Performance Of Recent Ipos Against Credit Ratings

Published Date: 02 Nov 2017

I, Bhavarth Sheth student of Masters of Business Administration from Amity Business School, Amity University Uttar Pradesh hereby declare that I have completed Dissertation on "MANDATORY IPO GRADING: REFLECTIONS FROM THE INDIAN CAPITAL MARKET" as part of the course requirement.

I further declare that the information presented in this project is true and original to the best of my knowledge.

Date: Bhavarth Sheth

Enroll. No: A0101910134

Place: Noida MBA Class of 2012

AMITY UNIVERSITY UTTAR PRADESH

AMITY BUSINESS SCHOOL

CERTIFICATE

I, Dr. Shalini Trivedi hereby certify that Bhavarth Sheth student of Masters of Business Administration at Amity Business School, Amity University Uttar Pradesh has completed his dissertation on "MANDATORY IPO GRADING: REFLECTIONS FROM THE INDIAN CAPITAL MARKET", under my guidance.

Dr. Shalini Trivedi

Assistant Professor

Department of Economics

ACKNOWLEDGEMENTS

An in-depth study of Mandatory IPO Grading – this would have not been possible without the imprints of a number of people who directly or indirectly helped me in completing the present study. I would be failing in my duties if I don‘t say a word of thanks to all those who helped me conduct this research.

First of all, I am extremely grateful to our Director General Dr. Sanjay Srivastava, for his continuous guidance and encouragement during the entire course. I would also like to extend my heartfelt gratitude to our Program Leader Mr.Pradeep Narwal for his continuous support and encouragement. I would also like to thank Dr.Shalini Trivedi for her tutelage during the course of dissertation. I would like to thank her for her continuous support, mellow criticism and able directional guidance during the project report.

I would also like to thank all the respondents for giving their precious time and relevant information and experience, I required, without which the Project would have been incomplete.

Finally I would like to thank all lecturers, friends and my family for their kind support and to all who have directly or indirectly helped me in preparing this project report. And at last I am thankful to all divine light and my parents, who kept my motivation and zest for knowledge always high through the tides of time.

Sheth Bhavarth Urvishkumar

A0101910134

MBA(G) Class of 2012

TABLE OF CONTENTS

Sr.No.

Particulars

Page No.

1.1.

Performance of Recent IPOs against Their Credit Ratings

9

3.1

Reliability Statistics of IPO Grading – Pilot Test

17

3.2

Reliability Statistics of Investment Perception – Pilot Test

17

4.1

ANOVA Test for IPO Grades v/s Retail Subscription

21

4.2

Regression Analysis of IPO Grades v/s Retail Subscription

21

4.3

ANOVA Test for IPO Grades v/s Listing Day Gains

22

4.4

Regression Analysis of IPO Grades v/s Listing Day Gains

24

4.5

IPO Performance

25

4.6

Regression Analysis of IPO Grades v/s Listing Day Gains

29

4.7

Regression of Relative Returns

30

4.8

One Sample Statistics of what investors think about IPO Grades

37

4.9

One Sample t-test of what investors think about IPO Grades

37

4.10

Working of Credit Rating Agency * IPO Grades are Free from Biases Crosstabulation

39

4.11

Chi – Square: Working of Credit Rating Agency * IPO Grades are Free from Biases

39

4.12

Kruskal-Wallis Rank Test of four CRAs

42

4.13

Ranks of four CRAs

42

4.14

Factors influencing Investment Decision in an IPO

45

4.15

KMO and Bartlett’s Test

45

4.16

Communalities of Factor Analysis

46

4.17

Total Variance Explained of Factor Analysis

47

4.18

Rotated Component Matrix of Factor Analysis

48

4.19

Factor Extraction and Classification of Factor Analysis

49

LIST OF TABLES

LIST OF FIGURES

Sr.No.

Particulars

Page No.

1.1.

IPO Grading Process

6

3.1

Number of IPOs applied by Respondents’ till date – Pilot Test

18

3.2

Respondents’ Awareness of IPO Grading – Pilot Test

18

4.1

Average Listing Day Gains w.r.t. IPO Grades

23

4.2

IPO Grades in 2010

26

4.3

Failure Rate of IPO

27

4.4

Average Relative Returns

28

4.5

Respondents’ Gender

31

4.6

Age - Group of Respondents

31

4.7

Annual Investment in Stock Market

32

4.8

Since how many years investing in Stock Market

32

4.9

No. of IPOs applied till date

33

4.10

Understanding of IPO Grading & Consider IPO Grading Crosstabulation

34

4.11

Understanding of IPO Grading & Consider IPO Grading Crosstabulation

35

4.12

Understanding of IPO Grading & can predict post IPO Grading

36

4.13

Invest in poorly graded IPOs

40

4.14

Crosstabulation-Mandatory IPO Grading to continue & cost is to be shared

41

4.15

Working of CRAs

43

4.16

Need for Grading by more than one CRA

44

4.17

Grade considered when grading by more than one CRA

44

ABSTRACT

SEBI has mandated grading of the Initial Public Offers (IPO) since May 2007 in order to make more information available at the hands of the investors so as to enable them to make a better assessment of the IPO. The rationale behind compulsory rating is the fact that retail investors who are usually at a disadvantage when it comes to disclosure of information and news relating to developments about the company are given an opportunity to look at the fundamentals of the company before investing their hard earned savings and not to be deterred by the general disclaimers that equity investments are subject to market risks. Out of the total 56 public issues that were launched during the one year period from January 2010 to December 2010, 42 issues traded at a loss after one year of listing compared to their issue price. All these were rated from Grade 1 to Grade 4.

This study analyses the objectives of IPO grading and its implications for retail investors on selecting a company for investment based on grading. The issues with listings period between January 2010 and December 2010 are considered for analysis. A primary analysis was done by undertaking a survey of investors’ to know their perception regarding Mandatory IPO Grading System and its effect on their investment decision. Working of CRAs has come under scanner off late due to the global financial crisis and their role in it, an attempt has been made to know investors’ perception on the same. Thus, a multidimensional study is undertaken to know the Reflections of Mandatory IPO Grading on the Indian Capital Market.

CHAPTER 1: INTRODUCTION

For the first time in the history of securities market regulator, the Indian Market regulator Securities & Exchange Board of India (SEBI) introduced a new requirement effective from May 1, 2007. The new requirement states that a company planning to get listed on the stock exchange needs to obtain a grading of its Initial Public Offering (IPO), prior to the IPO issue, from at least one credit rating agency that is registered with SEBI. This new requirement was unique in the world of IPOs.

