IPO grading
Also written Grading of an IPO
The requirement that an unlisted company's IPO be graded by an approved credit rating agency before the issue — a pre-issue checklist item the workbook states without specifying a grading scale.
In plain language
Before an unlisted company can go public, one of the boxes the lead manager must tick is getting the issue graded by a credit rating agency the regulator has approved.
The workbook lists this among the lead manager's pre-issue tasks, alongside appointing the R&T agent and filing the draft prospectus. It does not go further into how the grading works.
How it works
The workbook states only this: "for an issue by an unlisted company, get the IPO graded by an approved credit rating agency", as one line in the lead manager's pre-issue checklist. It gives no grading scale, no list of qualifying agencies and no timeline for when in the pre-issue process the grading must be obtained. Where the source is this thin, the honest answer is to say so rather than to import a grading scale from outside the workbook.
A worked example
Anantpur Engineering Ltd, an unlisted company, plans an illustrative IPO of Rs 250 crore — a size chosen only to make the example concrete, not a figure from the workbook. As part of its pre-issue work, the lead manager gets this Rs 250 crore issue graded by a SEBI-registered credit rating agency, alongside appointing the R&T agent and bankers and filing the Draft Red Herring Prospectus.
The grading report becomes part of the pre-issue documentation the lead manager assembles before the DRHP is filed with SEBI. What the workbook does not supply, and what this example does not invent, is any grading scale, any named agency or any size threshold that triggers the requirement — the workbook's own text is silent on all three.
Why NISM asks about it
Chapter 9, section 9.1 (Pre-Issue Work), which lists IPO grading as one bullet among the lead manager's pre-issue responsibilities for an unlisted company's issue. Expect a simple recall question — who does the grading (an approved credit rating agency) and for which issues (unlisted companies) — rather than a numeric one.
Common exam traps
- Do not invent a 1-to-5 grading scale or name specific agencies — the workbook passage for this series gives neither.
- Grading applies to an issue by an unlisted company in the workbook's wording — it is a pre-issue step, not a post-listing requirement.
- Do not confuse IPO grading with credit rating of a debt instrument — the workbook treats them as related but separate uses of a credit rating agency's function.
Check yourself
1.All public issues of shares have to get a credit rating done. True or false?
- a)False
- b)True
Show the answer
Answer: (a) False
The requirement is confined to one situation, so the statement is false.
For an issue by an unlisted company, get the IPO graded by an approved credit rating agency.
By an unlisted company — which is one of the lead manager's pre-issue steps, not a universal rule. A further public offer by an already listed company does not attract it.
The reason is informational. A listed company already discloses continuously under its listing agreement, which has clauses for continuous and timely flow of relevant information to the investors, corporate governance and investor protection. An unlisted company has no such record before the market, so an independent grading adds something.
Note also that grading is not the same as a debt credit rating. Chapter 3 describes rating as an exercise converting the ability and willingness of the company to service the instrument proposed to be issued into a symbol — a judgement about repayment. An IPO grading concerns the equity offering.
What every public issue does require is extensive disclosure through the offer document. The prospectus is the document which contains all the information relevant to an investor to make an investment, its content and format... prescribed by SEBI; and in a book-built issue the DRHP contains all statutory disclosures.
Plus, more recently, an audio-visual version: salient disclosures made in the DRHP, RHP and price band advertisement for public issues shall also be made available in Audio Visual format (AV)... for all main board public issues, initially... in bilingual format i.e. English and Hindi.
And underwriting, unlike grading, is universal: underwriting is mandatory, save for a public issue through an offer for sale.
Where this is taught
Free preparation for NISM Series II-ARelated terms
- Credit ratingAn opinion on how likely a borrower is to service an instrument on time, reduced to a symbol by a SEBI-registered rating agency — and reviewed continuously, not fixed for the life of the bond.
- Brokers to the issueStock exchange members appointed in a public issue to collect application forms and bids from investors, and paid a commission based on what they collect.
- Confirmation Allocation NoteThe intimation an anchor investor or a fixed-price applicant receives confirming the shares allotted to them in a public issue — the allotment counterpart to a refund order.