What is IPO Grading ?
IPO Grading is the professional assessment of a Credit Rating Agency (CRA) on the fundamentals of the company in relation to the other listed equity shares in India.
It is mandatory for the issuer company coming up with Initial Public offering, to obtain IPO Grading from CRA and disclose the same on the cover page of offer document and application form
IPO grading aims to provide the investor with an informed, objective, independent and unbiased opinion of a CRA after analyzing various relevant factors.
IPO Grading serves as an additional input available for making an investment decision.
IPO Grading doesnot reflect a suggestion or recommendation for subscribing to an IPO. Infact, an IPO Grading needs to be read together with the disclosures made in the offer document including the risk factors as well as the price at which the shares are being offered.
Investors need to make independent yet informed decision regarding pricing of an IPO as IPO Grading doesnot take into account the pricing of shares being offered.
Factors under consideration for IPO Grading:
- Business Prospects and Competitive Position – Industry Prospects & Company Prospects
- Financial Position
- Management Quality
- Corporate Governance Practices
- Compliance and Litigation History
- New Projects – Risk and Prospects
The ones mentioned above are just indicative factors subject to change on case to case basis.
- IPO Grade 1 : Poor Fundamentals
- IPO Grade 2 : Below Average Fundamentals
- IPO Grade 3 : Average Fundamentals
- IPO Grade 4 : Above Average Fundamentals
- IPO Grad 5 : Strong Fundamentals
As mentioned above, the grade scale is a 5-point scale, with Grade 1 as lowest and grade 5 is the Highest.
The higher the Grades, the stronger the fundamentals.
Where to check for Grades?
IPO Grades obtained by a company can be found with the description in the below mentioned documents:
1. Offer Document
2. Abridged Prospectus
3. Issue Advertisements
4. Any other place where the issuer is advertising the issue
5. Credit rating agency’s grading letter to the issuer, containing details for assigning the particular grade, which is available for inspection at the registered office of the company and on the websites of the stock exchanges where the proposed listing will take place.
SEBI’S Role in IPO Grading
CRA which assigns the grading for IPO are regulated by SEBI. However, SEBI doesnot pass any judgement on the quality of the issuer company. SEBI’s observations on offer document are independent of the IPO Grading process or the grades received by the company.
Following are the credit rating agencies in India, further details on the same can be obtained from their websites
- CRISIL LIMITED
- India Ratings and Research Limited (Formerly known as Fitch ratings)
- ICRA Limited
- CARE Ratings Limited
- Brickwork Ratings
- SMERA Ratings Limited
- Infomerics Rating
Note : Wherever required information has been used from SEBI’s Website