The rationale behind this compulsory requirement was that IPO grading would represent the fundamental analysis of the issue. And with stock market participation of new and foreign investors increasing, there is need for greater value-added information on companies tapping the capital market and their intrinsic quality. Also, SEBI believed that an IPO grade would offer an additional feedback to investors, in arriving at an investment decision. Hence, IPO grading can be seen as an effort to make additional indications available to the investors to help them in assessment of equities offered through IPO.

The decision for mandatory IPO grading was a result of pressure from certain investor groups. However, the debate on the relevance of IPO grading refuses to die down. There has been disagreement from companies, investment bankers, fund managers and even the SEBI board members for it. They feel that grading should be made optional rather than mandatory because of the fact that it increases the cost of raising funds and also leads to unnecessary delay in the process. The debate is intensified whenever the price of a scrip slips below the IPO price, an IPO gets withdrawn after grading or a highly-graded IPO does not do well on the bourses. Given the fact that grading expenses have been as high as one percent of the total issue size in some cases, some of the concerns by the opposition deserve attention.

The question arises is that do these facts make IPO grading irrelevant? The answer is no. This is because IPO grading does not comment on the valuation or pricing of an issue. Also, the price being a market function, it is entirely possible for highly-graded IPOs to do badly on the bourses, especially if the valuations were aggressive and the market on a downward slide or vice-versa.

Overall, the basic purpose of grading is to serve as an additional input, which is independent and arrived at through a rigorous analytical process, to aid an investor's decision in subscribing to an IPO. Now, what weightage an investor assigns to an IPO grade given to a stock is a matter of individual judgment.

THEORETICAL BACKGROUND

Meaning of IPO:

IPO is an acronym of Initial Public Offering. An initial public offering (IPO) is the financial mechanism by which a private company offers stock to the general public for the first time and officially becomes a publicly traded company. The advantages of raising funds through an IPO are as below –

Creation of liquidity and potential exit for the current owners

Access to capital to fund growth

Enhancement of the company’s public profile

Enable cheaper access to capital

Attract and retain the best management and employees

IPO in India is done through different methods like fixed price method, book building method, or a combination of both. In the fixed price method the issuer company and the merchant banker agree on an "issue price". The basis of issue price is disclosed in the offer document where the issuer discloses in detail about the qualitative and quantitative factors justifying the issue price.

Book Building is a process undertaken by which the demand for the securities proposed to be issued by a body corporate is elicited and built up and the price for the securities is assessed on the basis of the bids obtained for the quantum of securities offered for subscription by the issuer. This method provides an opportunity to the market to discover the price for securities. The process is named so because it refers to collection of bids from investors, which is based on a price range. The issue price is fixed after the closing date of the bid. The IPO market in India has been developing since the liberalization of the Indian economy. According to Ernst & Young (India) , India is the 3rd largest in terms of number of IPOs after China and USA in the first quarter of 2010.

Meaning of IPO Grading:

On the scale of functional analysis, IPO grading can be defined as an exercise directed towards assessing the quality of equity shares proposed to be offered to the public, with the task of assessment being carried out by a specialised agency, known as ‘Credit Rating Agency’ (CRA). The outcome of this exercise would be a grade, which would in turn be the qualitative indicator of the fundamentals underlying the security proposed to be issued vis-à-vis the corresponding parameters of the already listed securities.

The grade, reflective of the issue quality, is unarguably based on an indeterminate and non-quantifiable concept of fundamentals of the issuer and is an outcome of the assessment of factors which are in turn only qualitative guides to the security being graded. An exhaustive listing of these factors would be a task too tedious and impractical for the simple reason that each moment there arise a host of factors which affect the company and its operations but taking account of all those may not be worthwhile for making an estimation of the underlying strength of the security. Thus, it is pragmatic to identify a list of core factors.

The factors identified by SEBI in this regard are –

Business and Competitive Position: The alignment between industry opportunities, the company’s strategy and objectives.

Financial Position and Prospects: Forward looking assessment of key financial indicators such as RoE, ES, P/E, growth in profit, relevant or an equity investor.

Management Quality: An evaluation of the ability of the management to handle uncertainty in terms of capitalizing on future business opportunity and mitigating the impact of contingencies.

Corporate Governance practices: An evaluation of the company’s governance architecture to determine if it is structured such that the risks and rewards of business are equally available to all shareholders.

The selection of these factors evidently reflects a bias in favour of subjective appreciation rather than objectively verifiable components. Furthermore, this grade will not be a recommendation to invest in or sell- off or hold onto a security which is a security-specific assessment essentially based on liquidity and demand of security. As IPO grading discounts the price of the IPO as a factor, it will merely aid the investor in making the investment decision by providing pure information regarding the relative strength of an issue.

To elaborate further, the grading is proposed to be done on a five point scale. The lower rung consists of grade 1 denoting ‘poor fundamentals’, grade 2 denoting ‘below average fundamentals’ and grade 3 indicating ‘average fundamentals’. On the higher rung are grade 4 and grade 5 denoting ‘above average fundamentals’ and ‘strong fundamentals’ respectively.

Credit Rating Agencies in India

The success stories of credit rating agencies in the US encouraged a few Indian and foreign financial institutions and banks to establish rating agencies in India. Credit rating in India is the brain child of CRISIL (Credit Rating and Information Services of India Limited).

CRISIL was incorporated in January 1987 and commenced its rating activities in January 1988. Its first rating was released in March 1988.

ICRA (Investment Information and Credit Rating Agency of India Limited) is the second rating agency established in India (January 1, 1991) at a time when the country was all set to embrace the economic liberalization policy.

CARE (Credit Analysis and Research Limited) is the third credit rating agency to be set up in India (April 1993).

Duff and Phelps Credit Rating India Limited (DCR) is the fourth, but the first private sector rating agency which commenced its operations in India in 1995. Duff and Phelps, and Duff and Phelps India Private Limited merged in November 2001 to form a new entity called, Fitch India Limited, a 100% subsidiary of Fitch IBCA.

Brickwork Ratings India Private Limited is the fifth credit rating agency (second private rating agency) registered with SEBI in 2007.

