Information Asymmetry, IPO Grading& Pricing Efficiency: An Empirical Analysis of IPOs in India

Researches in the past have clearly witnessed the evidence of underpricing of IPOs. Many efforts have been made to explain this phenomenon and ‘Information Asymmetry’ has been cited as one of the most significant causes. In 2006, SEBI introduced IPO grading as a technique of IPO certification, as a pioneer effort in the world and made it mandatory in May, 2007. It was emphasized by SEBI that it can reduce underpricing by curtailing the level of information asymmetry. The purpose of this certification process is to provide information to the individual investors regarding fundamentals of the issuer. SEBI again made IPO grading voluntary in February 2014 citing that IPO grading had failed to serve its pre stated objectives. SEBI alleged that correlation was found neither between grading and subscription nor between grading and post listing performance. This study aims at analysing whether the grading technique is helpful in reducing underpricing and assisting retail investors in better decision making. The data have been collected for 5 years from 2011–2015 for book built IPOs only. The first three years i.e. from 2011 to 2013 is the period when grading was mandatory and next two years i.e. 2014 & 2015 when grading was not mandatory. OLS regression analysis has been used for analysing this cross sectional data. The study reveals that higher graded IPOs are not better subscribed by retail investors. The paper also concluded that the under-pricing is not significantly different for graded and non graded IPOs but when only graded IPOs were analysed it was found that higher graded (with grade 4&5) IPOs witnessed lesser under-pricing. The authors are of the opinion that if retail investors would have been made more aware, the performance of the IPO grading may have been different as some of the studies show that the higher graded IPOs are better subscribed by institutional investors.