Examining SEBI’s Edict: Mandatory to Voluntary IPO Grading

Abstract

A major landmark that took place in the history of India was Securities and Exchange Board of India’s (SEBI) resolution to make IPO grading mandatory with effect from 1 May 2007. But SEBI’s decision to make IPO grading voluntary with effect from 4 February 2014 has made researchers reexamine the impact of this verdict on underpricing. Multivariate regression analysis run on the data collected from 164 graded initial public offerings (IPOs), which are issued during mandatory grading regime (from 1 May 2007 to 4 February 2014) in the Indian capital market, reveals the efficacy of IPO grading in lowering underpricing. The implication for the naive investors is that the assessment tool dispensed by the market regulator to make splendid investor choice was actually proving its worth for them as well as for the issuer company in lowering the anomaly they face in the form of underpricing. It was concluded that graded IPOs faced lesser underpricing, thereby making quizzical SEBI’s verdict.