Credit rating agencies came into being to evaluate the credit risk of the financial instruments. The basic philosophy behind assigning a credit rating is to enable the investors to take proper investment-related decisions to minimize their risk and maximize their benefits.

IPO GRADING PROCESS

The following is the IPO Grading Process followed by CRISIL. To initiate the process of obtaining an IPO grade, the company first contacts one of the grading agencies. The rating agency broadly tries to identify the strengths and weaknesses of the company under issue in terms of systematic and unsystematic risks and returns. Analysing the overall economic trend, followed by an industry analysis gives the potential investor to get a perspective of the company and its prospects for the days to come. Some of the firm level analysis done during grading includes a report on the financials of the company and information about the upcoming projects and orders. This usually forms the basis for the issue and intends to give a clear view to the investor to make a decision. It is necessary to note that the grading process and the exercise do not include any comment on the price band of the issue. In fact, the price band is not even determined by the Investment Bankers/ Issuers till the time grading is obtained. It is a step – wise regulated process.

The steps involved in the grading process are as follows:

Step I: The issuer shares the required information with the grading team of the rating agency

Step II: Rating agency follows up with detailed management meetings with the CEO, CFO, and the board of directors, and further follows up with subsequent site visits.

Step III: The grading team prepares a detailed note and grading committee assigns the grade.

Step IV: Grading Agency publishes a rationale outlining the reasons for the assigned grade

Step V: Grading Agency sends the grading report to SEBI, stock exchanges, and to the company.

The following is the diagrammatic representation of the grading process –

Figure 1.1 – IPO Grading Process

Can the issuer company reject an IPO grade?

IPO grade/s cannot be rejected. Irrespective of whether the issuer finds the grade given by the rating agency acceptable or not, the grade has to be disclosed as required under the DIP (Disclosure and Investor Protection) Guidelines. However the issuer has the option of opting for another grading by a different agency. In such an event all grades obtained for the IPO will have to be disclosed in the offer documents, advertisements etc.

SIGNIFICANCE OF STUDY

Investment is a risk-return balancing game. A large number of investors have invested a sizeable amount of their savings in expectation of good returns. Over the years, a number of investors have burnt their fingers as a number of companies yielded negative returns. A number of entities defaulted in meeting financial obligations of payment of interest and the repayment of principal amount. Nevertheless, a few investors reaped the fruits of the market.

To succeed in the market, there is a need for evaluating the fundamentals of issuer companies, their prospects and associated risks, before investing in their securities. Managing a risk is a difficult task. It is very difficult to identify and evaluate the risk associated with investments. Successful management of risk, to a greater extent, depends upon the availability of complete and reliable information. Even if the information is available, it is very difficult to understand and analyze the information to take informed investment decisions as many a number of investors do not possess adequate knowledge and skills to analyze and interpret information. They may not be able to understand the finer aspects of information. There lies the significance of specialized market intermediaries who can assist them in understanding the fundamentals of the company and market and read between the lines. It is believed that credit rating agencies are of great help in this regard. Through the transition of economic liberalization, the credit rating agencies in India have grown and they are providing useful services to minimize the risk of loss due to failure of borrower organizations to meet the financial obligations as per the schedule and to enable the investors to understand the fundamentals of companies issuing the equity shares.

Inspite of pivotal service by the credit rating agencies, they are kept under watch. One of the reasons for this is their failure to predict the fall of many corporate borrowers. Also, many IPOs rated very high performing very badly and vice-versa.

SCOPE OF STUDY

Given that no other capital market in the world practices such a grading scheme, the need to study this unique feature about India’s capital market that calls for IPO grading.

There are various positive sides of an IPO grading. The most significant factors that go in favour of IPO grading are –

Professional and independent appraisal

Removal of information overload

Improving investors’ sophistication

Additionally benefit of the IPO grade, in the eyes of the rating agencies, is particularly significant for the smaller firms. While the large and well-known companies would not find it difficult to raise the funds, the middle rung companies would like their equity to be graded such that they could access funds without much track record of their performance.

Although IPO grading is a novel method used to safe guard retail investors it has the following potential negative aspects, apart from the criticism already discussed –

Grading discourages small entrepreneurs as they are bound to get lower grading due to their relatively poor back ground

The cost of grading is borne by the issuer. Technically SEBI has to bear the cost of monitoring the quality of IPOs. With grading, SEBI shares these costs with the issuers and hence grading may discourage entrepreneurs to raise equity in the public market

Grading equities, unlike debt where the cash flows and time horizon are defined, is much difficult as the cash flows and time horizon are not certain.

However, the present growing concern which has brought the issue of the mandatory IPO grading at the trial is that the issuers which have been assessed at a high grade are not performing as per the expectation while those graded low are performing better than these. Many analysts believe that mandatory grading requires amendment since grading does not reflect in the performance of issues in the market.

The following table shows the performance of some of the last few public issues that have come in the market.

Company

IPO Grade

Credit Rating Agency

Issue Price (Rs)

List Price

(Rs)

Price as on Oct 31, 2011

(Rs)

Return as on Oct 31, 2011 (Non-annualised) (%)

Adani Power

3

ICRA

100

105

88.15

-11.85

NHPC

4

Crisil

36

39

25.10

-30.28

OIL India

4

Crisil

1050

1096

1295.40

23.37

Jindal Cotex

3

Brick Work

75

77

77.05

2.73

Mahindra Holidays & Resorts Limited

4

Fitch

300

315

342.25

14.08

Globus Spirits Limited

3

CARE

100

110

119.95

19.95

Pipavav Defence and Offshore Engineering Company

3

CARE

58

60.05

86.25

48.71

Table 1.1: Performance of Recent IPOs against Their Credit Ratings

As it is clearly visible from the table, there is a large variation between the returns generated by IPOs with the same grades. For example, both NHPC and OIL India earned a grade of 4 from the same rating agency Crisil, but as on Oct 31, 2011, Oil India has given a return of 23.37 while NHPC is struggling with a negative return of 30.28

Hence, it becomes very important to get an investor’s take on the IPO Grading and its importance. To study the investors’ perception of Grading and how it affects their investment decision is very important. Therefore, a primary research of investors would be undertaken for the same.

CHAPTER 2: LITERATURE REVIEW

Investors’ Perception

It is very important to study the investors’ take on the mandatory IPO Grading. To know their perceptions, behaviour and attitude towards the grading system, following literatures were reviewed. It was found necessary to study the impact of grading on the investment pattern of the investors.

