Higher Grades, Better Performance: Debunking Myths Associated with IPOs

Abstract

May 1, 2007 marked the day when a distinctive mandatory system prevalent nowhere in the world was introduced by India's market regulator SEBI - mandatory initial public offering (IPO) grading. It was for the first time in the history of securities market regulator that a company planning to get listed needed to get a grading of its issue. The rationale behind the mandatory grading was that the retail investors who are usually at a disadvantage of having inadequate information about the issue would get an indication about the fundamentals of the company. The belief that "Higher Grades lead to better IPO performance both in the pre and post listing period" has been proved to be a myth over and over again. Lately, there has been a debate over the significance and relevance of IPO Grading. Out of the total 56 public issues that were launched and listed on the NSE during the one year period from January - December 2010, 42 issues traded at a loss after one year of listing as compared to their issue price. This paper analyses the myths surrounding the IPO Grades and their performance.