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Venture Backed IPO's in India: Issues of Certification and Underpricing

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  • A. Vinay Kumar

    (Indian Institute of Management)

Abstract

Indian venture capital industry is now considered as one of the predominant players among South Asian countries. As India started emerging as a country which is considered as a hi-tech and global outsourcing center, Indian venture capital industry started looking up with new investment opportunities. New funds have opened their shop here in India and are continuing to bring in more and more funds. Indian research on initial public offerings is sparse. Previous studies have highlighted the presence of significant underpricing in IPOs. Studies also review the aftermarket performance of these IPOs but the aspect of venture backed IPOs and certification was never studied before. The present study has attempted to study whether venture backed IPOs are different in terms of underpricing and does it indicate certification of quality by venture capitalists. The study finds that underpricing is significantly less in venture backed IPOs and through econometric models it finds that the presence of venture capitalists on the board does signal quality of the IPO and therefore certify the IPO. Good lead managers generally understand the kind of value addition venture capitalists try to make to a firm they fund and they therefore attempt to market the IPO at a better price thus reducing underpricing. One of the essential and logical purposes of venture capital business is to exit, ideally through an initial public offering (IPO). The reason for their preference for an IPO is not difficult to understand, and could be attributed to the higher valuation per share that a venture capitalist would get if they offer their stock to public when compared to valuation in any other form of exit.

Suggested Citation

  • A. Vinay Kumar, 2004. "Venture Backed IPO's in India: Issues of Certification and Underpricing," Journal of Entrepreneurial Finance, Pepperdine University, Graziadio School of Business and Management, vol. 9(2), pages 93-108, Summer.
    • Handle: RePEc:pep:journl:v:9:y:2004:i:2:p:93-108
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    References listed on IDEAS

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    1. Brav, Alon & Gompers, Paul A, 1997. "Myth or Reality? The Long-Run Underperformance of Initial Public Offerings: Evidence from Venture and Nonventure Capital-Backed Companies," Journal of Finance, American Finance Association, vol. 52(5), pages 1791-1821, December.
    2. Loughran, Tim & Ritter, Jay R. & Rydqvist, Kristian, 1995. "Initial public offerings: International insights," Pacific-Basin Finance Journal, Elsevier, vol. 3(1), pages 139-140, May.
    3. Baron, David P, 1982. "A Model of the Demand for Investment Banking Advising and Distribution Services for New Issues," Journal of Finance, American Finance Association, vol. 37(4), pages 955-976, September.
    4. Megginson, William L & Weiss, Kathleen A, 1991. "Venture Capitalist Certification in Initial Public Offerings," Journal of Finance, American Finance Association, vol. 46(3), pages 879-903, July.
    5. Rock, Kevin, 1986. "Why new issues are underpriced," Journal of Financial Economics, Elsevier, vol. 15(1-2), pages 187-212.
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    More about this item

    Keywords

    Venture Capital; Venture-Backed; Certification; Underpricing; India;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups
    • O53 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Asia including Middle East

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