IPO Grading: Is There Any Value Addition?

Two most imperative reforms the Indian IPO market has seen are Grading of IPOs by Credit Rating Agencies (CRAs) and introduction of issues through Book Building Process for efficient price discovery. SEBI is the only Capital Market Regulator in the world which made IPO Grading mandatory with effect from May 1, 2007 followed by which all the issuances were graded on the scale of 1 to 5 in which 1 indicates Poor Fundamentals and 5 indicate Strong Fundamentals. IPO Grading would help investors especially Retail Individual Investors (RIIs) who will not be able to take informed decisions by assessing IPOs objectively as the Information Asymmetry and Behavioral biases prevalent in the markets. In the light of SEBI scuffled the idea of mandatory IPO Grading and made it voluntary, this paper attempts to find the short- run and long- run performance of different grade IPOs to see whether higher grading has any impact on generating improved returns to the investors by analyzing the data using One Factor ANOVA. The analysis is made on the issues, which were issued under Book Building and listed on National Stock Exchange during January 1, 2008 to June 2013.