Sub Section - Iii IPO Grading: WWW - Sebi.gov - in

Sub Section – III
IPO Grading
This sub‐section attempts to cover the basic concepts and questions related to IPO
Grading. For full particulars of laws governing the primary market, please refer to the
Acts/Regulations/Guidelines/Circulars appearing under the Legal Framework Section
of our website i.e. www.sebi.gov.in.
All details regarding operational aspects of IPO grading like, grading methodology,
validity of grading, scope of grading etc, as given below are based on the information
obtained from the Credit Rating Agencies (CRAs) (including their FAQs) and are
meant only for general informational purpose regarding the overall functioning of the
IPO Grading system. Specific details regarding IPO grading may be obtained directly
from the respective Credit Rating Agencies.
1. What is ‘IPO Grading’?

IPO grading is the grade assigned by a Credit Rating Agency (CRAs) 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 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 endeavour to make additional information

available for the investors in order to facilitate their assessment of fundamentals of
the company offering equity issues through an IPO.
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2. I am an issuer. By when am I required to obtain the grade for the IPO?
IPO grading can be done either before filing the draft offer documents with SEBI or
thereafter. However, the Prospectus/Red Herring Prospectus, as the case may be,
must contain the grade/s given to the IPO by all CRAs approached by the company
for grading such IPO.
3. Who bears the cost of the IPO grading process?

The company desirous of making the IPO is required to bear the expenses incurred
for grading an IPO.
4. Is grading optional?
Yes, IPO grading is optional. It was mandatory previously. However, with effect from
February 04, 2014 IPO grading has been made optional for the issuer.
5. Can the issuer reject an IPO grade?

IPO grade/s cannot be rejected. 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. However 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, advertisements etc.
6. Will IPO grading delay the process of issue?

IPO grading is intended to run parallel to the filing of offer document with SEBI and
the consequent issuance of observations. Since issuance of observation by SEBI
and the grading process, function independently, IPO grading is not expected to
delay the issue process.
7. What are the factors that are evaluated to assess the fundamentals of the
issue while arriving at the IPO grade?
The IPO grading process is expected to take into account the prospects of the
industry in which the company operates, the competitive strengths of the company
that would allow it to address the risks inherent in the business and capitalize on the
opportunities available, as well as the company’s financial position.
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While the actual factors considered for grading may not be identical or limited to the
following, the areas listed below are generally looked into by the rating agencies,
while arriving at an IPO grade:
a. Business Prospects and Competitive Position

i. Industry Prospects
ii. Company Prospects
b. Financial Position
c. Management Quality
d. Corporate Governance Practices
e. Compliance and Litigation History
f. New Projects—Risks and Prospects
It may be noted that the above is only indicative of some of the factors considered in
the IPO grading process and may vary on a case to case basis.
8. Does IPO grading consider the price at which the shares are offered in the
issue?
No. IPO grading is done without taking into account the price at which the security is
offered in the IPO. Since IPO grading does not consider the issue price, the investor
needs to make an independent judgment regarding the price at which to bid
for/subscribe to the shares offered through the IPO.
9. Where can I find the grades obtained for the IPO and details of the grading
process?
All grades obtained for the IPO along with a description of the grades can be found
in the Prospectus, Abridged Prospectus, issue advertisement or any other place
where the issuer company is making advertisement for its issue. Further the Grading
letter of the Credit Rating Agency which contains the detailed rationale for assigning
the particular grade will be included among the Material Documents available for
Inspection at the registered office of the Company.
10. Does an IPO grade, which indicates ‘above average or strong

fundamentals’ mean I could subscribe safely to the issue?
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An IPO grade is NOT a suggestion or recommendation as to whether one should
subscribe to the IPO or not. IPO grade needs to be read together with the
disclosures made in the prospectus including the risk factors as well as the price at
which the shares are offered in the issue.
11. How do I interpret the IPO Grades?

The grades are allocated on a 5‐point scale, the lowest being Grade 1 and highest
Grade 5. The meaning of these grades has been explained under Question 1 in this
FAQ.
12. How does IPO Grading help in deciding about investing in an IPO?
IPO Grading is intended to provide the investor with an informed and objective
opinion expressed by a professional rating agency after analyzing factors like
business and financial prospects, management quality and corporate governance
practices, etc. However, irrespective of the grade obtained by the issuer, the investor
needs to make his/her own independent decision regarding investing in any issue
after studying the contents of the prospectus including risk factors carefully.
13. What is the role of SEBI in IPO grading exercise?

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 that agency.
14. Will IPO Grading given by CRAs be a parameter for SEBI to issue its
observations?
The grading is intended to be an independent and unbiased opinion of a rating
agency. SEBI does not pass any judgment on the quality of the issuer company.
SEBI’s observations on the IPO document are entirely independent of the IPO
grading process or the grades received by the company.
15. Which credit rating agencies are registered with SEBI?

The details of credit rating agencies registered with SEBI can be accessed at
http://www.sebi.gov.in/sebiweb/home/list/5/33/0/0/Recognised-Intermediaries
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Sub Section – III

1. What is ‘IPO Grading’?

IPO grade 1 ‐ Poor fundamentals

IPO grading has been introduced as an endeavour to make additional information

3. Who bears the cost of the IPO grading process?

5. Can the issuer reject an IPO grade?

6. Will IPO grading delay the process of issue?

a. Business Prospects and Competitive Position

10. Does an IPO grade, which indicates ‘above average or strong

11. How do I interpret the IPO Grades?

13. What is the role of SEBI in IPO grading exercise?

15. Which credit rating agencies are registered with SEBI?

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