Baker and Mansi (2002) in their work studied about the attitudes, perceptions, and behaviours of issuers and investors towards the credit rating agencies and their impact on the knowledge they provide about the market participants. Through a survey they found that industrial companies issuing bonds and mutual funds investing in corporate bonds differ in some of their assessments about rating agencies. The differences reflect the different roles that rating agencies serve for issuers and investors.

Bheemanagouda and Madegowda (2010) in their study undertook a survey of investors to analyze the investors’ perception on the working of credit rating agencies in India. They made an attempt to know the sentiments of the investors towards the rating agencies after the global meltdown that shook the world. They observed from the responses of the respondent investors that the rating agencies certainly play an important role in the development of the capital market.

Czarnitzki & Kraft (2007) in their study examined whether credit ratings contribute valuable information and are they helpful to investors. They made an attempt to analyze that do the ratings help to minimize risk. They found that credit ratings provide valuable information to the investors. They concluded that credit ratings are a good reform.

Dorn (2009) studied the sentiment that drives IPO purchases made by a sample of clients at a German retail broker. He analyzed the data of two years and observed that the willingness to overpay points to sentiment as a driver of retail trading decisions. Consistent with this interpretation and with sentiment affecting prices, he concluded that the IPOs that are aggressively bought by individuals in the when-issued market exhibit high first-day returns as well as poor aftermarket returns relative to benchmarks of similar stocks.

Credit Ratings Agency

Credit Ratings Agencies are the ones that drive this system of mandatory grading. They study the company and issue a grade showing its fundamental strength. Numerous debates have been there on the working and authenticity if their working after the global crisis. Henceforth, literatures concerning the Credit Rating Agencies were reviewed to get further inputs and views on the same.

International Journal (2008) in its article discussed about rationale for the existence of the Credit Rating Agencies after the subprime crisis. The article cites interviews that include valuable insights by 14 experts of the field of finance sharing their views on the same.

Ministry of Finance (2009) in their working paper on Comprehensive Regulation for Credit Rating Agencies examined wide ranging steps to improve the functioning and accountability of CRAs including the suggestion that in the medium run regulators may move away from the mandatory rating practice at least in the capital market. Based on the examination of the CRA business models, current regulatory activities, global experiments and the Indian context, this report aims to lay out a broad framework for strengthening the existing regulatory architecture for CRAs in India and incorporates the Committees‘ vision for new arrangements and practical steps required in this direction. They suggested that CRA’s assertion that rating is only an opinion mandatory rating may need to be relooked at. Regulators also need to enhance their due diligence and investors need to strengthen their own information processing systems.

IPO Grading

IPO Grading is a unique feature in the capital markets and its introduction to the Indian Capital Market has been an issue of hot discussion. There have been both positive and negative impacts of the grading system with both parties with their explanation. Therefore, articles were reviewed to know the impact if grading and reason for its opposition.

BT Money (2007) in the article throws lights on the failure of IPOs in the capital market and the reasons behind it. The article talks about IPO Grading and has important insights from Crisil’s head. The article talks about the importance of IPO Grading for investors and the future of IPO Grading.

Deb and Marisetty (2008) in their study examined the efficacy of the unique certification mechanism introduced by SEBI. They analyzed numerous IPOs and found that underpricing of IPOs is lower in the post –grading regime, Retail investors respond to the IPO grading quality i.e. retail investors show more interest on better quality IPOs and Post issue results indicate that high quality or better graded IPOs attract higher liquidity and exhibit lower risk.

Khurshed, Paleari and Pande (2010) in their study analysed the certification role of grading. They determined the importance of grading for retail investors and effects of grading on the book – building process. They found that as of now the IPO Grading process is not significantly able to reduce the ex-ante uncertainty and therefore there is no significant drop in the first day returns of Indian IPOs after the introduction of Grading. The uninformed investors for whom IPO Grading was meant are not making use of the ratings.

Poudyal (2008) in his study analysed the efficacy of IPO Grading. He analysed various IPOs to determine a relationship between IPO Grading and numerous other parameters like Underpricing, Overall Subscription, Retail Subscription, Age of company, Price to Book ration, etc. He concluded that there is positive relationship between IPO Grade and Underpricing, Overall Subscription and Retail Subscription. He found that IPO Grading has helped bring more transparency and information symmetry to the market.

The Chartered Accountant (2006) in the article throws light on the reasons behind making IPO grading mandatory in India unlike any other country in the world where it is not. The article speaks about SEBI’s take on mandatory grading and the benefits to the uniformed investors.

Gupta (2007) in his article talked about IPO Grading and how it can help the investors. He emphasized on the fact that most IPOs are like dark horse and very little is known about them. Their grading on the basis of fundamental quality will eliminate the worst of them. He also discussed about the existence of bad quality of IPOs in the market and how grading can separate it from the good ones. He talked about the process and SEBI’s guidelines in his article.

Haldea (2007) in his article in Express Money discusses on IPO grading as an uncalled requirement. He calls it a weak concept and an inconclusive verdict on whether or not to invest in an IPO. According to him, there are chances that a low grade IPO does well after listing and grading can lead to a lost opportunity. Also, many investors look at the grade as just numbers. He concluded saying that IPO grading gives the investors false sense of security and even lead to confusion.

Factors affecting IPO and its Grading

There are numerous factors that affect the grading and IPO performance. Also, grading plays an important role in subscription of the issues. Factors like over - subscription, under - pricing and retail investment are the outcome grading as shown by few authors. The following literatures were reviewed to the find the factors affecting IPO and its grading.

Deb (2009) in his study examined the Indian IPOs during the period from 2001 to 2009. He attempted to find the price performance and its relationship with ex-ante and ex-post risk notions on newly issued common stocks in India. He analyzed the data from NSE and BSE and found a strong positive relationship between underpricing and ex-ante as well as ex-post measures of uncertainty. He also studied that the mispricing adjusts very quickly and no excess returns are available to investors in the aftermarket in the short run.

Garg, Arora and Singla (2008) in their study examine the existence of underpricing in the Indian Stock Market and the various factors that leads to the same. The study was conducted on the IPOs issued through the NSE in the past seven years. They found the IPO underpricing is significant in short run whereas the abnormal returns because of the same differ from bullish phase to bearish phase.

