Mumbai: Major shareholders of rating agency Credit Analysis and Research Ltd (CARE) have agreed in principle to list the shares of the company, according to two persons familiar with the development. One is a CARE official and the other a senior executive with one of its promoters. Both declined to be named as the proposal is yet to be approved by the board of the rating agency.
IDBI Bank Ltd is the largest shareholder in the company with a 26.75% stake.
CARE managing director and chief executive officer D.R. Dogra declined to comment.
“Yes, majority of the shareholders have agreed to go for an initial public offering (IPO). Details of stake dilution are yet to be worked out. Right now, we are in the process of appointing investment bankers,” the executive with one of the promoters said.
For IDBI Bank, any such move will be part of a strategy to unlock the value of its holdings in many unlisted firms, including the National Stock Exchange of India Ltd (NSE), National Securities Depository Ltd, Stock Holding Corp. of India Ltd and the Small Industries Development Bank of India (Sidbi).
R.M. Malla, chairman and managing director of IDBI Bank, told Mint that the total value of the bank’s investment in these companies is currently around Rs 5,000 crore.
As a lender to development projects, IDBI Bank has helped most of these institutions, which were pioneers in their fields. But IDBI Bank’s role has now changed, and these institutions are now financially strong enough to look after themselves, he said.
Malla said the process for an IPO in CARE has started and as per some recent transactions, the firm is likely to fetch a valuation of at least Rs 2,000 crore.
“Recently there were some off-market transactions in shares of CARE at Rs 1,500-1,600 apiece, valuing the company at Rs 1,500-1,600 crore. (Hence), it should fetch a valuation of at least Rs 2,000 crore,” Malla said.
In August, private equity firm Milestone Religare Investment Advisors Pvt. Ltd had bought around 5% of CARE, valuing the firm at about Rs 1,450 crore.
A few other investors—Bajaj Holdings and Investment Ltd (around 5%), Aditya Birla Private Equity (around 4%) and the Poonawala Group’s Serum Institute of India Ltd (around 3%)—also picked up stakes in the firm, but details of these transactions are not known.
Set up in 1993, CARE is the only rating agency in India controlled by local promoters.
Global rating agency Standard and Poor’s holds a 51% stake in Crisil Ltd and Moody’s is the single largest shareholder in Icra Ltd with a 28.51% stake. The fourth rating agency, Fitch Ratings Ltd, is unlisted.
Crisil got listed in 1993 and Icra in 2007. Crisil has a market capitalization of Rs 4,962 crore and Icra, Rs 1,041 crore.
If CARE is valued at Rs 2,000 crore, the share sale should raise around Rs 500 crore from the capital market to meet the minimum 25% public float requirement set by the regulator. But the final contours of the listing are yet to be worked out.
Other promoters of CARE include Canara Bank (23.67%) and State Bank of India (9.97%). In addition, there are around 15 institutional shareholders, including Federal Bank Ltd, Infrastructure Leasing and Financial Services Ltd and some Tata group firms.
head of the IPO, Malla said the rating agency is likely to restructure its equity capital. CARE’s current equity capital base is around Rs 9.5 crore. According to current regulations, a company needs to have a minimum equity capital of Rs 10 crore to tap the capital market.
IDBI Bank will need to wait to unlock the value of its investments in NSE as current norms do not allow bourses to list shares, making it difficult for existing promoters to exit.
Similarly, a share sale in Sidbi is difficult unless the government allows IDBI Bank to do so, even though there is a provision to list the institution in the Act that governs it, Malla said.
IDBI Bank has been undergoing an organizational recast in the last one year. It recently absorbed its Pune-based mortgage subsidiary IDBI Home Finance and primary dealer arm IDBI Gilts.
According to the CARE official, the purpose of a public issue is to provide an exit option to the shareholders of the company, besides improving the visibility of the agency and strengthening its foothold in the fast-growing rating space.
So far, CARE has completed about 9,800 rating assignments worth an aggregate value of around Rs 31 trillion.
“Given that rating is not a capital intensive business, raising money may not be a primary aim of the public offering. The major stakeholders of the company are stuck with their holdings for quite some time now and this will provide them a good exit route,” said the CARE official cited above.
For the year to 31 March, CARE posted a net profit of Rs 87.19 crore against Rs 55.38 crore in the previous year, according to the latest figures available.
Unlike rivals, CARE has limited itself to the core business of ratings and research. Crisil has a risk solutions and advisory business, and Icra has knowledge-processing, grading, software development and risk management services as well.
The sheen has gone off rating agencies in the global markets following the global financial crisis, analysts said.
“There was a time when companies used to blindly trust ratings. After the crisis, there is a dent in the credibility of these firms,” said Saurabh Tripathi, partner and director at the Boston Consulting Group.
However, given the growth in the Indian economy, such firms are likely to benefit from the rising amount of debt paper coming into the market, analysts said. While India is unique in having as many as four rating agencies, analysts see opportunities for all of them in the world’s second fastest growing major economy.
Besides debt, most agencies are grading equities as well. Also, in accordance with Basel II banking guidelines, banks are required to get outstanding corporate loans rated. India’s banking assets have been growing at 20% at least in the past few years.