IPO grades not a factor in investors' decision making

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A large number of investors are not influenced by the grades provided for IPOs, various studies had showed, which led market regulator Sebi to do away with mandatory grading norms for initial public offerings.

In a move to uplift the dormant primary market, Securities and Exchange Board of India last month cleared the proposal to make the IPO grading mechanism voluntary.

Findings of two studies on effectiveness of IPO grading mechanism noted that retail investors, for whom the system was introduced, had "fully or overwhelmingly subscribed" to their portion in as many as 73 out of 86 'lower grade' IPOs.

A similar pattern was also found among the Qualified Institutional Buyers (QIBs).

This was informed by Sebi to its Board in the last meeting held on December 24, 2013, through an agenda paper.

"...The study shows that the retail investors are not taking any cues from grading and even QIBs have refused to acknowledge grades," the paper noted.

"This indicates that grading has been not a factor in investors' decision making process," it added.

The studies which were placed before Sebi's Primary Market Advisory Committee (PMAC) had also found that IPO issues with a higher grade had yielded more losses compared to other low grades.

The studies had thus suggested that as the IPO grading had not served the intended purpose, it "may be discontinued".

A separate study had however favoured the IPO grading and had concluded that "there is a strong correlation between the IPO grades and the valuation multiples commanded by them".

But, the organisation which undertook that study also said that IPO grading should not be 'mandatory', but should only be "recommended" or "encouraged".

Other stakeholders like investor associations and the Association of Investment Bankers of India (AIBI) had also recommended that IPO grading be made optional.

IPO grading was made mandatory by the Sebi in April, 2007 and the regulator had decided to review it periodically.

Subsequently, the matter was placed before the PMAC for deliberations.

Taking into account views of the PMAC and other market participants, Sebi had proposed to the board that IPO grading "may be made voluntary" instead of being a "mandatory" requirement.


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