In our previous article we discussed about What is an IPO and in this article we’ll explain the methods of Pricing of an IPO and Credit Rating of IPO. An IPO may be priced either on Fixed Price Method or Book Building method or a combination of both.
Fixed Price Method
Under a Fixed Price Method, the price at which the company intends of offer its shares is fixed in Advance.
In case a company opts for Book Building Process, the Issue is required to be kept open for a minimum of 3 days and a maximum of 10 days.
Book Building Method
In the Book Building Method, the Investors have to bid for shares within a price band specified by the issuer and the final price is decided after observing the result of the bidding.
In case a company opts for Book Building Process, the Issue is required to be kept open for a minimum of 3 days and a maximum of 7 days. However, this is extendable by 3 days in case of Revision of the Price Band.
A company proposing to issue Capital through the Book building process shall in the Red Herring Prospectus filed with the SEBI disclose either the floor price of the securities offered through it or a price band along with the range within which the price can move.
The Issuer Company can mention a Price Band of maximum 20% (i.e. the cap in the price band shall not exceed 20% of the Floor Price)
To help Investors make rational decisions about making Investments in IPO’s, the Govt. has now mandatorily instructed all issuers to get a Credit Rating before issuing shares to the public.
Credit Rating/IPO Grading
Credit Rating/IPO Grading is the grade assigned by a Credit Rating Agencies (like Crisil, ICRA etc.) registered with SEBI, to the initial public offering (IPO) of equity shares or any other security which may be converted into or exchanged with equity shares at a later date.
The Credit Rating process takes into account the prospects of the industry in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business and capitalize on the opportunities available, as well as the company’s financial position.
The grade represents a relative assessment of the fundamentals of that issue in relation to the other listed equity securities in India. Such grading is generally assigned on a five‐point point scale with a higher score indicating stronger fundamentals and vice versa as below.
IPO Grade 1 ‐ Poor Fundamentals
IPO Grade 2 ‐ Below‐Average Fundamentals
IPO Grade 3 ‐ Average Fundamentals
IPO Grade 4 ‐ Above‐Average Fundamentals
IPO Grade 5 ‐ Strong Fundamentals
Credit Rating has been introduced as an endeavour to make additional information available for the investors in order to facilitate their assessment of equity issues offered through an IPO. Credit Rating is intended to provide the investor with an informed and objective opinion expressed by a professional rating agency after analyzing factors like business and financial prospects, management quality and corporate governance practices etc.
Credit Rating has been made mandatory and the Red herring Prospectus shall contain the Rating obtained by the Issuing Company from the all the Credit Rating Agencies approached by the Company for grading the IPO.