Initial Public Offer

Introduction to IPOs grading:

As a first of its kind among securities market regulators in the world, the Securities & Exchange Board of India (SEBI) after much deliberation introduced a new requirement effective May 1, 2007 that a firm planning to be listed in the stock exchange obtain a grading of its Initial Public Offering (IPO), prior to the IPO issue, from at least one rating agency that is registered with SEBI. Arriving at the decision was with a belief that the IPO grade represented a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Furthermore, SEBI believed that an IPO grading will provide an additional input to investors, in arriving at an investment decision, based on independent and objective analysis. Hence, IPO grading can be seen as an endeavour to make additional information available to the investors in order to facilitate their assessment of equity issues offered through an IPO. However, the path to mandatory grading of IPOs has been rocky, with opposition from companies, investment bankers, fund managers, market experts and even the SEBI board members. The parties that are in opposition want the grading to be an optional exercise. They argue that the mandatory grading has increased the cost of raising funds and also has led to delay in the IPO process, which SEBI was attempting to make faster and shorter with the help of grading. Given that the grading expenses have been as high as one percent of the total issue size in some cases, some of the concerns by the opposition deserve consideration. The initial introduction of IPO grading requirement was launched was an optional one. However, with the purpose of bringing additional transparency to the market, the requirement was further changed to a mandatory one.

A number of agencies in the private domain carry out equity ratings and provide buy, hold, sell recommendations to investors. However a Grade which just signifies the...