IPO grading will no longer be compulsory, says regulator

The Securities and Exchange Board of India (Sebi) on Tuesday said grading of initial public offers, or IPOs, will no longer be compulsory. A formal announcement will be made by the capital markets regulator in the next 10 days.

Expressing concern on the lack of infrastructure to facilitate large fund-raising activities in India, Sebi chairman U.K. Sinha said, “If a country of our size is to continue growing at 5%, fund-raising activity will have to grow in future.”

Addressing a conference of investment bankers, Sinha also said there is no adequate infrastructure to meet this need and Sebi can work with investment bankers to help corporations raise capital.

Sebi made ratings of IPOs compulsory in April 2007. Grading from at least one credit rating agency was made mandatory and unlike a rating where a corporate entity has the discretion of not accepting the rating, in case of IPO-grading, a company is required to disclose all the grades obtained by it for its IPO in its prospectus and use them in advertisements for the public issue.

Sanjay Sharma, managing director of Deutsche Equities India Pvt. Ltd, said scrapping of IPO grading is a welcome move “as it was serving no purpose”. Sharma also added that grading of any equity instrument has no meaning without reference to its price.

Prithvi Haldea, chairman and managing director of Prime database, a database on Indian primary capital market, said there is an inverse correlation between grading of IPOs and their prices. He pointed out that last few years data suggests that most of the IPOs that have got good grading have performed very poorly and vice versa.

Haldea added that IPO grading only provides false sense of security to investors.

Credit rating agencies will see a drop in business when Sebi formally makes the announcement but according to such agencies, IPO grading has not been a very lucrative business. A senior executive of one the credit assessing companies who did not want to be named said that IPO grading is necessary as most investors will not be able to read bulky prospectus filed by the issuers. He also said that credit assessors rate these IPOs in an unbiased manner as unlike investment bankers their fees for grading the IPOs does not depend on the success or failure of the IPOs.

At the conference, Sinha also said that Sebi will consider expanding the list of companies who can file self-prospectus. Haldea of Prime Database said this will help corporations that frequently tap markets to raise debt as they do not have to file a new prospectus always.