What is IPO Grading?
It is a rating assigned by the Securities and Exchange Board of India-registered
credit rating agencies to initial public oferings (IPOs) of various r!s" #he grade
indicates an assess!ent of business funda!entals and !ar$et conditions in
co!parison to other listed e%uities at the ti!e of the issuance" #hese ratings are
generally assigned on a ve-point scale& 'ith a higher score indicating stronger
co!panies" IPO grading can be done either before ling the draft ofer
docu!ents or thereafter" (o'ever& the red herring prospectus !ust have the
grades given by all the rating agencies"
) co!pany 'hich has led the draft ofer docu!ent for an IPO on or after *ay +&
,--.& !ust be rated by at least one agency" /o!panies cannot re0ect the grade"
If dissatised& they can opt for another agency" But& all grades obtained for the
IPO !ust be disclosed to the regulator and the investors"
Why is it important?
IPO grading 'as introduced to !a$e additional infor!ation about unlisted
co!panies or those 'ithout any trac$ record of their perfor!ance available to
the investors& helping the! assess the issue before investing and burning their
ngers" 1rading is additional investor infor!ation and assistance to enable
infor!ed invest!ent decisions and !ore realistic pricing of shares" It helps
issuing co!panies in that if they are given a higher score 2 indicating stronger
funda!entals 2 they co!!and a higher pre!iu! for their issue"
Which factors determine the grade?
IPO grading covers both internal and external aspects of the issuing co!pany"
Internal factors include the co!petence of the !anage!ent& pro!oters3
prole& !ar$eting strategies& gro'th prospects& co!petitive
edge& technology& operating e4ciency& li%uidity and nancial 5exibility& asset
%uality& accounting %uality& protability and hedged ris$s" External factors 'ould
be the industry and econo!ic& or& business environ!ent for the co!pany" It does
not ta$e into account the issue price" #herefore& investors needs to !a$e an
independent 0udge!ent on the subscription price"
Where can one see IPO grades in the ofer document?
)ll grades& along 'ith a description of the sa!e& can be found in the issue
prospectus& abridged prospectus and the issue advertise!ent" 6urther& the
grading letter of the credit rating agency& 'hich contains the detailed rationale
for assigning the grade& is included 'ith the docu!ents available for inspection"
How does it help?
IPO grading by a professional credit rating agency infor!s investors about the
issuing co!pany after analysing factors li$e business and nancial prospects&
!anage!ent %uality and corporate governance practices etc" #he grade is not a
reco!!endation to subscribe to the IPO" It needs to be read 'ith the disclosures&
including ris$ factors"
Grading Category Definitions
Ind-Ra IPO Grade 5
(ind)
Strong fundementals
Ind-Ra IPO Grade
4(ind)
Above average
fundementals
Ind-Ra IPO Grade 3
(ind)
Average fundementals
Ind-Ra IPO Grade 2
(ind)
Below average
fundementals
Ind-Ra IPO Grade 1
(ind)
Poor fundementals
Benefits of IPO Grading
> Ind-Ra' IP Grading brings value to issuer and investors!
> It "rovides an inde"endent evaluation of t#e fundamental strengt# of t#e issuer$
> %#e evaluation& grade enables relative assessment between 'om"anies of different si(e
o"erating in different industries$
> It #el"s in in'reasing bot# domesti' and foreign investor "arti'i"ation$
.
Who decides the price band
It may be understood t#at t#e regulatory me'#anism does not "lay a role in setting
t#e "ri'e for issues$ It is u" to t#e 'om"any to de'ide on t#e "ri'e or t#e "ri'e band)
in 'onsultation wit# *er'#ant Ban+ers$ %#e basis of issue "ri'e is dis'losed in t#e
offer do'ument$ %#e issuer is re,uired to dis'lose in detail about t#e ,ualitative and
,uantitative fa'tors -ustifying t#e issue "ri'e$
