Initial Public Offering (IPO) Grading has been introduced as an attempt to make additional information available for investors to facilitate their assessment of equity issues offered through an IPO. With the increase in the domestic retail and institutional participation in the equity markets, the markets regulator, Securities and Exchange Board of India, has made the grading of these IPOs mandatory. Ind-Ra is one of the approved credit rating agencies for undertaking IPO Grading.

Investment decisions for IPOs presently require analysing complex disclosure documents, which is a challenge for investors, especially retail investors. IPO Grading aims to provide an independent, unbiased view of the company's fundamentals, enabling the investor to benchmark new issuers with their peers in the equity universe.

It is a one-time assessment undertaken prior to the proposed initial public issue; therefore, there would be no ongoing coverage of the issuer after the initial grading.

Benefits of IPO Grading

  • Ind-Ra's IPO grading brings value to issuer and investors.
  • It provides an independent evaluation of the fundamental strength of an issuer.
  • The evaluation/grade enables relative assessment between the companies of different sizes operating in different industries.
  • It helps in increasing both domestic and foreign investor participation.

IPO Grading Process

  • The issuer has to submit the IPO grading along with a filled Draft Red Herring Prospectus or a Red Herring Prospectus to SEBI. The typical Ind-Ra IPO grading process will take a time of four to six weeks. The process typically follows the following steps:
  • The issuer signs an agreement with Ind-Ra.
  • Fees are decided according to relevant regulatory guidelines, or are negotiated between the issuer and Ind-Ra if the guidelines are not available.
  • Publicly available information, including the prospectus filed with SEBI, past annual reports is reviewed.
  • In-depth discussions with the promoters and management are conducted.
  • The analysis is finalised.
  • An IPO grading committee is held for assigning a grading and issuing a grading rationale and grading letter.

IPO Grading Methodology

  • The IPO Grading methodology adopted by Ind-Ra is a combination of both the quantitative and qualitative factors taken to assess the financial and business risks of the issuer. The analysis considers the issuer’s operating history including financial performance, as well as an analysis of the issuer's forecasts, including investment plans, and the utilisation of the proceeds from the proposed IPO.
  • A core part of Ind-Ra's analysis of the issuer's fundamentals also includes a comparative analysis, through which the issuer's financial and operating risk profile is measured against its peer group. Ind-Ra will use the publicly available information, including the IPO prospectus filed by the issuer with SEBI, past annual reports, and forecasts and future plans, supplemented by discussions with the issuer and other stakeholders.

Qualitative Analysis

On the qualitative aspect, Ind-Ra evaluates factors including, but not limited to:

  • Industry analysis and market position.
  • Analysis of the operating environment.
  • Management quality and parentage.
  • Corporation governance, quality of disclosures in the prospectus, accounting standards, and compliance.

Quantitative Analysis

On the quantitative side, Ind-Ra evaluates the financial strength and stability of the issuer. This is customised, depending on the nature of the issuer i.e. bank/institutions/non-banking finance company or corporates. An analysis of a corporate issuer would include evaluating factors such as:

  • Past financial performance including growth, earnings, profitability, cash flow analysis, capital structure, liquidity, and working capital.
  • Future financial prospects including investment, capital expansion, acquisition plans and utilisation of IPO proceeds, and projections.

Capital History

IPO Grading Scale

The IPO grade scale as arrived at by SEBI is a 5-point scale with Grade 1 denoting poor fundamentals and Grade 5 indicating strong fundamentals. The grade assigned to any individual issue represents a relative assessment of the 'fundamentals' of that issue in relation to the universe of other listed equity securities in India.

Grading CategoryDefinitions
Ind-Ra IPO Grade 5Strong fundamentals
Ind-Ra IPO Grade 4Above average fundamentals
Ind-Ra IPO Grade 3Average fundementals
Ind-Ra IPO Grade 2Below average fundementals
Ind-Ra IPO Grade 1Poor fundementals


Is IPO Grading Mandatory?

As per SEBI guidelines, all issuers in the primary market filing their DRHP, draft prospectus or offer document on or after 1 May 2007 must get an IPO Grading from any credit rating agency registered with SEBI.

When IPO Grading is to be Done?

IPO Grading can be done at any stage of the IPO planning process, preferably before filing the DRHP with SEBI. It needs to be completely disclosed in the final RHP.

What is the Validity of IPO Grading?

IPO Grading is a one-time exercise. It does not have an on-going validity.

Who Pays for the IPO Grading Exercise?

The issuing company pays for this exercise.

What is Ind-Ra's IPO Grading?

Ind-Ra’s IPO Grading is an independent opinion of the company's fundamentals covering business, financials, management and corporate governance. The opinion is based on the grading exercise as explained in the 'IPO Grading Methodology' section above.

What Ind-Ra’s IPO Grading is Not:

Ind-Ra’s IPO Grading is not a valuation of equity offering or issue price of the shares being offered or a recommendation on the investment decision for the graded company or an audit of the issuer.

What is the Difference Between Ind-Ra's IPO Grading and a Credit Rating?

The objective of an assessment for an IPO Grading and a Credit Rating is very different; though the basis elements of the analysis are same. An IPO Grading assesses factors from equity-holder's perspective and is a point in time exercise, whereas a Credit Rating assesses factors from debt-holders perspective and usually requires recurring surveillance over the life of the instrument.