The Long-Run Performance of Graded IPOs in the Indian Capital Market

Abstract

Initial public offering (IPO) grading was introduced in India as an additional tool to help the retail investors in making the investment decisions. The primary objective of this article is to establish the relation between the assigned grade and the long-term performance of the IPO. With a few exceptions, graded IPOs in the Indian capital market during 2007–2010 have underperformed the benchmark over the long run. There is a substantial variation in performance across grades. IPOs graded relatively higher have not performed better than those graded relatively lower. Mandatory grading of IPOs does not appear to serve the interests of investors. As IPO grading was introduced by the regulator six years back, not much literature is available in Indian context analyzing the relation between the IPO grade and the long-term performance of the IPO. This article establishes that in the present form IPO grading is not serving the interest of the retail investors for whose benefits it was introduced.