Mumbai: Stock market regulator Securities and Exchange Board of India’s (Sebi) decision to make grading compulsory for all initial public offers (IPOs) will substantially boost the revenue of rating agencies, but it could leave investors as perplexed as ever.
Prithvi Haldea, managing director of Prime Database Pvt. Ltd, a firm that tracks primary-market activities, expects the number of IPOs in India this year to rise by more than 50%, to around 150.
“We expect the amount raised from IPOs this year to rise to around Rs45,000 crore from around Rs22,000 last year,” Haldea says.
Since all IPOs will now be graded, this could prove a big boon for rating agencies, which expect the average IPO grading to yield them a fee of Rs5-10 lakh, translating into a potential market of around Rs15 crore per annum.
The annual consolidated revenue of Crisil Ltd, India’s single largest rating agency, was Rs285 crore in fiscal 2005-06. On the stock market, the Crisil stock rose 5% to Rs2490.3 on Friday, even as the benchmark 30-stock index of the Bombay Stock Exchange (BSE) fell by 0.17%. Another rating agency, ICRA Ltd, closed its IPO on Friday; the issue was subscribed over 70 times.
Fitch Ratings India, which has so far not offered equity gradings, is now planning to take a hard look at the business opportunity. “While we don’t do this anywhere else in this world, that doesn’t mean we can’t offer the service in India,” says Amit Tandon, managing director, Fitch.
All issues filed with Sebi from Friday will have to compulsorily seek an IPO grading.
“This may delay those companies that are just about to file their draft prospectuses with Sebi, but since it’s now clear that this is compulsory over the medium term, it should not impact issue timelines much,” says Vikas Chandra, group head, capital-markets group, at SBI Capital Markets Ltd, the investment-banking arm of the State Bank of India, India’s largest commercial bank.
“As the companies will be coming for rating after preparing their red herring prospectus, most of the data will be readily available. Grading could take about four weeks,” adds Anjan Ghosh, head, corporate ratings, ICRA Ltd.
“In the past, most of the big fish were escaping the voluntary grading process piloted by Sebi. Now, not only will the gradings be compulsory, but the company will have to disclose all the gradings it has sought and received from every credit-rating agency,” says D.R. Dogra, executive director, Credit Analysis & Research Ltd, another rating agency. The firms are gearing up to handle around 100 IPOs each.
Interestingly, Fitch, Moody’s Investors Service, and Standard & Poor’s (S&P), which rate companies around the world, have never graded a single IPO in their history. This means that the domestic rating agencies have developed their own methodologies for this purpose. Crisil is the Indian associate of S&P, while Moody’s holds a substantial stake in ICRA.
To entice issuers, many agencies are planning to charge fees that may be even lower than what they charge to rate debt instruments.
Some agencies plan to levy a one-time fee of 0.05-0.1% of the issue size. The fees will also be capped at well under Rs75 lakh even for mega IPOs. The floor for fees will be Rs1-2 lakh.
“This is not a well-established business like credit ratings, which are two decades old. So, we have to establish our credibility and value before we can start charging what we should,” says R. Ravimohan, managing director of Crisil Ltd.
The big problem with the gradings is that the process involves a debt-like approach to equities even though an investor’s motivation for buying bonds is very different from buying equity shares.
Besides, the gradings will not exactly be advisories that recommend that investors buy a share or otherwise.