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What is IPO Grading

09 Aug 2023

A company which has filed a draft document of offer for an IPO, must, according to a SEBI (Securities and Exchange Board of India) ruling, be rated. This rule applies to any IPOs listed after 2007. An IPO grading has to be obtained from at least one agency, authorised to generate such a rating. In case a company is dissatisfied with the rating it has been assigned, it can approach another grading agency. 

What is IPO grading?

When you open a demat account to first invest in company stocks from the stock market, you would naturally wish to know about any returns on your investment in stocks. How do you get to know about this? Well, you would obviously study a company’s past track record and wish to learn about the success of the company. This can tell you a lot about the potential growth path of any company. 

If you notice that a company has the potential for growth and success in the future, you would likely buy that company’s stock. While investing in an IPO, IPO grading can help you to invest in a company’s IPO by knowing the position of an unlisted company relative to other companies in the same sector/industry. If the company’s fundamentals are strong, as denoted by a high grading, then investors are confident about investing in it. 

Why is IPO grading important?

To invest in any upcoming IPO, investors cannot simply rely on hearsay about a company’s prospects for success. This is why IPO grading was initially introduced. IPOs are generated by unlisted companies, and investors wish to have some assurance before they invest. Sometimes, there may not be enough information available about unlisted companies that investors can bank on. The official grading helps an investor to put an unlisted company into perspective and make an informed investment choice. The grading also helps to attain a realistic view of the share price. In case a company has a high grade, its share price will be aligned with this (it will have a high share price). Once you asked the question, “What is IPO grading?” and got your answer, you can use this to subscribe to any IPO. 

Factors Influencing the Grading of IPOs

Internal as well as external factors affect how a company is graded according to IPO grading. The factors that account for internal variables include the competence of the company management, the company’s edge over any competition, the efficiency of a company’s operations, the company’s liquidity, risks of hedging, and more. With regard to external conditions, these comprise the scenario in the industry, the conditions of the economy, etc. 

Look for IPO Grades in Offer Documents

When you go in for an upcoming IPO 2023 subscription, you must always read the offer document with care. In the prospectus of the issue, you can find IPO grading, with a corresponding description. You may also find the IPO grading in the IPO issue advertisement. The rating letter of the credit agency would also be present in the offer document for any investor’s perusal. If you are considering an IPO subscription, you may also want to open a Demat account and try your fortune at the stock market. 

Related articles: 5 Tips for Investing In IPOs | What's the big deal about IPOs | Clearing the confusion from IPOs | IPO in India- The future looks bright | Upcoming IPO

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