Grading of Initial Public Offerings (IPOs) is a service aimed at facilitating assessment of equity issues offered to the public. The Grade assigned to any individual IPO is a symbolic representation of rating agency’s assessment of “fundamentals” of the issuer concerned relative to other listed securities.

IPO Grades are assigned on a five-point point scale, where IPO Grade 5 indicates the highest grading and IPO Grade 1 indicates the lowest grading, i.e a higher score indicates stronger fundamentals. An IPO Grade is not an opinion on the price of the issue, pre- or post-listing.

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

Why is IPO grading necessary?

An investor in a hitherto unlisted company may either have limited access to information on it, or may find it challenging to appropriately assess, on the basis of the information available, its business prospects and risks. An IPO Grade provides an additional input to investors, in arriving at an investment decision based on independent and objective analysis.

In recent times, with the stock market participation of new and foreign investors increasing, there is need for greater value-added information on companies tapping the capital market and their intrinsic quality . In this context, IPO Grades, being simple, objective indicators of the relative fundamental positions of the issuers concerned, could help in both widening and deepening the market.

IPO Grading is NOT a recommendation to buy sell or hold the securities Graded. Similarly, it is NOT a comment on the valuation or pricing of the IPO Graded nor is it an indication of the likely listing price of the securities Graded.

What are the issues that are assessed while arriving at the grading?

The emphasis of the IPO Grading exercise is on evaluating the prospects of the industry in which the company operates , its competitive strengths that would allow it to address the risks inherent in the business(es) and effectively capitalise on the opportunities available as well as the company’s financial position.

In case the IPO proceeds are planned to be used to set up projects, either greenfield or brownfield, rating agency evaluates the risks inherent in such projects, the capacity of the company’s management to execute the same, and the likely benefits accruing from the successful completion of the projects in terms of profitability and returns to shareholders. Due weightage is given to the issuer company’s management strengths and weaknesses and issues , if any, from the corporate governance perspective.

Accordingly, IPO Grading methodology examines the following key variables:

• Business and Competitive Position
• New Projects—Risks and Prospects
• Financial Position and Prospects
• Management Quality
• Corporate Governance practices
• Compliance and Litigation History

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 a rating agency.

How long the rating is valid?

The assigned grade would be a one time assessment done at the time of the IPO and meant to aid investors who are interested in investing in the IPO. While the grading itself is valid for a period of 6 months from the date of issuance, the grading letter will have a validity of 2 months from the date of issue and would need to be revalidated subsequently- there would not be any additional charges for the revalidation. Rating agency however reserves the right to change the grading after the same has been assigned should the circumstances so warrant.

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