need to do away with dual regulation
since such conversion is subject to Central Government approval and specific
rules. The Stock Exchange is now empowered to order revaluation of non-cash
consideration for preferential al otment to promoters, their relatives, associates
and related entities for consideration other than cash, if the Stock Exchange is
not satisfied by the valuation submitted to it by the issue. This ensures genuine
valuations and guards against artificiality.

(g) Well-organized Procedure and Sufficient Disclosures : Under DIP Guidelines,
two forms of Book Building were allowed- 100 % and 75%. The ICDR

Regulations does away with the 75% book built route which was hardly used.

Under DIP Guidelines, in case, there was a revision in the price band in a book building
issue, the issue period was not clear but ICDR Regulations clarified this limitation by
incorporating the clause that total issue period should not exceed 10 working days,
including any revision in the price band. Further, 30 days period for allotment / refund
in case of fixed price issue as provided under DIP Guidelines were replaced by 15 days,
as there was no valid reason to provide an additional 15 days to complete the procedure
in case of fixed issue price, making the public issue process faster and accountable to
investors’ interest.

Unlike DIP Guidelines, where in case of a fix price public issue allowed the issuer to
take into account market dynamics in deciding the price closer to the issue date.

The ICDR Regulations required that any pledge of shares by promoters should be
disclosed in the prospectus for the public issue. This amendment is in line with the
changes in the Equity Listing Agreement and in SEBI (Substantial Acquisitions of Shares
and Takeovers) Regulations, 1997 and is an significant indicator of the level of control
exerted by the promoters in a company. This information coupled with the financial
data provides a reasonable indicator of the likelihood of the promoters losing control of
the company to lenders / lender nominees.

It is to be noted that definition of ‘employee’ under the ICDR Regulations excludes
promoters and immediate relatives of the promoters. So in an IPO, the employee’s
reservation portion will only be available to employee / director of the issuer company
and benefit of no-lock-in on options allocated to employees shall extend only to
employee/ director of the issuer company and the group companies.

A controversial amendment in the ICDR Regulations is to preclude forecasts / predictions
to select investors outside the offer document. This change is in line with US practice.

This approach was received with resistance from institutional investors who argued that
in developing markets several companies approaching the market lack a proven track
record necessitating financial forecasts to measure company potential. The counter
view is that a level-playing field is required so that the same information is available to
all potential investors.

With the notification of the ICDR Regulations, the impasse which unnerved the market
players was on the status of the pending offer documents with the SEBI for proposed

Indian Banking Sector - Initial Public Offering Scenario & its Impact

45
issue of securities. However, maintaining the scale up on practicality, which seems to
be the highest of ICDR Regulations, no re-filing of draft offer documents needed by

SEBI. A checklist of compliances for the already filed DRHPs (Draft Red Herring

Prospectuses) can be submitted under the ICDR Regulations, compliance of which
needs to be ensured at the stage of filing the red herring prospectus by the issuer.

It will be quite interesting to discuss important points of SEBI ICDR (Amendment)

Regulations, 2014 also. On 4th of February, 2014, SEBI issued a notification amending
the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 (‘ICDR

Regulations’) to make grading of an initial public offer (IPO) by one or more credit
rating agencies voluntary by companies. In addition to such amendment, SEBI also
altered the format of the Statement of Assets and Liabilities that needs to be disclosed
by issuing companies in their offer document.

Key points of the amendments

(a) IPO Grading made voluntary : Chapter III of the ICDR Regulations lists out the
eligibility requirements applicable to a public issue. Regulation 26 of Chapter

III enumerates the requirements in case of an IPO. Sub-regulation of Regulation

26 provides the following:

“(7) No issuer shal make an initial public offer, unless as on the date of registering
prospectus or red herring prospectus with the Registrar of Companies, the
issuer has obtained grading for the initial public offer from at least one credit
rating agency registered with the Board.”

Such mandatory grading had to be disclosed by companies in the prospectus /
red herring prospectus of the IPO.

This sub-regulation has been substituted with the following:

"(7) An issuer making an initial public offer may obtain grading for such offer
from one or more credit rating agencies registered with the Board.

Rationale for the Amendment : The amendment has been introduced in the
wake of the slowdown that has been surrounding the primary market since

January 2010. The necessity of IPO grading had kept out many companies
from gaining access to the primary market. The BSE IPO index, which tracks
the value of companies for two years after they list, fell over 37% to 1,300
between 4 January 2010 and 31 December 2011. 82 out of the 112 companies
which came out with IPOs in the year 2010 and 2011 are trading below their
issue price. However, the BSE IPO index has risen by 28% to 1679 in the year

2012, with just 2 out of 17 companies listed were trading below their issue
price. However, such a move had the possibility of undermining the interest of
the investors and can act as a restraint to informed decisions by investors.

Credit rating acts as yardsticks based on which investments are made. Credit
rating agencies used various parameters to determine the grading of a company.

A higher grade meant that the company had strong fundamentals. Such an
assessment would now not be possible, as companies with weaker fundamentals
would prefer to avoid such a process altogether leading to misguided investment.

(b) Amendment to Statement of Assets and Liabilities : The format of the Statement

46

Indian Banking Sector - Initial Public Offering Scenario & its Impact
of Assets and Liabilities was provided in sub-para IX in para 2 of Part A to

Schedule VIII of the ICDR Regulations. The Statement was divided under 5
heads, namely (1) Fixed Assets, (2) Current assets, loans and advances, (3)

Liabilities and Provisions, (4) Net Worth, (5) Represented by (based on share
capital, reserve and net worth).

The amendment revised such format to similar lines with the format of Balance Sheet
under Part I Schedule III of the Companies Act, 2013. As per the amendment, the
heads have been divided into 5 categories namely, (1) Equity & Liabilities, (2) Non

Current Liabilities, (3) Current Liabilities, (4) Non Current Assets, and (5) Current Assets.

Continuing with the discussion on ICDR Regulations, at this juncture it is essential to
discuss Securities and Exchange Board of India (Issue of Capital and Disclosure

Requirements) (Fourth Amendment) Regulations, 2017. In the Securities and Exchange

Board of India (Issue of Capital and Disclosure Requirements) Regulations 2009, in
regulation 70, after sub-regulation (4), the following was incorporated namely-

— The provisions of the Chapter shal not apply where the preferential issue of specified
securities is made to the lenders pursuant to conversion of their debt, as part of a
debt restructuring scheme implemented in accordance with the guidelines specified
by RBI, subject to the following conditions:

(a) the guidelines for determining the conversion price have been specified by

RBI in accordance with which the conversion price shall be determined and
which shall be in compliance with the applicable provisions of the Companies

Act, 2013;

(b) the conversion price shall be certified by two independent qualified valuers,
and “valuer” shall be a person who is registered under section 247 of the

Companies Act, 2013 and the relevant Rules framed thereunder.

However, till such date on which section 247 of the Companies Act, 2013 and
the relevant Rules come into force, valuer shal mean an independent merchant
banker registered with SEBI or an independent chartered accountant in practice
having a minimum experience of ten years;

(c) specified securities so allotted shall be locked-in for a period of one year from
the date of their allotment.

However, for the purpose of transferring the control, the lenders may transfer
the specified securities allotted to them before completion of the lock-in period
subject to continuation of the lock-in on such securities for the remaining
period, with the transferee;

(d) the lock-in of equity shares allotted pursuant to conversion of convertible
securities issued on preferential basis shall be reduced to the extent the
convertible securities have already been locked-in;

(e) the applicable provisions of the Companies Act, 2013 are complied with,
including the requirement of special resolution.”

— The provisions of the Chapter shall not apply where the preferential issue, if any, of
specified securities is made to person(s) at the time of lenders selling their holding

Indian Banking Sector - Initial Public Offering Scenario & its Impact

47
of specified securities or enforcing change in ownership in favour of such person(s)

pursuant to a debt restructuring scheme implemented in accordance with the
guidelines specified by RBI, subject to the following conditions:

(a) the guidelines for determining the issue price have been specified by RBI in
accordance with which the issue price shall be determined and which shall be
in compliance with the applicable provisions of the Companies Act, 2013;

(b) the issue price shall be certified by two independent qualified valuers, and

“valuer” shal be a person who is registered under section 247 of the Companies

Act, 2013 and the relevant Rules framed thereunder.

However, till such date on which section 247 of the Companies Act, 2013 and
the relevant Rules come into force, valuer shal mean an independent merchant
banker registered with SEBI or an independent chartered accountant in practice
having a minimum experience of ten years;

(c) the specified securities so allotted shall be locked-in for a period of at least
three years from the date of their allotment;

(d) the lock-in of equity shares allotted pursuant to conversion of convertible
securities issued on preferential basis shall be reduced to the extent the
convertible securities have already been locked-in;

(e) a special resolution has been passed by shareholders of the issuer before the
preferential issue;

(f) the issuer shall, in addition to the disclosures required under the Companies

Act, 2013 or any other applicable law, disclose the following information
pertaining to the proposed allottee(s) in the explanatory statement to the notice
for the general meeting proposed for passing the special resolution as stipulated
at clause (e) of this sub regulation:

a.

the identity including that of the natural persons who are the ultimate
beneficial owners of the shares proposed to be allotted and/ or who
ultimately control the proposed al ottee(s);
b. the business model;
c.

a statement on growth of business over the period of time;
d. summary of audited financials of previous three financial years;
e. track record in turning around companies, if any;
f.

the proposed roadmap for effecting turnaround of the issuer.

(g) the applicable provisions of the Companies Act, 2013 are complied with.

It will be quite interesting to discuss important amendments in SEBI (ICDR) Regulations,

2009. In addition to amendment, SEBI has also altered the format of report to be
submitted by monitoring agency.

48

Indian Banking Sector - Initial Public Offering Scenario & its Impact

Key points of the amendments

Empowerment of Stock Exchanges for Effective Regulation of Listed Entities : In order
to empower the stock exchanges for effective regulations of listed entities, amendments
have been notified to the SEBI (Issue of Capital and Disclosure Requirements) Regulations,

2009 (ICDR Regulations) to enable actions such as imposition of fines and suspension
of trading by stock exchanges for contravention of ICDR Regulations.

