Significance of IPO grading in Indian stock market: Empirical evidence

For the first time in the world, the Indian stock market regulator, Securities and Exchange Board of India (SEBI), introduced the system of IPO grading and made it mandatory for the companies going public since May 2007. This was done in order to decrease the information asymmetry between the retail investors and qualified institutional buyer's (QIBs) and to protect the wealth of retail investors from the investments in low quality Initial Public Offerings (IPOs). IPO grades, which are based on the fundamentals of the companies are supposed to indicate quality signals about the future prospects of the company's performance and hence ensure better returns from the investments in quality IPOs. This was done to help the majority of investors so that they can made wise investments. This study is an effort to investigate the relevance of IPO grading on under pricing, long-term returns liquidity, volatility and the P/E ratio of the companies. For the purpose of the study, 83 IPOs are selected, which came after May 2007 through National Stock Exchange (NSE) and possess IPO grades at the time of issue. The IPO's of different IPO grades are analyzed in terms of under pricing, liquidity, P/E ratio, volatility and long term returns using t-test and regression analysis. The results indicates that the QIBs considers IPO grading significantly and hence also affects the overall subscription of the IPO. The Listing Day liquidity of higher graded IPOs is low but commands better liquidity in the long term. Long-term performance of the higher graded IPO is better than low graded IPO's. However, the IPO Grading in not relevant in explaining the Listing Day returns. Also, the IPO grading has no impact on the subscription behavior of retail investors.