IPO GRADING :
IPO grading (Initial Public Offering Grading) is a service aimed at facilitating the assessment of equity issues
offered to public. The grade assigned to any individual issue represents a relative assessment of the fundamentals’ of that issue in relation to the universe of other listed equity securities in India. Such grading is assigned on a five-point scale with a higher score indicating stronger fundamentals.
IPO grading is different from an investment recommendation. Investment recommendations are expressed as ‘buy’, ‘hold’ or ‘sell’ and are based on a security specific comparison of its assessed ‘fundamentals factors’
business prospects, financial position etc.) and ‘market factors’ (liquidity, demand supply etc.) to its price. On the other hand, IPO grading is expressed on a five-point scale and is a relative comparison of the assessed fundamentals of the graded issue to other listed equity securities in India.
As the IPO grading does not take cognizance of the price of the security, it is not an investment recommendation. Rather, it is one of the inputs to the investor to aiding in the decision making process.
As per SEBI (ICDR) Regulations, every unlisted company obtaining grading for IPO shall disclose all the grades obtained, along with the rationale discretion furnished by the credit rating agency(ies) for each of the grades obtained, in the prospectus, abridged prospectus, issue advertisements and at all other places where the issuer company is advertising for the IPO.
SEBI has been taking a pioneering role in investor protection by increasing disclosure levels by entities seeking to access equity markets for funding. This has caused India to be amongst one of the more transparent and efficient capital markets in the world. However, these disclosures demand fairly high levels of analytical sophistication of the reader in order to effectively achieve the goal of information dissemination.
IPO grading is positioned as a service that provides ‘an independent assessment of fundamentals’ to aid comparative assessment that would prove useful as an information and investment tool for investors. Moreover, such a service would be particularly useful for assessing the offerings of companies accessing the equity markets for the first time where there is no track record of their market performance.
As mentioned above, the IPO grade assigned to any issue represents a relative assessment of the ‘fundamentals of that issue in relation to the universe of other listed equity securities in India. This grading can be used by the investor as tool to make investment decision. The IPO grading will help the investor better appreciate the meaning of the disclosures in the issue documents to the extent that they affect the issue’s fundamentals. Thus, IPO grading is an additional investor information and investment guidance tool.