Enhancing the Ceiling on Employee Reservation in Issues : As per SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009, an issuer can make reservation for
employees not exceeding 5 per cent of the post issue capital of the issuer. The value of
al otment to any employee in pursuance of reservation was restricted to Rs. 2 lakh. SEBI
has now allowed allotment to employees in excess of the extant limit of Rs. 2 lakh per
employee under the employee reservation quota. The value of total allotment to an
employee under the employee reservation portion, including the additional allotment
shall not exceed Rs. 5 lakh.

It is important to understand the pertinent SEBI DIP Guidelines which stand revoked
after the onset of SEBI (Issue of Capital and Disclosure Requirements) Regulations,

2009, with effect from August 26th, 2009. The distinction between SEBI (DIP) Guidelines
and SEBI (ICDR) Regulations, 2009 is provided below-

Major differences between the rescinded SEBI (DIP) Guidelines and the new

SEBI (ICDR) Regulations

Sr. No.

Subject Matter

Provision under the SEBI (DIP)

Provision under the

Guidelines

SEBI (ICDR)

Regulations, 2009

1.

Exemption from

Exemption available to banking

Exemption removed.

eligibility norms for
company, corresponding new bank

Eligibility norms made
making an IPO
and infrastructure company.

applicable uniformly to all
types of issuers.

2.

Debarment

Company prohibited from making

Issuer not to make public
an issue of securities if it had been
issue or rights issue of
prohibited from accessing the
specified securities if:

capital market under any order or

(a) the issuer, any of its
direction passed by the Board.

promoters,
promote r
group or dire ctors or
persons in control of the
issuer are debarred from
acc essing the c apital
market by the Board; (b)

if any of the promoters,
direc tors or pe rsons in
control of the issuer was
or also is a promoter,
direc tor or person in
c ontrol of any othe r
c ompany
which
is
debarred from accessing
the capital market under
any order or directions
made by the Board.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

49

3.

Offer for sale by listed

The company shall not make public

Provided for and defined
companies
or rights issue or an offer for sale
as follows: Further public
of securities under :-
offer means an offer of

(a)

the company enters into an
specified securities by a
agreement with a depository
listed issuer to the public
for dematerialisation.

for subscription and

(b) the company gives an option
includes an offer for sale
to subscribers /shareholders/
of specified securities to
investors.

the public by any existing
holders of such securities
in a listed issuer

4.

OTCEI Issues and E-IPO

Contained in Chapter XIV and

Omitted

Chapter XI A

5.

Firm allotment in public Permitted

Omitted
issues

6.

Reservation on compe-

(a)

For Indian and multilateral

(a)

Omitted.

titive basis in public
development financial institu-

(b) For shareholders
issues
tions, Indian mutual funds,

(other than pro-
foreign institutional investors
moters) in respect of
and scheduled banks.

listed promoting

(b) For shareholders of the
companies, in case of
promoting companies in the
a new issuer and
case of a new company and
listed group
shareholders of group
companies, in case of
companies in the case of an
an existing issuer.

existing company.

7.

Book building process

Book building process through 75%

75% book building route
or 100% of issue size.

omitted.

8.

Allotment / refund

30 days for fixed price issues and

15 days for both fixed
period in public issues

15 days for book built issues.

price and book built issues.

9.

Disclosure of price or

Required in draft prospectus in case

Not required to be
price band
of fixed price public issues.

disclosed in draft
prospectus.

10.

Transfer of surplus

Surplus money to be transferred to

Surplus money to be
money in Green Shoe

Investor Protection Fund of Stock
transferred to Investor

Option (GSO) Bank

Exchanges.

Protection and Education

Account

Fund (IPEF) established by
the Board.

11.

Issue period for Infra-

21 days, as against 10 days for

Uniform period of 10 days
structure companies
otherissues.

for all types of issuers.

in public issues

12.

Currency of financial

Particulars as per audited financial

Government and non-
statements disclosed
statements not to be more than
government issuers
in the offer document

6 months old from the issue
treated at par.

opening date for all issuers, except

Government companies.

50

Indian Banking Sector - Initial Public Offering Scenario & its Impact

13.

Definition of “Key

Not defined

Defined as follows: KMP

Management
means the officers vested

Personnel” (“KMP”)

with executive powers and
the officers at the level
immediately below the
board of directors of the
issuer and includes any
other person whom the
issuer may declare as a key
management personnel

14.

Disclosure on pledge

Not provided

Provided for
of shares by
promoters

15.

Extent of underwriting

Not explicit

Where 100% of the offer
obligation
through offer document
is underwritten, under-
writing obligations shall be
for the entire amount
underwritten.

16.

Financial institution as

The term “Financial Institution”

The term “financial
a monitoring agency
open to interpretation.

Institution” replaced by

“public financial institution
or a scheduled commercial
bank”.

17.

Definition of

Includes permanent employee/

Excludes promoters and

“employee”

director of subsidiary or holding
an immediate relative of
company of the issuer.

promoter.

18.

Restrictions on

If issue opening and closing

If advertisement contains
advertisements
advertise-ment contained high-
information other than
lights, then the advertisement
the details specified in the
required to contain risk factors.

format for issue advertise-
ment, the advertisement
shall contain risk factors.

19.

Forfeiture of money

Open to interpretation.

Where the warrant holder
on unexercised
exercises his option to
warrants in preferen-
convert only some of the
tial issues
warrants he ld by him,
upfront payment made
against only such warrants
c an be adjusted. The
balance upfront payment
made
against
the
remaining une xe rcise d
warrants shall be forfeited.

20.

Outstanding conver-

Compulsory conversion of out-

Compulsory conversion of
tible instruments in
standing convertible instruments
all outstanding convertible
case of initial public
and other rights held by
instruments held by any
offer (IPO)

promoters or shareholders.

person.

21.

Minimum promoters’

Could be brought in by promoters/

Shall be brought in only \

Indian Banking Sector - Initial Public Offering Scenario & its Impact

51
contribution
persons belonging to promoter
by promoters whose
group/friends, relatives and associates
identity, photograph, etc
of promoters.

are disclosed in the offer
document.

22.

Issue period in case of

Issue period not clear in case of

Total issue period not to
public issues
revision in price band in book built
exceed 10 days, including
public issues.

any revision in price band.

23.

Timing of pre-issue

Pre-issue advertisement to be made

Pre-issue advertisement
advertisement for
immediately after receipt of obser-
to be made after
public issues
vations from the Board.

registering of prospectus/
re d herring prospe ctus
with

Re gistrar
of

Companie s
before
opening of the issue.

24.

Documents to be

Documents such as memorandum

Only checklist to be
attached with due
of association and articles of associa-
attached.

diligence certificate
tion of the company, audited balance
sheet, checklist for compliance with
the rescinded Guidelines etc.

25.

Group companies

The term “group companies” not

The term “group
explained.

companies” explained.

Source:SEBI (Disclosure and Investor Protection) Guidelines, 2000)

Exit opportunity to dissenting shareholders

69A

Applicability

(1)

The provisions of this Chapter shal apply to an exit offer made by the promoters
or shareholders in control of an issuer to the dissenting shareholders in terms of
section 13(8) and section 27(2) of the Companies Act, 2013, in case of change
in objects or variation in the terms of contract referred to in the prospectus.

(2)

The provisions of this Chapter shal not apply where there are neither identifiable
promoters nor shareholders in control of the listed issuer.

69B.

Definitions

For the purpose of this Chapter:

(a) “dissenting shareholders” means those shareholders who have voted against
the resolution for change in objects or variation in terms of a contract,
referred to in the prospectus of the issuer;

(b) “frequently traded shares” shall have the same meaning as assigned to it
in the Securities and Exchange Board of India (Substantial Acquisition of

Shares and Takeovers) Regulations, 2011.

(c) “relevant date” means date of the board meeting in which the proposal
for change in objects or variation in terms of a contract, referred to in the
prospectus is approved, before seeking shareholders’ approval.

52

Indian Banking Sector - Initial Public Offering Scenario & its Impact

69C.

Conditions for exit offer

The promoters or shareholders in control shall make the exit offer in accordance
with the provisions of this Chapter, to the dissenting shareholders, if:

(a) the public issue has opened after April 1, 2014; and

(b) the proposal for change in objects or variation in terms of a contract,
referred to in the prospectus is dissented by at least ten per cent of the
shareholders who voted in the general meeting; and

(c) the amount to be utilized for the objects for which the prospectus was
issued is less than seventy five per cent of the amount raised (including
the amount earmarked for general corporate purposes as disclosed in the
offer document).

69D.

Eligibility of shareholders for availing the exit offer

Only those dissenting shareholders of the issuer who are holding shares as on
the relevant date shal be eligible to avail the exit offer made under this Chapter.

69E.

Exit offer price

The ‘exit price’ payable to the dissenting shareholders shall be the highest of
the following:

(a) the volume-weighted average price paid or payable for acquisitions, whether
by the promoters or shareholders having control or by any person acting in
concert with them, during the fifty-two weeks immediately preceding the
relevant date;

(b) the highest price paid or payable for any acquisition, whether by the
promoters or shareholders having control or by any person acting in concert
with them, during the twenty-six weeks immediately preceding the relevant
date;

(c) the volume-weighted average market price of such shares for a period of
sixty trading days immediately preceding the relevant date as traded on
the recognised stock exchange where the maximum volume of trading in
the shares of the issuer are recorded during such period, provided such
shares are frequently traded;

(d) where the shares are not frequently traded, the price determined by the
promoters or shareholders having control and the merchant banker taking
into account valuation parameters including book value, comparable trading
multiples, and such other parameters as are customary for valuation of
shares of such issuers.

69F.

Manner of providing exit to dissenting shareholders

(1)

The notice proposing the passing of special resolution for changing the objects
of the issue and varying the terms of contract, referred to in the prospectus
shal also contain information about the exit offer to the dissenting shareholders.

