What is IPO grading?

IPO grading is the grade assigned by Sebi-registered credit rating agency or agencies to an initial public offering (IPO). The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed securities in India.

Here, one must note that the IPO grading is done without considering the price band at which the security is offered in the IPO. Investors need to make an independent judgment regarding the price at which they should bid for.

Such a grading is generally assigned on a five-point scale with a higher score indicating stronger fundamentals and vice versa. It is an attempt to offer additional information to investors, helping them facilitate their assessment of fundamentals of the issue on the block.

But it is not mandatory for the issuer to get its issue graded. The process was made optional for issuers with effect from February 04, 2014.

IPO grading is intended to run parallel to the filing of the offer document with Sebi and the consequent issuance of observations. Since the issuance of observations and the grading process function independently, IPO grading is not expected to delay the issue process.

Meanwhile, irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the ICDR Regulations. It cannot be rejected.

That said, the issuer has the option of opting for another grading by a different agency. In such an event, all grades obtained for the IPO will have to be disclosed in the offer documents and advertisements.