There are times when within a few hours of the launch of an Initial Public Offering, investors jump for a share and the issue gets oversubscribed. The reason behind so much interest of investors is the goodwill of the company and its grades. According to experts, these grades can be very crucial for an IPO as it decides its credibility.
The stock market is full of poor quality and deceptive IPOs. It is very important to understand the strength of the financial base of a company before investing in their IPO. Remember, as the company is selling their stocks for the first time, you can’t have a historical chart of their stock’s growth as references before buying them. Stock market regulator, the Securities and Exchange Board of India (SEBI), introduced the grading system so that investors can measure a company’s strength of finance and business growth.
A company can choose an agency to grade their IPO through a certified and recognized credit rating agency. The grading is conducted on a scale between 1 and 5, where 5 is the highest grade. However, it is important to understand that the key purpose of the grading is for investors to decide whether or not they wish to invest in the company. The grading can never decide the price of the shares of the company.
Procedure for grading
Different agencies have different methods to grade IPOs. They assess the company’s business planning, company structure, future planning, expansion planning, strength of fund sources, market reputation, publicity, the need of the product to the people and, most importantly, the financial position. All of the above parameters should be strong for a company to get positive IPO grades.
Grading versus investments
While a grade may indicate the credibility of a company based on its achievements and future prospects, by no means can it predict the performance of the company’s stocks. A whole host of internal and external factors such as the company’s management, the country’s and the world’s economic environment etc. play a role in the performance of the company once shares are listed.