(2)

In addition to the disclosures required under the provisions of section 102 of

Indian Banking Sector - Initial Public Offering Scenario & its Impact

53
the Companies Act, 2013 read with rule 32 of the Companies (Incorporation)

Rules, 2014 and rule 7 of the Companies (Prospectus and Al otment of Securities)

Rules, 2014 and any other applicable law, a statement to the effect that the
promoters or the shareholders having control shall provide an exit opportunity
to the dissenting shareholders shal also be included in the explanatory statement
to the notice for passing special resolution.

(3)

After passing of the special resolution, the issuer shall submit the voting results
to the recognised stock exchange(s), in terms of the provisions of regulation

44(3) of the Securities and Exchange Board of India (Listing Obligations and

Disclosure Requirements) Regulations, 2015.

(4)

The issuer shal also submit the list of dissenting shareholders, as certified by its
compliance officer, to the recognised stock exchange(s).

(5)

The promoters or shareholders in control, shall appoint a merchant banker
registered with the Board and finalize the exit offer price in accordance with
these regulations.

(6)

The issuer shall intimate the recognised stock exchange(s) about the exit offer
to dissenting shareholders and the price at which such offer is being given.

(7)

The recognised stock exchange(s) shal immediately on receipt of such intimation
disseminate the same to public within one working day.

(8)

To ensure security for performance of their obligations, the promoters or
shareholders having control, as applicable, shall create an escrow account which
may be interest bearing and deposit the aggregate consideration in the account
at least two working days prior to opening of the tendering period.

(9)

The tendering period shall start not later than seven working days from the
passing of the special resolution and shall remain open for ten working days.

(10)

The dissenting shareholders who have tendered their shares in acceptance of
the exit offer shal have the option to withdraw such acceptance till the date of
closure of the tendering period.

(11)

The promoters or shareholders having control shal facilitate tendering of shares
by the shareholders and settlement of the same through the recognised stock
exchange mechanism as specified by SEBI for the purpose of takeover, buy-
back and delisting.

(12)

The promoters or shareholders having control shall, within a period of ten
working days from the last date of the tendering period, make payment of
consideration to the dissenting shareholders who have accepted the exit offer.

(13)

Within a period of two working days from the payment of consideration, the
issuer shal furnish to the recognised stock exchange(s), disclosures giving details
of aggregate number of shares tendered, accepted, payment of consideration
and the post-offer shareholding pattern of the issuer and a report by the merchant
banker that the payment has been duly made to al the dissenting shareholders
whose shares have been accepted in the exit offer.

54

Indian Banking Sector - Initial Public Offering Scenario & its Impact

69G.

Offer not to exceed maximum permissible non-public shareholding

In the event, the shares accepted in the exit offer were such that the shareholding
of the promoters or shareholders in control, taken together with persons acting
in concert with them pursuant to completion of the exit offer results in their
shareholding exceeding the maximum permissible non-public shareholding,
the promoters or shareholders in control, as applicable, shall be required to
bring down the non-public shareholding to the level specified and within the
time permitted under Securities Contract (Regulation) Rules, 1957.”

RBI Framework

Master Direction- Issue and Pricing of shares by Private Sector Banks, Directions,

2016

In exercise of the powers conferred by 35 A of the Banking Regulation Act, 1949 the

Reserve Bank of India being satisfied that it is necessary and expedient in the public
interest so to do, hereby, issues the Directions hereinafter specified.

These Directions shall be called the Reserve Bank of India (Issue and Pricing of Shares
by Private Sector Banks) Directions, 2016. According to these Directions, “Private Sector

Banks”, means banks licensed to operate in India under Banking Regulation Act, 1949,
other than Urban Co-operative Banks, Foreign Banks and banks licensed under specific

Statutes.

It needs to be noted that banks generally issue shares by way of:

(i) Public Issues

(a) Initial Public Offer

(b) Further Public Offer

(ii) Private Placement

(a) Preferential issue

(b) Qualified Institutional Placement

(ii ) Rights Issue

(iv) Bonus Issue

Issue and Pricing of Shares- General Permission

A private sector bank, both listed and unlisted, has general permission for issue of
shares through all the routes mentioned in Section 4 above subject to the following
conditions:

(i) The issue of shares shall be in compliance with the provisions of Foreign

Exchange Management Act, 1999 (FEMA) and extant Foreign Investment Policy
of Government of India for Private Sector Banks.

(ii) The issue of shares shall be in compliance with the extant SEBI guidelines,
provisions of Companies Act and rules made there under.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

55

(ii ) The issue of shares through any of the routes shall have the approval from the
bank’s Board / AGM, as the case may be in compliance with the Companies

Act, 2013 /SEBI guidelines

(iv) Pricing of shares through any of the routes by listed banks shall be as per SEBI
formula, while for unlisted banks the pricing shall be as per Companies Act and
rules made there under.

(v) Allotment of shares to the investors under any of the routes shal be subject to
compliance with the extant RBI Master Directions dated November 19, 2015
on Prior approval for acquisition of shares or voting rights in private sector
banks which requires investors to obtain specific prior approval of RBI if the
proposed acquisition results in aggregate holding of 5 per cent or more of the
paid-up capital of the bank.

(vi) The specific regulatory limits permitted to the shareholders or the promoters /
promoter group shall not be breached on account of fresh subscription, own
entitlement, renouncement of rights or otherwise.

(vi ) On completion of al otment process subject to compliance with the stipulation
as at para 5 (v) above, if applicable, complete details of the issue shall be
reported to RBI viz. date of issue, details of the type of issue, issue size, details
of pricing, number and names of al ottees, post al otment shareholding position,
etc, along with a copy of Board / AGM Resolution and prospectus / offer
document in the format given in the schedule to these Directions.

At this juncture it is essential to discuss briefly regarding instructions / guidelines dealing with IPO issues covered by the following circulars issued by Reserve Bank of India
which now stands repealed-

(a) DBOD.No.BC.76/16.13.100/94 dated June 17, 1994

(b) DBOD.No.PSBS.BC.72/16.13.100/98-99 dated July 10, 1998

(c) DBOD.No.PSBD.BC.99/16.13.100/2004-05 dated June 25, 2005

(d) DBOD.No.PSBD.BC.92/16.13.100/2009-2010 dated April 20, 2010

(a) DBOD.No.BC.76/16.13.100/94 dated June 17, 1994

According to the captioned circular, banks in private sector, whose shares are
not listed on the stock exchanges, are needed to obtain prior approval of

Reserve Bank of India (RBI) for issue of all forms of shares, viz; public,
preferential, rights / special al otment to employees and bonus shares. However,
banks whose shares are listed on the stock exchanges need not seek prior
approval of RBI for issue of shares except bonus shares, which is to be linked
with rights / public issues by all the banks in private sector. The matter has
since been reviewed and issue and pricing of shares by private sector banks
would be governed by the following guidelines:

Initial Public Offers (IPOs):

(i) All banks should obtain RBI approval for IPOs. After listing on the stock
exchanges, banks are free to price their subsequent issues.

56

Indian Banking Sector - Initial Public Offering Scenario & its Impact

(ii) Issue price should be based on merchant banker's recommendation. There
need be no reference to the CCI formula for deciding on the pricing of
such issues.

Rights issues

RBI approval would not be required for rights issues by both listed and unlisted
banks.

Bonus issues

Private sector banks, both listed and unlisted, need not seek RBI's approval for
bonus issues. The issues would, however, be subject to SEBI's requirements on
issue of bonus shares, viz. bonus issues (a) should be made from free reserves
built out of genuine profits or share premium, (b) should not dilute the value or
rights of partly or fully convertible debentures, (c) should not be in lieu of
dividend and (d) should not be made unless all partly paid-up shares are fully
paid-up. Further, bonus issues may be issued without linkage to rights issues.

Preferential issue

All preferential issues required prior approval of RBI. Pricing of preferential
issues by listed banks was as per SEBI formula, while for unlisted banks the fair
value was required to be ascertained or determined by a chartered accountant
or a merchant banker.

Pricing of issues not requiring RBI approval

In case of pricing of issues where RBI approval was not needed, the pricing
process was required to espouse the SEBI Guidelines; in cases where prior
approval of RBI was required, pricing was required to take into consideration
both SEBI and RBI Guidelines.

(b) DBOD.No.PSBS.BC.72/16.13.100/98-99 dated July 10, 1998

According to the captioned circular private sector banks were required to seek
prior approval of Reserve Bank of India (RBI) for issue of all types of shares, i.e.

public, preferential, rights / special allotment to employees and bonus shares.

The above mentioned instructions were reviewed and the decision taken was
that in future, banks whose shares are listed on the stock exchanges need not
seek prior approval of RBI for issue of shares except bonus shares. However, it
was made mandatory that banks should acquiesce with pertinent regulations of
the Securities and Exchange Board of India (SEBI) and seek their approval,
wherever required.

Further, as and when issues of the above categories were made, banks were
required to furnish a report to Reserve Bank of India (RBI) providing complete
details of the issue. The circular stated that banks should continue to obtain
prior approval of RBI for issue of bonus shares.

(c) DBOD.No.PSBD.BC.99/16.13.100/2004-05 dated June 25, 2005

In continuation of the circular mentioned in point (b), all banks in private sector
were required to obtain approval of Reserve Bank of India (RBI) for issue of

Indian Banking Sector - Initial Public Offering Scenario & its Impact

57
shares through Initial Public Offers (IPOs) and preferential issues. Further, while
the banks were advised to follow certain prescriptions relating to pricing in
respect of Initial Public Offers (IPOs), Bonus issues and Preferential issues,

SEBI requirements in respect of Bonus issues have also been indicated.

SEBI introduced an additional capital raising route in May 2006 viz. Qualified

Institutional Placements (QIPs) that would enable listed companies to raise
funds from the domestic market. Consequently, many of the private sector
banks have been availing this route for raising capital. Since in terms of SEBI

Guidelines the allotments under QIP are on private placement basis, the QIP
issues have been treated as preferential issue of shares which requires RBI's
prior approval in terms of circular DBOD.No.PSBS.BC.79 /16.13.100/2001-

2002 dated March 20, 2002.

