IPO GRADING

Apeejay School of
Management
IPO - INITIAL PUBLIC OFFERING

 IPO is the process by which private companies can go

public by sale of its stocks to the general public.
 Companies can raise equity capital with the help of an IPO
by issuing new shares to the public or the existing
shareholders can sell their shares to the public without
raising any fresh capital.
 After IPO company’s shares are traded in the open market.
WHAT IS IPO GRADING ?
 IPO Grading is an independent opinion on the
fundamentals of graded issue expressed as a relative
assessment in relation to other listed equity shares in India.

 Grading can be done at any stage of the IPO planning

process, that is, before/after filing DRHP with the SEBI.

 It should be completed and disclosed in the final/red

hearing prospectus.
 As per SEBI Regulations, it is mandatory for issuers in the
primary market who file their draft red-herring prospectus
(DRHP) to get an IPO grading from SEBI-registered rating
agency.
GRADING EXERCISE COMPRISES AN
ANALYSIS OF:
A. Business Prospectus – in terms of
a) Industry prospectus
b) Company prospectus
(Competitive position of the issuer, alignment b/w industry
opportunities, company’s strategy and it’s capabilities)

B. Financial Prospectus – in terms of

(forward looking assessments, independent forecasting of
key financial indicators)
C. Management Evaluation/Quality – in terms of
(assessing the ability of the management to handle uncertainty
in terms of capitalising on future business opportunity and
mitigating the impact of contingencies)

D. Corporate Governance – in terms of

(evaluation of governance structure of the company to
determine if it is structured such that the risks and rewards of
business are equally available to all shareholders)
 WHAT IPO GRADING IS NOT

 Recommendation to invest/not invest in the graded instruments

 Comments on the issue of shares being offered, likely listing
movement of price post-listing
 Valuation of equity offering
 Assessment of market risk associated with equity investments
 Audit of the issuer
 Forensic exercise to detect fraud
IPO GRADING PROCESS
1. The issuer shares the required information with the grading
team.

- Information includes:
 Last 5 years annual report
 Hard copy of draft prospectus
 Detailed project report for a new project
 Details on promoters background, other main companies
within the group and last 5 years annual reports of group
companies
 Financial projections for the next 5 years with relevant
assumptions
 Details of instruments to be graded
 Any additional information required in specific circumstances

2. This is followed by detailed management meeting and plant/site

visits. They comprise meetings with the CFO,
functional/plant/sub-heads, independent directors and the CEO
3. The grading team prepares a detailed note and presents it to the
grading committee comprising senior internal resources and
eminent external experts which assigns the rating.

4. The issuer is provided the grading report and the grade.

(In case the issuer believes that the material relevant
information has not been considered in the grading and led out
in the report, an appeal can be made to the grading committee)
IPO GRADING SCALE
Grade Assessment

5/5 Strong fundamentals

4/5 About average fundamentals

3/5 Average fundamentals

2/5 Below average fundamentals

1/5 Poor fundamentals

Question to be answered before investing in
an IPO?

1. How strong is the company on the fundamentals?

2. Is it being offered at the right price?
3. Is it right investment for you?

The answers to these questions will help take investment

decisions that are tailored, rather than going only by traditional
“by”, “hold”, and “sell” recommendations
BENEFITS OF IPO GRADING

 Brings value to issuers and investors

 Provides an independent evaluation of the
fundamental strength of the issuer
 The evaluation/grade enables relative assessment
between companies of different size operating in
different industries
 Helps in increasing both domestic and foreign
investors participation
 Provides an additional input for investors to arrive at a
decision based on independent and objective analysis
 GRADING OF CENTRAL BANK OF INDIA

 Central Bank of India entered the capital market with an initial

public offering of 8 crore equity shares of Rs10 each at a price
to be decided through a 100% book building process.
 The main objective of the issue was to augment its capital base
to meet Basle II standards.
 The bank also intended to grow its assets in sync with the
growth of the Indian economy, primarily the loan and
investment portfolio.
 Valuation
 EPS for the year ended March 2007 on post issue equity
worked out to be Rs 12.3. Nevertheless, profit for FY 2007
included recovery/ write back of provisions of Rs 163.33 crore,
but such a repeat every year seemed difficult.
CENTRAL BANK: ISSUE DETAILS
Sector Bank – Public Sector

No. of share on offer 80000000 (face value Rs 10)

Price band (Rs) 85 – 105

Post-issues equity (Rs. crore) Rs 404.14 crore

Post-issue promoters stake (%) 80.20

Issue Open Date 24/07/2007

Issue Close Date 27/07/2007

Listing BSE/NSE

Grading 2/5