Underpricing of Initial Public Offerings: The Indian Experience

This paper attempts to identify the factors explaining underpricing of initial public offerings (IPOs) in an emerging economy, India, using 1,842 companies that got listed on the Bombay Stock Exchange from 1993 to 2001. It is found that uncertainty played a role in perverse underpricing in the Indian primary market. IPOs with a large issue size and those that went for seasoned offerings had less underpricing. Contrary to the international evidence, underpricing was less during the high volume (hot) period compared to the slump period in the Indian IPO market. During the hot period, new issues belonging to business groups underpriced more than their stand-alone counterparts did. Small issues belonging to private stand-alone firms had less underpricing during the hot period and did not come to the market subsequently to raise funds. Large issues belonging to the business groups, on the other hand, underpriced more and subsequently raised funds from the market. These results support the predictions of signaling theory for the IPOs listed in the Indian stock markets over the last decade.