It was considered essential to vividly provide the approval mechanism with
reference to Qualified Institutional Placements (QIPs). Accordingly, the
guidelines pertaining to issue and pricing of shares by private sector banks was
amended to incorporate the Qualified Institutional Placements mode of raising
capital and also drawn a a reference to the stipulations communicated vide our
circular DBOD.No.PSBD.BC.99/16.13.100/2004-05 dated June 25, 2005 in
respect of Rights Issue.

The revised guidelines were as follows-

Initial Public Offers (IPOs)

(a) All banks were required to obtain RBI approvals for IPOs. After listing on
the stock exchanges, banks were free to price their subsequent issues.

(b) Issue price was required to be based on merchant banker ’s
recommendation. There was no need for taking reference of CCI formula
for deciding on the pricing of such issues.

Rights issues

RBI approval was not required for rights issues by both listed and unlisted
banks. However, banks need to adhere with the requirements that were laid
down in the circular DBOD.No.PSBD.BC.99/16.13.100/2004-05 dated June

25, 2005 on Rights Issue.

Bonus issues

Private sector banks both listed and unlisted, were not required to ask for RBI’s
approval for bonus issue. The issues were subject to SEBI’s requirements on
issue of bonus shares, viz. bonus issues (a) should be made from free reserves
built out of genuine profits or share premium, (b) should not dilute the value or
rights of partly or fully convertible debentures, (c) should not be in lieu of
dividend and (d) should not be made unless all partly paid-up shares are fully
paid-up. Further, bonus issues may be issued without linkage to rights issues.

Preferential issue

All preferential issues required prior approval of RBI. It was prescribed that
pricing of preferential issues by listed banks may be done as per SEBI formula,

58

Indian Banking Sector - Initial Public Offering Scenario & its Impact
while for unlisted banks the fair value may be ascertained by a chartered
accountant or merchant banker.

Qualified Institutional Placement

Private sector banks were required to approach RBI for prior “in principle”

approval in case of Qualified Institutional Placements. Banks were required to
approach RBI along with details of the issue once the bank’s Board approves
the proposal of raising capital through this route. Further, allotment to the
investors were subject to compliance with SEBI guidelines on QIPs and RBI
guidelines dated February 3, 2004 on acknowledgement of al otment / transfer
of shares. Once the allotment process was completed, the banks were also
required to provide details of the issue of RBI in the enclosed format (appended
below) for seeking post facto approval. This was irrespective of whether any
acquisition results in shareholding of 5% or more of the paid up capital of the
bank.

In case of pricing of issues were RBI approval was not required, pricing of issue
was required to be done as per SEBI guidelines. In cases, where prior approval
of RBI was required, pricing required to take into consideration both SEBI and

RBI guidelines.

(d) DBOD.No.PSBD.BC.92/16.13.100/2009-2010 dated April 20, 2010

As per the extant instructions, all banks in private sector were required to
obtain approval of Reserve Bank of India (RBI) for issue of shares through Initial

Public Offers (IPOs) and preferential issues. Further, while the banks were
advised to follow certain prescriptions relating to pricing in respect of Initial

Public Offers (IPOs), Bonus issues and Preferential issues, SEBI requirements in
respect of Bonus issues have also been indicated.

SEBI had introduced an additional capital raising route in May 2006 viz. Qualified

Institutional Placements (QIPs) that would enable listed companies to raise
funds from the domestic market. Consequently, many of the private sector
banks have been availing this route for raising capital. Since in terms of SEBI

Guidelines the allotments under QIP are on private placement basis, the QIP
issues have been treated as preferential issue of shares which requires RBI's
prior approval in terms of circular DBOD.No.PSBS.BC.79 /16.13.100/2001-

2002 dated March 20, 2002.

It was considered essential to clearly spell out the approval mechanism in
respect of Qualified Institutional Placements (QIPs). Accordingly, the guidelines
in respect of issue and pricing of shares by private sector banks were revised to
incorporate the Qualified Institutional Placements mode of raising capital and
also draw a reference to the stipulations communicated vide our circular

DBOD.No.PSBD.BC.99/16.13.100/2004-05 dated June 25, 2005 in respect of

Rights Issue.

The revised guidelines were as follows-

Initial Public Offers (IPOs)

(a) All banks were required to procure RBI approval for IPOs. After listing on
the stock exchanges, banks were free to price their subsequent issues.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

59

(b) Issue price was required to be based on merchant banker ’s
recommendation. However, there was no need to refer the CCI formula
for determining the pricing of such issues.

Rights issues

RBI approval was not required for rights issues by both listed and unlisted
banks. However, banks were required to comply with the requirements that
were laid down in the circular DBOD.No.PSBD.BC.99/16.13.100/2004-05 dated

June 25, 2005 on Rights Issue.

Bonus issues

Private sector banks, both listed and unlisted were not required to seek RBI’s
approval for bonus issues. The issues were however subject to SEBI’s
requirements on issue of bonus shares, i.e. bonus issues a) were required to be
made from free reserves built out of genuine profits or share premium, b)

should not dilute the value or rights of partly or fully convertible debentures,

(c) should not be in lieu of dividend and (d) should not be made unless all
partly paid-up shares are fully paid-up. Further, bonus issues may be issued
without linkage to rights issues.

Preferential issue

All preferential issues required prior approval of RBI. Pricing of preferential
issues by listed banks was to be done as per SEBI formula, while for unlisted
banks the fair value was to be determined by a chartered accountant or a
merchant banker.

Qualified Institutional Placement (QIP)

Private sector banks were required to approach RBI for prior 'in principle' approval
in case of Qualified Institutional Placements. Banks required to approach RBI
along with details of the issue once the bank’s Board approves the proposal of
raising capital through this route. Further, allotment to the investors were subject
to provide complete details of the issue to RBI in the prescribed format

(appended below) for seeking post facto approval. This would be irrespective
of whether any acquisition results in shareholding of 5% or more of the paid
up capital of the bank.

Format for furnishing the details of QIBs

Sr.

Name of

No. of

% of

No. of

% of

Aggregate

% of total

No.

the
shares
total
shares
shares
no. of
paid-up

Allottees
held prior
paid-up
approved
now
shares
shares
to allot-
share for
allot-
allotted

(post

(i.e. aggregate
ment
prior
ment
to paid
issue)

percentage

(A)

to allot-

(C)

up

(A + C)

shareholding
ment
shares
post QIP

(B)

(D)

issue)

(B + D)

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Indian Banking Sector - Initial Public Offering Scenario & its Impact

Pricing of issues not requiring RBI approval

In case of pricing of issues where RBI approval was not needed, pricing of issues was
required to be done as per SEBI guidelines; in cases where prior approval of RBI was
required, pricing was required to take into consideration both SEBI and RBI guidelines.

Listing Obligation and Disclosure Requirements, Regulations, 2015

At the time of listing of the securities, the issuer is required to ink a standard listing agreement with the stock exchanges. The listing agreement mandates certain periodic disclosures and
disclosures pertaining to price-sensitive information to be made by the issuer to the stock
exchanges, which is also to be made available on the website of the issuer.

In order to ensure compliance by the corporate houses of the mentioned listing
agreement, SEBI have introduced Listing Obligations and Disclosure Requirements

Regulations, 2015, which is like a one regulation to rule them all. While some of these
conditions can be observed in the Securities and Exchange Board of India (Issue of

Capital and Disclosure Requirements), 2009, the majority can be found in the listing
agreement between the company and the stock exchange on which the securities of
the company are listed.

At this juncture, it is essential to refer Section 21 of the Securities Contracts (Regulation)

Act, 1956, which provides a foundation of listing agreement. According to this Section,
when securities are listed on any recognized stock exchange, the issuing company
should adhere to the conditions of the listing agreement of that stock exchange. Thus,
a listing agreement is a statutorily mandated contract, between the listed company and
the stock exchange where it is listed, which sets out different obligations of the company
to protect the interests of the public shareholders and the capital markets largely.

The LODR Regulations serve to consolidate and streamline the provisions of the various
listing agreements in operation for various segments of the capital markets, like equity
listings, listing of debt instruments, units of mutual funds, and any other securities that

SEBI may specify. Further, by issuing these regulations, the SEBI has made an endeavour
to avert overlap between regulations, as there used to be with listing agreements.

All pre-listing requirements have been taken out from the LODR Regulations. They
only deal with post-listing requirements. The LODR Regulations have been divided into
categories. The substantive provisions are included in the main body of the regulations
and the procedural requirements are incorporated in the shape of Schedules to the
regulations. The LODR Regulations also capture the corporate governance principles
found in Clause 49 of SEBI’s Model Listing Agreement.

Principles governing disclosures and obligations of listed entity

Since this thesis report undertakes a study of Banks, Mutual Funds and Non-Banking

Finance Companies, which are listed on various stock exchanges, in view of this, it is
essential to delve deep into the principles governing disclosures and obligations of the
mentioned financial institutions.

(a) Information shall be prepared and disclosed in accordance with applicable
standards of accounting and financial disclosure.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

61

(b) The listed entity shall implement the prescribed accounting standards in letter
and spirit in the preparation of financial statements taking into consideration
the interest of all stakeholders and shall also ensure that the annual audit is
conducted by an independent, competent and qualified auditor.

(c) The listed entity shall refrain from misrepresentation and ensure that the
information provided to recognised stock exchange(s) and investors is not
misleading.

(d) The listed entity shall provide adequate and timely information to recognised
stock exchange(s) and investors.

(e) The listed entity shall ensure that disseminations made under provisions of
these regulations and circulars made there under, are adequate, accurate, explicit,
timely and presented in a simple language.

(f) Channels for disseminating information shal provide for equal, timely and cost
efficient access to relevant information by investors.

(g) The listed entity shal abide by all the provisions of the applicable laws including
the securities laws and also such other guidelines as may be issued from time
to time by the Board and the recognised stock exchange(s) in this regard and as
may be applicable.

(h) The listed entity shall make the specified disclosures and follow its obligations
in letter and spirit taking into consideration the interest of all stakeholders.

(i) Filings, reports, statements, documents and information which are event based
or are filed periodical y shall contain relevant information.

