New insights into pricing of Book-Built IPOs in India

The literature on Indian IPOs has largely been confined to the pre-2000 period when bookbuilding was not present in the Indian capital markets. This paper explores the underpricing of bookbuilt IPOs in India in the post bookbuilding period. Certain unique characteristics of the disclosure requirements in the Indian capital markets allow us to test the variables affecting the underpricing of bookbuilt IPOs. Using multivariate regression tests, for a unique hand collected data of 195 Indian IPOs, we find that the setting of the offer price in the bookbuilding band, the reputation of the investment banker, the oversubscription in the IPO, the offer size and the marketing expenditure made during the IPO affect the underpricing of IPOs. Our main contribution to the IPO literature is that marketing expenditure made during the IPO and underpricing act as substitutes. Investment bankers have a role in designing the marketing plan of the IPO of the firm going public and we find that investment bankers can either market the issue more or choose to leave more money on the table. These results have useful implications for retail investors in bookbuilt IPOs.