Understanding IPO Grading

Understanding IPO Grading

IPO grading is a unique concept involving an independent agency that is free from bias and with the available tools for assessing theinvestment attractiveness of an equity security.  IPO grading is a service aimed at facilitating the assessment of equity issues offered to the public, says SEBI.  IPO grading can act as an additional decision-making tool for them.  The idea is that IPO grading will help the investor better appreciate the meaning of the disclosures in the issue documents, collapsing all of the above information into a single digit.  Thus, IPO grading could be seen as an added investment guidance tool seeking to hide the ignorance of the above factors and still help the investors make an informed decision.  Grading of IPOs in terms of their fundamental quality will enable investors steer clear of unsound offers.  IPO grading in general would be a relative assessment of the fundamentals of the equity security by credit rating agencies registered with SEBI.

But IPO grading is totally unheard of anywhere else and is a First-From-India initiative.  The grading, to be done by the SEBI-registered credit rating agencies, would be applicable to all IPOs for which offer documents are filed after April 30, SEBI said in a circular.  SEBI does not play any role in the assessment made by the grading agency.  The grading is intended to be an independent and unbiased opinion of that agency.  The company needs to first contact one of the grading agencies and mandate it for the grading exercise.  Though this process will ideally require 2-3 weeks for completion, it may be a good idea for companies to initiate the grading process about 6-8 weeks before the targeted IPO date to provide sufficient time for any contingencies.  IPO grading is a service aimed at facilitating the assessment of equity issues offered to the public, says SEBI.

IPO grading is the grade assigned by a Credit Rating Agency registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date.

The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five-point point scale with a higher score indicating stronger fundamentals and vice versa as below.

IPO grade 1: Poor fundamentals
IPO grade 2: Below-average fundamentals
IPO grade 3: Average fundamentals
IPO grade 4: Above-average fundamentals
IPO grade 5: Strong fundamentals

IPO grading has been introduced as an endeavor to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO.

IPO Grading is not a recommendation to invest
Even if a Company is Graded 5 (i.e. with strong fundamentals), IPO grading is not a recommendation to invest in the graded instrument. It does not a comment on the price of the graded security or its suitability for a particular investor. It does not comment on issue price, likely price on listing or movement in price post listing.

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