(j) Periodic filings, reports, statements, documents and information reports shall
contain information that shall enable investors to track the performance of a
listed entity over regular intervals of time and shal provide sufficient information
to enable investors to assess the current status of a listed entity.

Corporate Governance Principles

The listed entity which has listed its specified securities shall comply with the corporate
governance provisions as specified below:

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Indian Banking Sector - Initial Public Offering Scenario & its Impact

(a) The rights of shareholders : The listed entity shal seek to protect and facilitate the exercise of the following rights of shareholders:

(i) right to participate in, and to be sufficiently informed of, decisions
concerning fundamental corporate changes.

(ii) opportunity to participate effectively and vote in general shareholder
meetings.

(ii ) being informed of the rules, including voting procedures that govern
general shareholder meetings.

(iv) opportunity to ask questions to the board of directors, to place
items on the agenda of general meetings, and to propose resolutions,
subject to reasonable limitations.

(v) effective shareholder participation in key corporate governance
decisions, such as the nomination and election of members of board
of directors.

(vi) exercise of ownership rights by al shareholders, including institutional
investors.

(vi ) adequate mechanism to address the grievances of the shareholders.

(vii ) protection of minority shareholders from abusive actions by, or in
the interest of, controlling shareholders acting either directly or
indirectly, and effective means of redress.

(b) Timely information : The listed entity shall provide adequate and timely
information to shareholders, including but not limited to the following:

(i) sufficient and timely information concerning the date, location
and agenda of general meetings, as wel as full and timely information
regarding the issues to be discussed at the meeting.

(ii) capital structures and arrangements that enable certain shareholders
to obtain a degree of control disproportionate to their equity ownership.

(ii ) rights attached to all series and classes of shares, which shall be
disclosed to investors before they acquire shares.

(c) Equitable treatment : The listed entity shall ensure equitable treatment of
al shareholders, including minority and foreign shareholders, in the fol owing
manner:

(i) All shareholders of the same series of a class shall be treated equally.

(ii) Effective shareholder participation in key corporate governance
decisions, such as the nomination and election of members of board of
directors, shall be facilitated.

(ii ) Exercise of voting rights by foreign shareholders shall be facilitated.

(iv) The listed entity shal devise a framework to avoid insider trading and
abusive self-dealing.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

63

(v) Processes and procedures for general shareholder meetings shall allow
for equitable treatment of all shareholders.

(vi) Procedures of listed entity shal not make it unduly difficult or expensive
to cast votes.

(d) Role of stakeholders in corporate governance : The listed entity shall
recognise the rights of its stakeholders and encourage co-operation between
listed entity and the stakeholders, in the following manner:

(i) The listed entity shall respect the rights of stakeholders that are
established by law or through mutual agreements.

(ii) Stakeholders shall have the opportunity to obtain effective redress
for violation of their rights.

(ii ) Stakeholders shall have access to relevant, sufficient and reliable
information on a timely and regular basis to enable them to participate
in corporate governance process.

(iv) The listed entity shall devise an effective whistle blower mechanism
enabling stakeholders, including individual employees and their
representative bodies, to freely communicate their concerns about il egal
or unethical practices

(e) Disclosure and transparency : The listed entity shall ensure timely and
accurate disclosure on al material matters including the financial situation,
performance, ownership, and governance of the listed entity, in the fol owing
manner:

(i) Information shall be prepared and disclosed in accordance with the
prescribed standards of accounting, financial and non-financial disclosure.

(ii) Channels for disseminating information shall provide for equal,
timely and cost efficient access to relevant information by users.

(ii ) Minutes of the meeting shall be maintained explicitly recording
dissenting opinions, if any.

(f) Responsibilities of the board of directors : The board of directors of the
listed entity shall have the following responsibilities:

(i) Disclosure of information:

(1) Members of board of directors and key managerial personnel
shall disclose to the board of directors whether they, directly,
indirectly, or on behalf of third parties, have a material interest in
any transaction or matter directly affecting the listed entity.

(2) The board of directors and senior management shall conduct
themselves so as to meet the expectations of operational
transparency to stakeholders while at the same time maintaining

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Indian Banking Sector - Initial Public Offering Scenario & its Impact
confidentiality of information in order to foster a culture of good
decision-making.

(ii) Key functions of the board of directors-

(1) Reviewing and guiding corporate strategy, major plans of action,
risk policy, annual budgets and business plans, setting performance
objectives, monitoring implementation and corporate
performance, and overseeing major capital expenditures,
acquisitions and divestments.

(2) Monitoring the effectiveness of the listed entity’s governance
practices and making changes as needed.

(3) Selecting, compensating, monitoring and, when necessary,
replacing key managerial personnel and overseeing succession
planning.

(4) Aligning key managerial personnel and remuneration of board of
directors with the longer term interests of the listed entity and
its shareholders.

(5) Ensuring a transparent nomination process to the board of directors
with the diversity of thought, experience, knowledge, perspective
and gender in the board of directors.

(6) Monitoring and managing potential conflicts of interest of
management, members of the board of directors and shareholders,
including misuse of corporate assets and abuse in related party
transactions.

(7) Ensuring the integrity of the listed entity’s accounting and financial
reporting systems, including the independent audit, and that
appropriate systems of control are in place, in particular, systems
for risk management, financial and operational control, and
compliance with the law and relevant standards.

(8) Overseeing the process of disclosure and communications.

(9) Monitoring and reviewing board of director’s evaluation framework.

(ii ) Other responsibilities:

(1) The board of directors shall provide strategic guidance to the listed
entity, ensure effective monitoring of the management and
shall be accountable to the listed entity and the shareholders.

(2) The board of directors shall set a corporate culture and the
values by which executives throughout a group shall behave.

(3) Members of the board of directors shall act on a fully
informed basis, in good faith, with due diligence and care,
and in the best interest of the listed entity and the shareholders.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

65

(4) The board of directors shall encourage continuing directors
training to ensure that the members of board of directors are kept
up to date.

(5) Where decisions of the board of directors may affect different
shareholder groups differently, the board of directors shal treat all
shareholders fairly.

(6) The board of directors shall maintain high ethical standards and
shall take into account the interests of stakeholders.

(7) The board of directors shall exercise objective independent
judgement on corporate affairs.

(8) The board of directors shall consider assigning a sufficient number
of non-executive members of the board of directors capable of
exercising independent judgement to tasks where there is a
potential for conflict of interest.

(9) The board of directors shal ensure that, while rightly encouraging
positive thinking, these do not result in over-optimism that either
leads to significant risks not being recognised or exposes the
listed entity to excessive risk.

(10) The board of directors shall have ability to ‘step back’ to assist
executive management by chal enging the assumptions underlying:

strategy, strategic initiatives (such as acquisitions), risk appetite,
exposures and the key areas of the listed entity’s focus.

(11) When committees of the board of directors are established, their
mandate, composition and working procedures shall be well
defined and disclosed by the board of directors.

(12) Members of the board of directors shall be able to commit
themselves effectively to their responsibilities.

(13) In order to fulfil their responsibilities, members of the board of
directors shall have access to accurate,relevant and timely
information.

(14) The board of directors and senior management shal facilitate the
independent directors to perform their role effectively as a member
of the board of directors and also a member of a committee of
board of directors.

(3) In case of any ambiguity or incongruity between the principles and relevant
regulations, the principles specified in this Chapter shall prevail.

Common Obligations of Listed Entities

General obligation of compliance

5. The listed entity shall ensure that key managerial personnel, directors, promoters

66

Indian Banking Sector - Initial Public Offering Scenario & its Impact
or any other person dealing with the listed entity, complies with responsibilities or
obligations, if any, assigned to them under these regulations.

6. Compliance Officer and his Obligations

(1) A listed entity shall appoint a qualified company secretary as the compliance
officer.

(2) The compliance officer of the listed entity shall be responsible for-

(a) ensuring conformity with the regulatory provisions applicable to the listed
entity in letter and spirit.

(b) co-ordination with and reporting to the Board, recognised stock exchange(s)

and depositories with respect to compliance with rules, regulations and
other directives of these authorities in manner as specified from time to
time.

(c) ensuring that the correct procedures have been followed that would
result in the correctness, authenticity and comprehensiveness of the
information, statements and reports filed by the listed entity under these
regulations.

(d) monitoring email address of grievance redressal division as designated by
the listed entity for the purpose of registering complaints by investors:

Provided that the requirements of this regulation shall not be applicable
in the case of units issued by mutual funds which are listed on recognised
stock exchange(s) but shal be governed by the provisions of the Securities and

Exchange Board of India (Mutual Funds) Regulations, 1996.

7. Share Transfer Agent

(1) The listed entity shal appoint a share transfer agent or manage the share
transfer facility in-house:

Provided that, in the case of in-house share transfer facility, as and when
the total number of holders of securities of the listed entity exceeds one
lakh, the listed entity shall either register with the Board as a Category

II share transfer agent or appoint Registrar to an issue and share transfer
agent registered with the Board.

(2) The listed entity shall ensure that all activities in relation to both physical
and electronic share transfer facility are maintained either in house or by Registrar
to an issue and share transfer agent registered with the Board.

(3) The listed entity shall submit a compliance certificate to the exchange, duly
signed by both the compliance officer of the listed entity and the authorised
representative of the share transfer agent, wherever applicable, within one
month of end of each half of the financial year, certifying compliance with
the requirements of sub- regulation (2).

(4) In case of any change or appointment of a new share transfer agent, the listed
entity shal enter into a tripartite agreement between the existing share transfer

Indian Banking Sector - Initial Public Offering Scenario & its Impact

67
agent, the new share transfer agent and the listed entity, in the manner
as specified by the Board from time to time:

Provided that in case the existing share transfer facility is managed in-house,
the agreement referred above shall be entered into between the listed entity
and the new share transfer agent.

(5) The listed entity shal intimate such appointment, referred to in sub-regulation

(4), to the stock exchange(s) within seven days of entering into the agreement.

(6) The agreement referred to in sub-regulation (4) shal be placed in the subsequent
meeting of the board of directors:

Provided that the requirements of this regulation shall not be applicable to the
units issued by mutual funds that are listed on recognised stock exchange(s).