Krishnamurti, Thong and Vishwanath (2009) in their study examined the effects of third-party certification in the Indian IPO market. They analysed the IPOs and their performance to conclude that credit rating agencies in emerging markets can potentially supply useful information of relevance to both retail and institutional investors.

Lin & Hsu (2008) in their study examined the pricing determinants of initial public offerings in the Hong Kong and Taiwanese markets by analyzing the data obtained from HKSE, Taiwan Stock Exchange (TSE) and the Stock and Future Commission (SFC) in Taiwan. They found that IPO shares are underpriced to reduce winner’s curse for the uninformed investors. This study provides additional evidence on the initial Performance of IPO firms. The study led to the conclusion that there is lack of influence of reputable underwriters, auditors, commercial banks and institutional investors on determining IPO price.

Shelly and Singh (2008) in their research examined the relationship between oversubscription and underpricing in IPOs. This study made an attempt to find out which signalling factors are responsible for oversubscription in Indian IPOs, besides providing evidence on how oversubscription contributes to underpricing in Indian IPOs. The study found that oversubscription had a positive and significant influence on underpricing in Indian IPOs.

Poon and Chan (2008) in their study examined whether credit ratings and rating outlooks of the listed companies that are assigned by Chinese rating agencies have any effect on their stock returns. They found that Profitability, Debt structure, firm size, and past stock performance are important factors in determining Chinese credit ratings and rating outlooks. They concluded that credit ratings that are assigned by major Chinese rating agencies have significant effects on the stock returns of the rated companies.

CHAPTER 3 – RESEARCH METHODOLOGY

RESEARCH DESIGN

The research design used in this study of "MANDATORY IPO GRADING: REFLECTIONS FROM THE INDIAN CAPITAL MARKET" is Exploratory Research and Descriptive Research

Exploratory Research is used to know the impact of mandatory IPO Grading on the investment decision of the investors. The study intends to gauge the level of awareness of the entire IPO grading system so as to understand whether the investors are aware of the fact that the grades are given only on the basis of the fundamentals of an issue and are not signals or recommendation for buy/sell. The basic purpose of this research study is to find out whether the investors are considering IPO grades given by the Credit Rating Agency as a parameter before taking decision regarding investing in the IPO of equity shares. The study also attempts to explore the perception of the investors towards IPO grades and Credit Rating Agency. As the study is essentially meant to gain a better insight into the investors’ perception of mandatory IPO grading system and the CRAs, exploratory research is used.

Descriptive Research is used for the secondary data analysis to determine if there exists any relationship between IPO grades vis-à-vis Retail Subscription Rate and Listing Day gain. It is a valid method for researching specific subjects and to undertake more quantitative studies. The idea behind this type of research is to study frequencies, averages, and other statistical calculations. Also, the reliability of IPO Grades to predict actual future performance in post IPO secondary market scenario would be tested through relative comparison with an index over a period of time.

OBJECTIVES

To determine the investor’s perception and take on the IPO Grades and IPO Grading System.

To examine the factors that influence investor’s investment decision in an IPO.

To understand the Investors’ perception about Credit Rating Agencies and its working.

To test the efficacy of IPO grading regulation on two questions :

Should Retail investors invest more in the high graded IPOs compared to low graded IPOs?

Do High graded IPOs lead to more listing day gains as compared to low graded IPOs?

To determine the extent of reliability of IPO Grades and find if they indicate actual future performance.

DESCRIPTION OF POPULATION, SAMPLE AND SAMPLING DESIGN

This research study deals with finding out the Effects of IPO Grading on Investment Decision & Investor's Perception. Hence a primary research will be undertaken for the purpose of understanding the opinions of the investors towards the process of IPO grading, grades and CRAs.

Population - Retail Investors of Delhi region.

Sample Size - A total of 152 investors surveyed. The sample size is selected on the basis of prior research conducted by Bheemanagouda and J Madegowda (2010) conducted in Karnataka.

Sampling Design - Judgmental sampling method.

Sample Size for Secondary Data: The sample size of secondary data would consist of all the IPOs issued and listed on NSE in the year 2010. A total of 56 IPOs were analyzed.

DATA COLLECTION PROCEDURES

Primary Data –

A close – ended Questionnaire is designed to collect primary data which will be circulated through - E-mail.

Secondary Data

Information about IPO grades, Issue Price, NSE Data, oversubscription and listing day gains will be obtained from -

www.bseindia.com

www.nseindia.com

www.crisil.com

www.icra.in

PILOT STUDY

A Pilot Survey was conducted of 20 samples. The questionnaire was circulated through the same medium as mentioned above.

RELIABILITY ANALYSIS OF THE VARIABLES SELECTED IN INSTRUMENT:

IPO GRADING –

Cronbach's Alpha

N of Items

.669

9

Table 3.1: Reliability Statistics of IPO Grading

INVESTMENT PERCEPTION –

Cronbach's Alpha

N of Items

.887

15

Table 3.2: Reliability Statistics of Investment Perception

As per Naresh Malhotra (2010), a Cronbach’s Alpha score of 0.6 or more is considered reliable. Both the scores as per the Pilot Survey conducted shows the variables of the instrument to be reliable to highly reliable. Hence, we can go ahead with the primary survey.

The respondents’ profile was broadly as follows –

Number of IPOs applied till date

Figure 3.1 – Number of IPOs applied by Respondents’ till date

80% of the respondents had applied in less than 5 IPOs till date while only 20% respondents applied for 5 to 15 IPOs.

Awareness of IPO Grading Concept

Figure 3.2 – Respondents’ Awareness of IPO Grading

85% of respondents were aware of the Concept of IPO Grading while 15% respondents were not.

Conclusions from the Pilot Study –

The Pilot Study showed that 85% of the respondents were aware of the concept of IPO Grading while 80% of them made use of it. This high percent shows that retail investors are making appropriate use of the mandatory IPO grading system introduced by SEBI with the objective of providing additional information for investors. While on preference of CRA was as - CRISIL, ICRA, CARE and FITCH, investors had mixed response when asked their view if the cost of grading is transferred on to them. But when it came to factors influencing investment decision, IPO Grading was not considered very important as it received a score of 2 by 55% of respondents.

The Pilot Study showed appropriate results and the questionnaire was found to be fulfilling the research questions. The reliability score is also high. Hence, a final survey can be conducted on the same questionnaire.

