Do IPO Certification Mechanisms Work? Empirical Evidence from India

In initial public offerings (IPOs), underpricing refers to pricing the issue at a price lower than its fair value which results in the listing price being much higher than the issue price. This higher information asymmetry results in more underpricing. To reduce such asymmetry, the Securities and Exchange Board of India (SEBI) introduced IPO grading and anchor investor participation in India. This article aims to assess the impact of these two factors on the underpricing of Indian IPOs over 2007-2017. This study uses multivariate regression analysis to compare the impact of graded versus ungraded IPOs and of anchor-backed versus non-anchor backed IPOs on underpricing; it finds that IPO grading and anchor investment do not have a significant overall impact on underpricing. These results justify the scrapping of mandatory IPO grading. Although insignificant, IPO grading has a greater influence on underpricing than anchor investor participation. Furthermore, the current study also analyses the subscription patterns of qualified institutional buyers (QIBs), non-institutional investors (NIIs) and retail individual investors (RIIs) and their influence on one another. Accordingly, it reveals that QIB subscription influences both NII and RII subscriptions.