8. Co-operation with intermediaries registered with the Board.

The listed entity, wherever applicable, shall co-operate with and submit correct
and adequate information to the intermediaries registered with the Board such
as credit rating agencies, registrar to an issue and share transfer agents, debenture
trustees etc., within timelines and procedures specified under the Act, regulations
and circulars issued there under:

Provided that requirements of this regulation shall not be applicable to the units
issued by mutual funds listed on a recognised stock exchange(s) for which the
provisions of the Securities and Exchange Board of India (Mutual Funds) Regulations,

1996 shall be applicable.

9. Preservation of documents

The listed entity shall have a policy for preservation of documents, approved by its
board of directors, classifying them in at least two categories as fol ows- (a) documents
whose preservation shall be permanent in nature ; (b)documents with preservation
period of not less than eight years after completion of the relevant transactions:

Provided that the listed entity may keep documents specified in clauses (a)

and (b) in electronic mode.

10. Filing of information

(1) The listed entity shall file the reports, statements, documents, filings and any
other information with the recognised stock exchange(s) on the electronic
platform as specified by the Board or the recognised stock exchange(s).

(2) The listed entity shall put in place infrastructure as required for compliance
with sub-regulation (1).

11. Scheme of Arrangement

The listed entity shall ensure that any scheme of arrangement /amalgamation/
merger /reconstruction /reduction of capital etc. to be presented to any Court or

Tribunal does not in any way violate, override or limit the provisions of securities
laws or requirements of the stock exchange(s):

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Indian Banking Sector - Initial Public Offering Scenario & its Impact

Provided that this regulation shall not be applicable for the units issued by

Mutual Fund which are listed on a recognised stock exchange(s).

12. Payment of dividend or interest or redemption or repayment

The listed entity shall use any of the electronic mode of payment facility approved
by the Reserve Bank of India, in the manner specified in Schedule I, for the payment
of the fol owing: (a) dividends; (b) interest; (c) redemption or repayment amounts.

Provided that where it is not possible to use electronic mode of payment,

‘payable-at-par’ warrants or cheques may be issued.

Provided further that where the amount payable as dividend exceeds one thousand
and five hundred rupees, the ‘payable-at-par’ warrants or cheques shal be sent by
speed post.

13. Grievance Redressal Mechanism

(1) The listed entity shall ensure that adequate steps are taken for expeditious
redressal of investor complaints.

(2) The listed entity shall ensure that it is registered on the SCORES platform
or such other electronic platform or system of the Board as shal be mandated
from time to time, in order to handle investor complaints electronically in the
manner specified by the Board.

(3) The listed entity shall file with the recognised stock exchange(s) on a quarterly
basis, within twenty one days from the end of each quarter, a statement
giving the number of investor complaints pending at the beginning of the
quarter, those received during the quarter, disposed of during the quarter
and those remaining unresolved at the end of the quarter.

(4) The statement as specified in sub-regulation (3) shall be placed, on quarterly
basis, before the board of directors of the listed entity.

14. Fees and other charges to be paid to the recognized stock exchange(s)

The listed entity shall pay all such fees or charges, as applicable, to the recognised
stock exchange(s), in the manner specified by the Board or the recognised stock
exchange(s).

Disclosure in Corporate Governance Report

The following disclosures needs to be made in the section on corporate governance of
the annual report of the listed entities. Thus these rules are applicable to listed banking,
asset management / mutual funds and non-banking financial companies also.

(i) A brief statement on listed entity's philosophy on code of governance.

(ii) Information, as prescribed in the Regulations, about the following:

(a) Board of Directors

(b) Audit Committee

(c) Nomination and Remuneration Committee

Indian Banking Sector - Initial Public Offering Scenario & its Impact

69

(d) Remuneration of Directors

(e) Stakeholders’ grievance committee

(f) General body meetings

(g) Means of communication

(h) General shareholder information

(ii ) Other Disclosures

(a) Disclosures on materially significant related party transactions that may
have potential conflict with the interests of listed entity at large;

(b) Details of non-compliance by the listed entity, penalties imposed on the
listed entity by stock exchange(s) or the board or any statutory authority,
on any matter related to capital markets, during the last three years;

(c) Details of establishment of vigil mechanism, whistle blower policy, and
affirmation that no personnel has been denied access to the audit
committee;

(d) Details of compliance with mandatory requirements and adoption of the
nonmandatory requirements;

(e) Web link where policy for determining 'material' subsidiaries is disclosed;

(f) Web link where policy on dealing with related party transactions;

(g) Disclosure of commodity price risks and commodity hedging activities.

Where there is any non-compliance of any requirement of corporate governance
report, reasons thereof also needs to be disclosed.

Quarterly / Half Yearly / Annual Compliances under SEBI Listing Regulations

2015 (LODR)

Regulation

Compliance

Regulation 7 (3) – Compliance Certificate

The listed entity shall submit a
compliance certificate to the
exchange, duly signed by both
that is by the compliance
officer of the listed entity and
the authorized representative
of the share transfer agent,
wherever applicable, within
one month of end of each
half of the financial year,
certifying maintaining physical

& electronic transfer facility

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Indian Banking Sector - Initial Public Offering Scenario & its Impact
either in house or RTA as
applicable.

Regulation 13 (3) - Statement of Investor

The listed entity shall file with
complaints.

the recognised stock exchange(s)

on a quarterly basis, within
twenty one days from the
end of each quarter, a
statement giving the number
of investor complaints pending
at the beginning of the quarter,
those received during the
quarter, disposed of during the
quarter and those remaining
unresolved at the end of the
quarter.

Regulation 27 (2) - Corporate Governance.

The listed entity shall submit a
quarterly compliance report on
corporate governance within
fifteen days from close of
the quarter. Further it may be
noted that it shall not apply, in
respect of - (a) the listed entity
having paid up equity share
capital not exceeding rupees
ten crore and net worth not
exceeding rupees twenty five
crore, as on the last day of the
previous financial year: Provided
that where the provisions of the
regulations specified in this
regulation becomes applicable
to a listed entity at a later date,
such listed entity shall comply
with the requirements those
regulations within six months from
the date on which the provisions
became applicable to the listed
entity. (b) the listed entity which
has listed its specified securities
on the SME Exchange.

Regulation 31 - Shareholding Pattern

(1) The listed entity shall submit
to the stock exchange(s) a
statement showing holding of
securities and shareholding

Indian Banking Sector - Initial Public Offering Scenario & its Impact

71
pattern separately for each
class of securities, in the format
specified by the Board from
tim e to time within the
following timelines –

–
one day prior to listing
of its securities on the
stock exchange(s);

–
on a quarterly basis,
within twenty one days
from the end of each
quarter;

–
within ten days of any
capital restructuring of
the listed entity resulting
in a change exceeding two
per cent of the total paid-
up share capital:

Provided that in case of listed
entities which have listed their
specified securities on SME

Exc hange,
the
above
statements shall be submitted
on a half yearly basis within
twenty one days from the end
of each half year.

Regulation 33 - Financial Results

The listed entity shall submit
quarterly and year-to-date
standalone financial results to
the stock exchange within
forty-five days of end of
each quarter, (other than last
quarter) along with Limited

Review Report or Audit Report
as applicable.

The listed entity shall submit
annual audited standalone
financial results for the financial
year, within sixty days from
the end of the financial year
along with the audit report
and statement on impact of
audit qualification (applicable

72

Indian Banking Sector - Initial Public Offering Scenario & its Impact
only) for audit report with
modified opinion. Provided that
if the listed entity has
subsidiaries, it shall, while
submitting annual audited
standalone financial results also
submit a nnual audited
consolidated financial results
along with the audit report and
statement on impact of audit
qualification (applicable only)

for audit report with modified
opinion.

For the purpose of this
regulations , any reference to

"quarterly/quarter" in case of
listed entity which has listed
their specified securities on

SME Exchange shall be
respectively read as "half
yearly/half year".

Regulation 34 – Annual Report

The listed entity shall submit
the annual report to the stock
exchange within twenty one
working days of it being
approved and adopted in the
annual general meeting as per
the provisions of the

Companies Act, 2013. In case
of top five hundred listed
entities based on market
capitalization (calculated as on

March 31 of every financial
year), business responsibility
report is required to include in

Annual Report is compulsory as
per prescribed Form at.

However in case of other than
top 500 listed companies based
on market capitalization and
listed entities which have listed
their specified securities on

SME Exchange, may include
these business responsibility
reports on a voluntary basis.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

73

Regulation 40 (9) – Certificate from Practicing

The listed entity shall ensure

Company Secretary.

that the share transfer agent
and/or the in-house share
transfer facility, as the case may
be, produces a certificate from
a practicing company secretary
within one month of the
end of each half of the
financial year, certifying that
al certificates have been issued
within thirty days of the date
of lodgment for transfer,
sub-division, consolidation,
renewal,
exchange
or
endorsement of cal s/al otment
monies.

Regulation 42(2) Record date

The listed entity shall intimate
the record date at least 7 clear
working days in advance
excluding the date of
intimation and record date
specifying the purpose of
record date.

In case of record date for
declaring dividend and/or cash
bonus at lea st 5 cle ar
working days in advance.

However, the grey area in Listing Obligations and Disclosure Requirements Regulations,

2015 is that it does not address the issues the industry is grappling with. In order to
address the issue, SEBI decided to release the FAQ on LODR on 8th of January, 2016.

This three page FAQ issued by SEBI fetched answers to the questions that have been
agitated and discussed at length in nearly dozens of workshops all over the country.

Most of the answers are too palpable. Apart from clarifying on the Regulatison 30 (9) of
the Regulations, which relates to disclosure of material events of the subsidiary of a
listed entity, the FAQs are rather a keepsake and far from addressing any of the issues
of the industry is witnessing.