DESCRIPTION OF HOW DATA WILL BE ANALYZED

The data obtained through primary research will be analyzed through statistical software SPSS. Various tests would be carried to know the impact of IPO Grading on investors’ decision and their perception of the whole system. For the first three objectives the following tests will be applied –

Investors’ Perception on IPO Grading System: t – test, Crosstabs.

Factors influencing Investment: Factor Analysis.

Investors’ Take on CRA: Cross Tabs, Kruskal-Wallis Rank Test

Secondary data would be analyzed by applying t-test and averages to know the efficacy of IPO grading and impact on Retail Subscription alongwith Listing Day gains.

CHAPTER 4: DATA ANALYSIS AND FINDINGS

SECONDARY DATA ANALYSIS

The secondary data analysis would answer to the following Research Questions -

What is the efficacy of IPO grading regulation on two questions :

Do Retail investors invest more in the high graded IPOs compared to low graded IPOs?

Do High graded IPOs lead to more listing day gains as compared to low graded IPOs?

What is the extent of reliability of IPO Grades? Do they indicate actual future performance?

For Secondary Data Analysis, IPOs that came in the year 2010 and were listed on NSE were taken into consideration. A total of 56 IPOs are considered for the analysis.

IPO Grades v/s Retail Subscription

Do Retail investors invest more in the high graded IPOs compared to low graded IPOs?

To analyze the above research question, Over – Subscription by the Retail Investors is taken into consideration.

Step: 1 - Hypothesis

Null Hypothesis – Grades does not impact Subscription Rate by Retail Investors

Alternate Hypothesis – Grades does impact Subscription Rate by Retail Investors

Step: 2 – Significance Level:

α = 0.05

Step: 3 - Critical Value and Rejection Region:

Reject the null hypothesis if p-value ≤ 0.05.

Step: 4 – Test Statistic

ANOVA Test is applied to test the hypothesis

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

205.792

1

205.792

2.329

.133a

Residual

4770.713

54

88.347

Total

4976.505

55

a. Predictors: (Constant), Grade

b. Dependent Variable: Retail_Subscription

Table 4.1: ANOVA Test for IPO Grades v/s Retail Subscription

Step: 5 - Conclusion

Since p-value = 0.133 > 0.05, we shall accept the null hypothesis.

Step: 6 - State conclusion in words

At α = 0.05 level of significance, there does not exists enough evidence to conclude that the IPO Grades affects the Retail Subscription.

Linear Regression Analysis

Model Summaryb

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.203a

.041

.024

9.39928

a. Predictors: (Constant), Grade

b. Dependent Variable: Retail_Subscription

Table 4.2: Regression Analysis of IPO Grades v/s Retail Subscription

The R value is 0.203, which represents the simple correlation and, therefore, indicates a very low degree of correlation i.e. almost no correlation. The R2 value indicates how much of the dependent variable, Retail Subscription, can be explained by the independent variable, IPO Grades. In this case, 4.1% variability in Retail Subscription can be explained by IPO Grades which is very low. Thus, our Null Hypotheses holds true i.e. Grades does not impact Retail Subscription.

IPO Grades v/s Listing Day Gains

Do High graded IPOs lead to more listing day gains as compared to low graded IPOs?

To analyze the above research question, Listing Day Gains are calculated as follows:

Listing Day Gains =

Step: 1 - Hypothesis

Null Hypothesis – There is no relationship between IPO Grades and Listing Day Gains.

Alternate Hypothesis – There is a relationship between IPO Grades and Listing Day Gains.

Step: 2 – Significance Level:

α = 0.05

Step: 3 - Critical Value and Rejection Region:

Reject the null hypothesis if p-value ≤ 0.05.

Step: 4 – Test Statistic

ANOVA Test is applied to test the hypothesis

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

25.091

1

25.091

.028

.867a

Residual

47887.926

54

886.813

Total

47913.017

55

a. Predictors: (Constant), Grade

b. Dependent Variable: Listing_Gains

Table 4.3: ANOVA Test for IPO Grades v/s Listing Day Gains

Step: 5 - Conclusion

Since p-value = 0.867 > 0.05, we shall accept the null hypothesis.

Step: 6 - State conclusion in words

At α = 0.05 level of significance, there does not exists enough evidence to conclude that there is any relationship between IPO Grades and Listing Day Gains. Hence, High graded IPOs does not lead to more listing day gains as compared to low graded IPOs

Diagrammatic Representation of Average Listing Day Gains w.r.t. IPO Grades

Figure 4.1: Average Listing Day Gains w.r.t. IPO Grades

As it can be clearly seen from the Average Listing Day Gains that Grade 1 IPOs return -23.47% while Grade 4 IPOs return 6.54% which is lesser than the returns by Grade 2 and Grade 3 IPOs.

Linear Regression Analysis

Model Summaryb

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.023a

.001

-.018

29.77941

a. Predictors: (Constant), Grade

b. Dependent Variable: Listing_Gains

Table 4.4: Regression Analysis of IPO Grades v/s Listing Day Gains

The R value is 0.023, which represents the simple correlation and, therefore, indicates no correlation. The R2 value indicates how much of the dependent variable, Listing Day Gains, can be explained by the independent variable, IPO Grades. In this case, only 1% variability in Listing Day Gains can be explained by IPO Grades which is almost nothing. Thus, our Null Hypotheses holds true i.e. Grades does not impact Listing Day Gains.

Reliability of IPO Grades

What is the extent of reliability of IPO Grades? Do they indicate actual future performance?

Credit Rating Agencies (CRAs) virtually do not have any accountability if the post-issue scenario erodes the wealth of the investors. Therefore, if an investor follows a grade 5 recommendation of an issue and if the share crashes on the listing day as in many cases, the investor cannot ask for compensation from the CRAs for any losses as the CRAs only give an opinion and not a recommendation or surety. In fact the CRA does not have any interface or votive with the investor, who is the end user and for whose assistance the entire infrastructure of mandatory IPO grading system is supposed to cater to.

To test whether IPO Grades can be relied on for future performance of the stock, an empirical analysis is conducted which would take into consideration the 56 IPOs listed between January 2010 and December 2010.

Empirical Analysis:

The following analysis is done to test whether the IPO grades are an indication of the actual future performance of the stock:

1. Compute the returns of the stock on listing w.r.t. issue price.

2. Compute the returns of the stock one year from the date of listing w.r.t. issue price.

3. Find the relative gain/loss of the stock w.r.t. a benchmark index (here Nifty) to compensate for the systematic risks.

