With stock-market regulator Securities and Exchange Board of India (Sebi) kick-starting the rating process for initial public offerings (IPO), companies planning to enter the stock market will be graded on five parameters. These are industrial prospects, financial risk, accounting quality, governance and management capabilities.
The firms will be graded on a scale of one to five, with five being the highest and one the lowest. All companies filing a draft prospectus with Sebi for new issues will be required to have the grading. The cost of such an exercise will be borne by the companies themselves. The market regulator ran a pilot project on this and paid for the expenses for such gradings from the stock exchanges’ investors’ protection fund. Three rating agencies—Crisil Ltd, Icra Ltd and Care Ltd—participated in this exercise.
“One does not know whether the fall of a stock is led by the fundamentals of the company or because a general bearish trend. Gradings of IPO could lend some kind of consistency in the equity mart,” said Crisil managing director and chief executive officer R. Ravimohan. “We have devised scientific methods to grade IPOs. It will evolve to a stage where there is consistency between earnings per share and the grading, ” he added.
According to him, the fee structure will be decided on the size of the firm. “Details have not been worked out, but there will be a cap and a floor,” he said. Crisil has already worked on rating six companies, and Care, on seven—an indication that there is an appetite for such an exercise even if it is not mandatory.
“This grading will provide an independent professional view to the primary market and weed out the not-so-strong IPOs,” said Rajesh Mokashi, executive director of Care.
However, not everybody is as enthusiastic as the chiefs of rating agencies. “Thousands of fund managers spend a lifetime trying to asses the risk of the securities. Only time will tell whether a debt-rating agency will be able to do it,” said Prithvi Haldea, managing director of Prime Database, a primary-market monitor.
Prashant Sawant, an economist with the institutional equities at brokerage Anand Rathi, said ratings would be good from the common man’s perspective. However, small companies that are naturally disadvantaged in the gradings process could be forced to look for private equity.
Saumya Roy and Rana Rosen contributed to the story.