Some of the vague provisions of LODR, which calls for some clarity from the capital
market regulator, SEBI-

(1) The applicability of the Business Responsibility Report- whether the reporting
requirement is from FY2016-17 or FY2017-18;

(2) The applicability of the requirement of disclosing the acquisition of 5% of
shares/voting rights in a company or further +/- 2% change by a NBFC or a

74

Indian Banking Sector - Initial Public Offering Scenario & its Impact
banking company when such acquisition is pursuant to any CDR/SDR schemes
floated by RBI – the same should be exempted by way of a notification;

(3) For the purpose of Regulation 30, while the qualitative definition of materiality
of event is given, the quantitative definition of the same is left to be inferred
from international standards and thumb rule;

(4) Regarding “archival policy” – Except for a mention in regulation 30(8), the

Regulations nowhere provides about preparing/adopting of an archival policy.

Therefore a listed entity apparently has to have an archival policy. However,
there is no clarity on the point that if such entity already have an archival policy
in place, whether streamlining the same in line with the regulations wil suffice
or will such entity have to prepare a new archival policy altogether.

(5) The SEBI circular regarding disclosure of shareholding of a listed entity mentions
about disclosing of details of “NBFCs registered with RBI” – it is not possible
for a listed entity to know which all shareholders who are NBFCs are registered.

***

Indian Banking Sector - Initial Public Offering Scenario & its Impact

75

Chapter - 5

Growth Prospects for IPO

Economic and Business Environment Scenario

The surge in IPO to a great extent depends upon the economic health of a nation. In
view of this, it is essential to study the current economic and business environment
scenario prevailing in India as a positive economic milieu will stoke up the IPO issues of
most of the sectors and banking sector in particular.

The year 2016 witnessed buoyancy as in first nine months 21 IPOs cutting across
sectors have procured INR 19,379.10 crore, the highest for the January – September
period since 2007, when 81 IPOs raised INR 28,993.65 crore.

It can be observed from the above exhibit that even a banking IPO (RBL Bank) have
figured in the top 10 IPOs according to the listing gains. Similarly at the beginning of

July 2016, integrated business service provider Quess Corporation Limited’s INR 400
crore IPO cajoled subscriptions that amounted to 144.3 times the issue size, registering
the fifth highest overall subscription (in percentage terms) for any IPO since 2000. Out
of the 21 IPOs that hit the Indian primary market in the first nine months of 2016 and
went on to list on the exchanges, merely six failed to generate positive returns to
investors on listing.

With the secondary market mirroring positive sentiment, there have been several new
issuances in the primary market in the recent past and many are there in the pipeline.

The Indian capital market especial y the primary market, is estimated to have an extremely
busy schedule in financial year 2018. It is to be noted that in the recent past the outlook
of investors pertaining to IPO have changed from merely being a fund raising alternative
for corporate houses to being an excellent opportunity for them to foray into the market
or good way to earn decent market returns. Going by the recent performances of initial
public offerings, it would not be incorrect to say primary issues can hold a significant
portion of overall investments in the near future. It is heartening to note that the IPO
market is heading for a rush with numerous high-profile names like, CDSL, UTI Mutual

Fund, NSE, Indian Renewable Energy Development Agency (IREDA), Reliance Nippon

Life Asset Management, HDFC Life and SBI Life to name a few, lining up issues.

It is noteworthy that year 2016 was the third-best since 1989 for initial public offers

(IPOs) in terms of total funds raised, even though the number of public issues was far
less compared with many of the earlier years. Incidentally, the funds raised in 2016
were almost double that of the previous calendar year when a total of 21 issues mobilised

Rs.13,614.08 crore. Merchant bankers attribute the trend to the strong profile of the
companies that forayed the capital market in 2016 along with the huge appetite that
both foreign and domestic investors showed for new paper floated by Indian companies

75

76

Indian Banking Sector - Initial Public Offering Scenario & its Impact
even as the secondary markets turned volatile in the last few months. In all 83 IPOs hit

Indian capital market in 2016 and total of $ 3.8 billion was raised and the activity looks
set to remain strong driven by a combination of high investor confidence and regulatory
reforms, says an EY report.

Globally, entrepreneurial and investor confidence was "challenged" throughout 2016 by heightened political and economic uncertainty. As a result, the number of IPOs in 2016
fell 16 per cent year-over-year to 1,055 and capital raised was down by 33 per cent to

USD 132.5 bil ion. India was the standout performer at the country level, recording a 38
per cent increase in deal volume and a 79 per cent surge in proceeds raised, driven by
stronger economic fundamentals and a pro-business political regime.

The Indian economy has sustained a macro-economic ecosystem of relatively lower
inflation, fiscal discipline and moderate current account deficit coupled with broadly
stable rupee-dollar exchange rate. The Economic Survey 2016-17 presented in the

Parliament by the Union Finance Minister stated that such a sustenance is despite global
sluggishness. According to the advance estimates released by the Central Statistics

Office, the growth rate of GDP at constant market prices for the year 2016-17 is placed
at 7.1%, as against 7.6% in 2015-16. This estimate is based mainly on information for
the first seven to eight months of the financial year. Government final consumption
expenditure is the major driver of GDP growth in the current year. For 2017-18, it is
expected that the growth would return to normal as the new currency notes in required
quantities come back into circulation and as follow-up actions to demonetisation are
taken. On balance, there is a likelihood that Indian economy may recover back to 6

¾% to 7 ½% in 2017-18. Several financial sector companies are looking to launch
initial public offerings (IPO) in 2017-18 . In the first six months of 2017, the primary
markets have witnessed a buoyant phase, with fund raising through initial public offers

(IPO) of equity having surpassed INR 10,000 crore. During January-June,2017, around
a dozen firms, including two issues which are set to launch, raised INR 11,783 crore
through IPOs, show data provided by Prime Database.

According to market participants, superior returns yielded by newly listed companies
and overall buoyancy in the secondary markets are key reasons for the record fund
raising in 2017. The BSE IPO index, a guage of newly listed companies, has gained a
little more than 30 per cent in 2017 so far. While, the benchmark BSE Sensex has gone
up 18 per cent.

Bankers are expecting equity capital market deals worth a record $20 billion (INR 1.3
lakh crore) to be struck in FY17, including partial privatisations by the government of

India, with the pace having been set by six companies that raised about Rs 22,300 crore
through Qualified Institutional Placements (QIPs) since April 1, 2017. Initial public
offers (IPOs), fol ow-on pubic offers (FPOs) and QIPs will likely help fund-raising efforts
hit a new high amid the continuing equity boom. QIPs set a record in FY10, raising Rs

40,000 crore, while that for IPOs was Rs 41,000 crore in FY 08. That was the record for
overall equity capital market (ECM) deals in India as well, with 122 companies raising
about Rs 67,000 crore through IPOs and FPOs, according to Prime Database. Piramal

Enterprises, Cadila Healthcare, Federal Bank, Hindustan Copper, Andhra Bank, Jammu
and Kashmir Bank, JSW Steel and others are planning to raise funds through QIPs. State

Bank of India’s recent Rs 15,000-crore QIP, the largest ever such placement in India,

Indian Banking Sector - Initial Public Offering Scenario & its Impact

77
saw demand from several foreign portfolio investors across geographies, domestic
institutional buyers and top individual shareholders who hold significant portfolios in

India.

From the above exhibit it is encouraging to see that two banks have also figured in the
list of further issue of capital. Thus, it can said without an iota of doubt that the wave of
optimism are touching the shores of Indian capital market.

A big infrastructure spending push, the boost to affordable housing and a fiscal deficit
target of 3.2% of gross domestic product announced in the Union budget came as a big
boost to banks. A tax concession on provisions for bad loans also came as a relief for

Indian banks which are struggling with gross non-performing assets of around Rs. 6.7
tril ion. Banking stocks ral ied more than the broader market with the BSE Bankex gaining

2.7%, a full percentage point more than the Sensex.

Other measures that will boost credit growth include affordable housing projects being
given infrastructure status and the highest target for farm credit at Rs. 10 trillion. After
the government’s move to withdraw Rs. 500 and Rs. 1,000 notes on 8 November,

2017 bank credit growth has fallen to around 5%, the lowest in a couple of decades.

Another positive announcement for the banking sector was the government’s
comparatively tame net market borrowing figure of Rs. 3.48 trillion in 2017-18, as
compared with Rs. 4.25 trillion in the current year. Capital expenditure data provided
in the budget document reveals that the gross market borrowing is set at Rs. 5.8 trillion
for the new financial year, which is approximately the same as 2016-17. Capital infusion
of Rs. 10,000 crore for recapitalization of PSU Banks wil be a morale booster in scenarios
where Banks are in dire need of capital for Credit growth and Basel III compliance.

Further, the deductions al owed for NPA provisions made by banks have been increased
upto 8.5% of the income which will act as a breather in supplementing profitability of
banks.

In the budget 2017, the Union Finance Minister also spoke about allowing asset
reconstruction companies (ARCs) to list the security receipts they issue against bad
loans on stock exchanges registered with the Securities and Exchanges Board of India

(SEBI).

Non-Performing Assets & Capital Scenario

In the earlier 90s, the Indian banking sector was dominated by public sector banks. Post
liberalization, India witnessed several private sector banks and foreign banks. One of
the significant objectives of banking sector reforms was to stimulate operational self-
sufficiency, flexibility and competition in the system and to improve banking standards
in India to the international best practices. Based on the recommendations of various
committees’ especially the Committee on Financial Sector Reforms under the

Chairmanship of Mr. M. Narasimham. But the every year, the rate of NPA of public
sector banks has been increased. The Crisil said that the asset quality woes of banks will
continue in the current fiscal with gross non-performing assets (NPA) ratio for the system
growing at 0.20 per cent to 4.5 per cent by March 2016. Many peoples mentioning on
their research publication on NPA that public sector banks don’t have ability to decrease
and eradicate the problems of NPA, even there are some acts to prevent this disease

78

Indian Banking Sector - Initial Public Offering Scenario & its Impact
and also they argue that private sector banks do their best than public sector banks. So,
in this juncture it is necessary to make the comparison between the level of NPA of

Private sector banks and Public sector banks in India.