4. If the relative return of the stock is negative, we shall consider the IPO as "Failure".

The retail investor very often expects and believes that an IPO with a higher grade would have lower failure rate. Ideally, the investors will expect IPOs with Grade 4 and 5 IPOs to be successful as they have been awarded with "Above average fundamentals" and "Strong fundamentals".

Post Listing Returns -

Out of the total 56 IPOs which got listed between January 2010 and December 2010 and were considered for this study, 42 of them delivered negative returns and 41 delivered relative negative returns i.e. relative performance of the stock with respect to Nifty. The negative return was as high as -83.48% while the relative return was lowest at -85.81%. December 2010 is taken as the cut-off date as computing the one year return is one of the critical parameters in determining the success/failure of any issue.

Grade

Failed IPOs

Total IPOs

Average Relative Returns

Failure Rate

1

1.00

1.00

-78.80

100.00

2

19.00

20.00

-42.76

95.00

3

10.00

18.00

18.04

55.56

4

13.00

15.00

-20.90

86.67

5

1.00

2.00

14.40

50.00

Table 4.5: IPO Performance

Figure 4.2: IPO Grades

From Figure (a), 62% out of 56 i.e. 35 issues received either Grade 3, Grade 4 or Grade 5 which indicates that the issuing companies must be having atleast average fundamentals. Therefore even if we ignore the timing of the issue which may drive down the prices despite good fundamentals, we will consider the returns of the stock one year from date of listing which is sufficient enough to even out periods of high volatility in secondary markets. Again the criteria for failure of the IPO would be the relative performance and not absolute performance to account for market conditions.

Figure 4.3: Failure Rate of IPO

Applying the rule for failure of an IPO as discussed above for our time period of analysis, we find that the failure rate increases with the decrease in grading except for Grade 4. The salient aspect being that for Grade 4 IPOs, the failure rate is as high as 86.67% and which is even higher than the IPOs that received Grade 3. This shows that IPOs with Grade 3 are faring better than Grade 4 IPOs after 1 year of listing. Even for Grade 5 issues which are supposed to be "Strong Fundamentals", the failure rate is 50%. For Grade 1 and 2, the failure rate is as high as 100% and 95% respectively. Therefore practically, any issue with grading Grade 1, Grade 2 or Grade 4 would have almost similar failure rates irrespective of the fundamentals of the company even when the market conditions are accounted for. Therefore, the investors have to reconsider the relevance of IPO grading as a factor while deciding whether or not to subscribe for an issue.

Figure 4.4: Average Relative Returns

Figure (c) shows the average returns generated by the cluster of each IPO grade. On an average basis, Grade 1 has the least return but that doesn’t mean that issues in other Grading segments fare better. Factually, Grade 2 has the highest number of negative return earning issues with the least being of -85.81% returns of DB Realty. Interestingly, Grade 3 issues such as Jubilant Foodworks, Thangamayil Jewellery, Talwalkars Better Value Fitness and Gravita India produced higher returns than the highest returns provided by Grade 4 stocks with Gravita India giving the highest return of 269.64% for the time period considered. In Grade 4 stocks, it was Eros International Media Limited and Gujarat Pipavav port which earned the highest returns of 55.47% and 53.88% respectively. In Grade 5 Coal India returned a positive increment of 49.06% while Moil India returned negative returns of -20.27%

There seems to be no relevancy of grades with returns given. Higher Grades does not result into higher gains. There appears to be no correlation when the returns of issues in one Grade are compared with returns of the other.

Linear Regression Analysis

Step: 1 - Hypothesis

Null Hypothesis – There is no relationship between IPO Grades and Relative Returns after one year.

Alternate Hypothesis – There is a relationship between IPO Grades and Relative Returns after one year.

Step: 2 – Significance Level:

α = 0.05

Step: 3 - Critical Value and Rejection Region:

Reject the null hypothesis if p-value ≤ 0.05.

Step: 4 – Test Statistic

ANOVA Test is applied to test the hypothesis

ANOVAb

Model

Sum of Squares

df

Mean Square

F

Sig.

1

Regression

10733.817

1

10733.817

2.440

.124a

Residual

237560.118

54

4399.261

Total

248293.935

55

a. Predictors: (Constant), Grade

b. Dependent Variable: Relative_Returns

Table 4.6: ANOVA of Relative Returns

Step: 5 - Conclusion

Since p-value = 0.124 > 0.05, we shall accept the null hypothesis.

Step: 6 - State conclusion in words

At α = 0.05 level of significance, there does not exists enough evidence to conclude that there is any relationship between IPO Grades and Relative Returns after one year. Hence, High graded IPOs does not lead to Relative Gains after one year of listing vis-à-vis Nifty. Therefore, IPO Grades cannot indicate actual future performance and neither can they be relied upon.

Model Summaryb

Model

R

R Square

Adjusted R Square

Std. Error of the Estimate

1

.208a

.043

.026

66.32693

a. Predictors: (Constant), Grade

b. Dependent Variable: Relative_Returns

Table 4.7: Regression of Relative Returns

The R value is 0.208, which represents the simple correlation and, therefore, indicates a very low degree of correlation i.e. almost no correlation. The R2 value indicates how much of the dependent variable, Relative Returns, can be explained by the independent variable, IPO Grades. In this case, 4.3% variability in Relative Returns can be explained by IPO Grades which is very low. Thus, Grades does not impact Relative Returns and can’t help in predicting future performance of the stocks.

PRIMARY ANALYSIS

Mandatory IPO Grading – Reflections from the Indian Capital Market

A Primary Analysis of its Effects on Investor's Perception & Investment Decision

DEMOGRAPHIC DETAILS

The Details pertaining to the Gender and Age Group of the Respondents of the Survey conducted to know Effects of Mandatory IPO Grading on Investor's Perception & Investment Decision:

Figure 4.6: Age - Group of Respondents

Figure 4.5: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender

Figure 4.1: Respondents’ Gender79% of the Investors surveyed were Male while meager 32 Females formed the remaining part of respondents.

78 Respondents belong to 18 – 27 years Age group which shows the increase in number of young people investing in the capital market.

42 Respondents belong to 28-37 years Age Group while the Age Group of 38- 47 had 25 Respondents.

Only 7 Respondents belong to the Age Group of 48 and above.

