The agreement of the SEBI board to initiate IPO grading on an optional basis at the discretion of the company coming with the public issue in 2005 was soon reversed in the year 2007. And public issues by unlisted company desirous of listing on the stock exchange post the issue registering draft offer documents on or after May 1, 2007 were compulsorily required to get their IPOs graded by Credit Rating Agencies (CRAs) registered with SEBI.
Grading or rating accorded to IPO issue between 1 to 5 is indicative of the issuer's fundamentals in respect to other equity securities already listed in the country. IPO issuer with strong fundamentals is given IPO grading 5 while the one with poor fundamentals is accorded lower rating of 1.
IPO grading typically underlining the fundamental of the company does not factor in the crucial pricing factor. Higher grading for a IPO can even mean a higher pricing of the IPO by the issuer.
Earlier concerning the matter, UK Sinha, SEBI Chairman said "The IPO grading has not served the purpose that it was supposed to. I think we need to have more dialogues with people and then come to a solution".
The scrapping of the mandate is suggested to have an effect whereby issuers will no longer reach CRAs for rating their public issues.