In case of public sector banks, despite soaring non-performing assets, they planned to
raise INR 58,000 crore from capital market during the fiscal year 2017. Public sector
banks, including SBI, Bank of Baroda and IDBI Bank, plan to raise Rs 58,000 crore
through equity dilution during the current fiscal to meet Basel-III norms and clean up
their balance sheets. Leading the pack, country's largest lender SBI plans to raise Rs

15,000 crore through share sale and expects this to complete by the year-end, probably
through a qualified institutional placement (QIP). Besides, Bank of Baroda and Central

Bank of India plan to raise Rs 6,000 crore and Rs 6,500 crore from capital markets,
respectively. Raising funds from the market will ease the pressure on the exchequer of
pumping in capital. As per the Indradhanush plan public sector banks need to raise Rs

1.10 lakh crore from markets, including follow-on public offer, to meet Basel-III
requirements, which will kick in from March 2019. This will be over and above Rs

70,000 crore banks will get as capital support from the government. Of this, the
government has already infused Rs 50,000 crore in the past two fiscals and the remaining
will be pumped in by the end of 2018-19. In the Budget speech on February 1, 2017,

Union Finance Minister announced capital infusion of Rs 10,000 crore for the current
fiscal.

PSU banks requires capital for meeting Basel-III norms and cleaning of balance sheet as
non-performing assets (NPAs) have reached unacceptably high levels. These banks are
saddled with non-performing assets or bad loans to the tune of a staggering Rs 6 lakh
crore. Bad loans rose by over Rs 1 lakh crore in the first nine months of last fiscal to Rs

6.07 lakh crore by 31 December 2016. Gross NPA of PSBs stood at Rs 5.02 lakh crore at
the end of March 2016, up from Rs 2.67 lakh crore at the end of March 2015. Corporation

Bank and Syndicate Bank have lined up fund raising plan of Rs 3,500 crore each, while

Bank of Maharashtra has taken board's approval for raising Rs 2,000 crore. SBI, in 2014,
had raised Rs 8,032 crore by selling shares through qualified institutional placement

(QIP), largely aided by state-owned life insurer LIC.

It is important to note that BASEL III contains various initiatives aimed at improving the
quantity and quality of capital, with the ultimate aim of improving the loss-absorption
capacity in both going concerns and liquidation scenarios. Retaining the minimum capital
adequacy ratio of 8%, the Tier I capital ratio increased to 6% with the equity component
stipulated at 4.5%. The new concepts introduced by Basel III are of capital conversion
buffer and countercyclical capital buffer (CCB). The capital conversion buffer ensures
that banks are able to absorb losses without breaching the minimum capital requirement,
and are able to carry on business even in a downturn without deleveraging. This is not
part of the regulatory minimum. So while the 8% minimum capital requirement remains
unchanged under Basel III, there is an added 2.5% as capital cushion buffer.

The implications of having a buffer are low dividend payout and low bonus to workforce.

So if the banks go for this buffer, the elementary question before them is how they are
going to reward their shareholders and incentivise their employees as the profits are
likely to decrease. Banks are already constrained in payment of dividends because there

Indian Banking Sector - Initial Public Offering Scenario & its Impact

79
is a statutory minimum ratio where the profits have to be transferred. In such a case,
how will banks attract more capital? There is a trade-off for banks between being
prudent and rising profit.

The countercyclical capital buffer is a pre-emptive measure that requires banks to build
up capital gradually as imbalances in the credit market develop. It may be in the range
of 0 -2.5% of risk weighted assets which could be imposed on banks during periods of
excess credit growth. There is also a provision for a higher capital surcharge on systemical y
important banks. Basel III strengthens the counterparty credit risk framework in market
risk instruments. This includes the use of stressed input parameters to determine the
capital requirement for counterparty credit default risk. A new capital requirement known
as credit valuation adjustment (CVA) risk capital charge for over-the-counter (OTC)

derivatives has been introduced to protect banks against the risk of decline in the credit
quality of the counterparty.

Exhibit 6

Minimum regulatory capital prescriptions (as % risk weighted assets)

Basel III

Current

Basel III

(as on

(Basel II)

(as on March

January

31, 2018)

2019)

A = (B + D)

Minimum total capital

8.00

9.00

9.00

B

Minimum tier 1 capital

6.00

6.00

7.00

C
of which:

Minimum common equity tier

1 capital

4.50

3.64

5.5

D

Maximum tier 2 capital

(within total capital)

2.00

3.00

2.00

E

Capital conservation buffer

(CCB)

2.50

2.5

F = C + E

Minimum common equity tier

1 capital + CCB

7.00

3.60

8.00

G = A + E

Minimum total capital + CCB

10.5

11.5

H

Leverage ratio (ratio to total
assets)

3.00

4.55

(Source: Address by Dr. Duvvuri Subbarao, September 4, 2012).

Now to comprehend whether non-performing assets had impacted the IPOs of banking
sector or not in statistical sense, the ensuing paragraph discusses the correlation between

IPO values and non-performing assets during the period 2010-2015. In order to ascertain
whether there is a positive or negative correlation between IPO values and non-
performing assets, Karl Pearson’s Co-efficient of Correlation. Further to ascertain the

80

Indian Banking Sector - Initial Public Offering Scenario & its Impact
process of variation in the dependent variable, i.e. initial public offer due to change in
the dependent variable, i.e. non-performing assets, co-efficient of determination is
used.

Karl Pearson’s Co-efficient of Correlation (r) = Σdx dy / Σdx2 Σdy2

(Figures in INR Crore)

Y ears

Initial Public dx
dx2

Non-
dy
dy2
dxdy

Offers of
performing

Banks /

Assets of

Financial

Banks

Institutions

(public and
in values
private

(INR
sector

Crore)

banks)

x
y

2010

3138

-13003

169078009

36149

-55434

3072928356

720,808,302

2011

17248

1107

1225449

40487

-51096

2610801216

-56,563,272

2012

35611

19470

379080900

63606

-27977

782,712,529

-544,712,190

2013

8273

-7868

61,905,424

95946

4363

19,035,769

-34,328,084

2014

29700

13559

183,846,481

139233

47650

2,270,522,500

646,086,350

2015

2873

-13276

176,252,176

174079

82496

6,805,590,016

-1,095,216,896

Σx =

Σdx =

Σdx2=

Σy =

Σdy=

Σdy2=

Σdxdy =

96843

-11

971388439

549500

2

15561590386

-363925790
x¯ = 16140.5 = 16141
y¯ = 91583
r

=

Σdx dy / Σdx2 Σdy2
r

= -363925790 / 971388439 x 15561590386 = -0.09
r2 (co-efficient of determination) = 0.0081

Probability Error (P.E.) = 0.6745 x (1-r2) / n

Probability Error = 0.27

Decision : From the aforesaid analysis it can be stated that there exists a negative
correlation between IPO values of the selected banks and non-performing assets of the
banks considered for the research study. Further, the co-efficient of determination is

0.0081, implying that the change in non-performing assets (dependent variable) is not
due to or explained by change in the independent variable (IPO values). Lastly, it can
be observed that r, i.e. 0.09 is less than 1.62 (6 x P.E.), it can be concluded that perhaps
there is no evidence of correlation.

Indian Banking Sector - Initial Public Offering Scenario & its Impact

81

Epilogue

From the aforesaid discussion it can be stated that IPO issues of Indian banking sector
may took a nose dive in the years ahead as revealed through the prognosis carried out
through parabolic trend equation. However, if buoyancy is there in Indian economy
then more IPOs can be witnessed as seen during 2016 and beginning of 2017. It will
be quite interesting to observe how amendments in crucial regulations pertaining to

IPO, i.e. SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and

SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 on IPO issues
of banking sector. No doubt from the analysis no correlation is established between
values of IPO and non-performing assets but still it will be interesting to observe that
whether rising non-performing assets or in case banks, especially public sector banks
fails to curtail the soaring non-performing assets then whether it will impact the IPO
activity or not.

Further, government policies towards fostering foreign direct investments may also play
a crucial role in strengthening IPO market in India.

Opportunity galore for Company Secretaries in IPO Process

The plethora of services, which a Practising Company Secretary can render in IPOs can
be listed as under:

1. Deciding the time line, Compliance related issues, Structure of Board, Promoters
consent and Method of issuance of shares (Demat/Physical/Both) - Compliance

2. Exercise Due Diligence relating to the compliances of Company Contract and

Leases, Legal and Tax Issues, Corporate issues, Financial Assets, assessment of

Financial Statement, Creditors & Debtors, and Legal Cases against the company.

3. Appointing Advisors and other intermediaries such as:

(a) Investment Bankers

(b) Book Running Lead Managers

(c) Registrar to an Issue etc.

(d) Legal Advisor

(e) Bankers to an Issue etc.

4. Review of the listing application form together with the accompanying
documents, underwriting agreement, prospectus, forms of application for
securities, press announcements regarding the new issue and its results and
basis of allocation and share certificates;

5. Drafting of prospectus/Offer Document/letter of offer related to issue of
securities and obtaining approvals in association with Lead Manager and same
filing with SEBI. Finalise prospectus after making corrections prescribed by SEBI.

6. Filing of forms with ROC regarding issue of securities and applying for In-
principle approval of Stock Exchange.

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Indian Banking Sector - Initial Public Offering Scenario & its Impact

7. Compliance requirements with respect to Issue Opening/Closing Date and
coordinating with Registrar/Bankers to an issue.

8. Compliance of various provisions relating to allotment of shares, basis of
allotment, conducting of board meeting for allotment, dispatch of share
certificates, Despatch of refund orders and payment of stamp duty.

9. Acts as a compliance officers for listing of shares with Designated Stock Exchange.

10. Issue of compliance certificate regarding comply of conditions of corporate
governance norms under SEBI (LODR), Regulations, 2015.

11. Discussion with the company and other relevant parties about the company’s
corporate secretarial, compliance and corporate governance matters.

***

Indian Banking Sector - Initial Public Offering Scenario & its Impact

83

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***

Table of Contents

- Chapter 1
- Chapter 2
- Chapter 3
- Chapter 4
- Chapter 5
- Chapter -2
- Chapter -3
- Chapter - 4
- Chapter XI A
- Book building process
- Chapter - 5