INVESTORS’ PROFILE

Q. What is your annual investment in the Stock Market?

Figure 4.7: Annual Investment in Stock Market

95 Respondents invested in the range of Rs.0 – Rs.50,000 which is also because of the fact that majority respondents belonged to the young class who has newly started earning.

While the range Rs.50,000 – Rs.1,00,000 and More than Rs.1,50,000 had almost equal number of Respondents, only 4% Respondents belong to Rs.1,00,000 – Rs.1,50,000 range.

Q. Since how many years have you been investing in the Stock Market?

Figure 4.8: Since how many years investing in Stock Market

64 Respondents had newly started investing in the stock market, the reason maybe the cheaply available Blue Chip shares during the last one year when the entire share market took a toll of Global Crisis or Surplus Income of many respondents.

33% of the Respondents were investing since 1 year to 3 years while 27 were associated with the market from 3 years to 5 years.

5 Respondents had been investing since 5 years to 10 years while 4 Respondents had been long associated with the market and their relationship was as long as more than 10 years.

Q. How many IPOs have you applied for till date?

Figure 4.9: No. of IPOs applied till date

65% of the Respondents had invested in less than 5 IPOs. This may be because of the fact that 64 Respondents had started investing just from last year. Also, in 2011 only 37 IPOs were successfully listed and out of that many were graded with poor and below average fundamentals.

Only 9 Respondents had applied for more than 15 IPOs and all of them were associated with the market for more than 3 years.

IPO GRADING

Q. Do you understand the Grades assigned by Credit Rating Agencies (CRA) and do you consider them before investing?

Figure 4.10: Understanding of IPO Grading & Consider IPO Grading Crosstabulation

80% of the Respondents told they understood the IPO Grades assigned by the Credit Rating Agencies while 20% of the investors were unaware of the concept. The system of IPO Grading has been introduced by SEBI to provide additional inputs to the retail investors before taking investment decision. But 20% illiteracy of the concept calls for Initiation of Financial Literacy drive by SEBI.

Out of 122 Respondents who understood the Grading, 14 of them did not consider it to be criteria while investing while 26 investors considered the grades though they didn’t understood what it actually shows.

This blindly follow of grading by 26 respondents may lead them to believe Grades as Recommendations and not an Opinion.

Q. What is the No. of IPOs applied by you and did you consider IPO Grades?

Figure 4.11: Understanding of IPO Grading & Consider IPO Grading Crosstabulation

30 Respondents who had applied for less than 5 IPOs did not consider the Grades which may have resulted in their applying of IPOs with Poor Fundamentals and Below Average Fundamentals which has a high rate of not performing as against the market.

All the Respondents with IPOs application of more than 15 did consider the Grades before investing. A total of 9 Respondents fall into this category. This is a startling fact which also shows that with increase in number of years in the market investing, people do start considering the grades.

Overall, there were 74% of respondents falling in various IPO Application categories who did consider the grades before investing.

Q. Do Investors’ who understand IPO Grades think that IPO Grades can predict post IPO secondary market liquidity and risk?

Figure 4.12: Understanding of IPO Grading & can predict post IPO Grading Crosstabulation

Perhaps the most critical factor while subscribing for any issue from the perspective of a retail investor would be its issue price. But the grading process and the exercise does not include any comment on the price band of the issue. In fact, the price band is not even determined by the Investment Bankers/ Issuers till the time grading is obtained. Also, the Grades are CRAs’ opinion on the Fundamentals of the Issue and not a recommendation that the Issue would do well Post IPO in secondary market.

The investors’ who claim to understand the IPO Grades and still believe that they can predict actual future performance are unaware of basic factors considered by CRAs and are with wrong interpretations in their mind which could prove fatal post IPO.

An astounding 29% of the respondents who claim to understand the grading believe the untrue. In order to remove possible misconception SEBI needs to bring in a mandate where it becomes necessary for the CRAs to prominently display on the grading document that the price of the issue has not been accounted, when the grade was assigned to the issue.

Q. What do Investors think about the grades assigned by CRA?

One Sample t-test is applied to check whether a positive consensus is formed among the respondents regarding the grades assigned by CRAs. Investors’ Perception is obtained on the four basic pillars of IPO Grades and an unbiased opinion by CRA.

One-Sample Statistics

N

Mean

Std. Deviation

Std. Error Mean

IPO Grades reflect the Business & Competitive Position of the Company

152

3.57

1.014

.082

IPO Grades reflect the Financial Position and Prospects

152

3.73

.913

.074

IPO Grades reflect the Management Quality

152

3.43

.896

.073

IPO Grades reflect the Corporate Governance practices

152

3.25

.937

.076

IPO Grades are Reliable

152

3.51

.913

.074

IPO Grades are Free from Biases

152

3.13

.961

.078

Table 4.8: One Sample Statistics of what investors think about IPO Grades

One-Sample Test

Test Value = 3

95% Confidence Interval of the Difference

t

df

Sig. (2-tailed)

Mean Difference

Lower

Upper

IPO Grades reflect the Business & Competitive Position of the Company

6.877

151

.000

.566

.40

.73

IPO Grades reflect the Financial Position and Prospects

9.858

151

.000

.730

.58

.88

IPO Grades reflect the Management Quality

5.885

151

.000

.428

.28

.57

IPO Grades reflect the Corporate Governance practices

3.290

151

.001

.250

.10

.40

IPO Grades are Reliable

6.927

151

.000

.513

.37

.66

IPO Grades are Free from Biases

1.689

151

.093

.132

-.02

.29

Table 4.9: One Sample t-test of what investors think about IPO Grades

Interpretation:

Investors’ agree on all the four pillars of IPO Grades viz.

IPO Grades reflect the Business & Competitive Position of the Company

IPO Grades reflect the Financial Position and Prospects

IPO Grades reflect the Management Quality

IPO Grades reflect the Corporate Governance practices

The only aspect where it fails is the Investors’ Perception on Whether the IPO Grades are free from Biases as p = 0.093 > 0.05 at 5% Level of Significance. This means that investors believe that grades can be manipulated easily. Obviously, the issuer pays and remunerates all other agencies like the merchant bankers and brokers at the front end and the rating agency and the registrar & transfer agent at the back end. Moreover, for the rating agencies it is the very nature of such fees that constitute the bread and butter of their total revenue. Hence, the fairness of grading has come under fire and more so after the recent financial crisis. This has led them to believe about the biasness of grades.

Q. Is there any relationship between Investors’ take on biasness in IPO G