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IPO Grading

IPO Grading

IPO Grading – Meaning

Initial Public Offering (IPO) Grading is a service aimed at facilitating the assessment of equity issues offered to the public. 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 initiative to make additional information available to the investors for their assessment to invest in the shares offered through IPO.

IPO Grading is not an investment recommendation. It does not take into account the price of the security. It is merely an input to the investor in aiding the decision-making process. IPO Grading is designed to provide investors an independent, reliable and consistent assessment of the fundamentals of new public issues. It includes an assessment of business and financial prospects, management quality and corporate governance.

Introduced under the aegis of Securities and Exchange Board of India (SEBI) regulation, an IPO Grading is particularly useful to retail investors who are seeking to invest in companies that are unknown in the equity markets.

Procedure for IPO Grading –

Credit Rating Agencies registered with SEBI will carry out IPO Grading.

The company needs to contact one of the Credit rating Agencies and mandate it for the grading exercise.

Information should be provided by the company to the grading agency which will relate the following –

1. Last 5 years annual reports
2. Hard copies of the draft prospectus
3. Detailed Project Report for a new project (if applicable)
4. Details on promoter background, other main companies within the group and last 5 years annual reports of these major group companies.
5. Financial projections for the next five years with relevant assumptions.
6. Details of the instrument to be graded
7. Any additional information that grading agency may require from the company in specific circumstances
 
On receipt of the required information, the grading agency will have discussions with the company’s management and visit the company’s operating locations, if required.
 
The grading agency prepares an analytical assessment report based on the information provided by the company. This report will then be presented to a committee comprising senior executives of the grading agency and assigned a grade.
 
The grade is then communicated to the company along with the assessment report outlining the rationale for the grade assigned.
 
As per SEBI (ICDR) Regulations, every unlisted company obtaining grading for IPO shall disclose all the grades obtained in the prospectus, abridged prospectus, issue advertisements, etc. The company desirous of making an IPO is required to bear the cost incurred towards the IPO grading.
 
With effect from February 4, 2014, SEBI has made the IPO Grading  “voluntary” instead of “mandatory”, thereby amending the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009.

 IPO Grading

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