Date:24/03/2007 URL: http://www.thehindubusinessline.com/2007/03/24/stories/2007032404781300.htm

Back Mandatory IPO grading `positive' for investors

Our Bureau

Rating agencies will not comment on price band or valuations

Crisil, ICRA and Care have already said that they will do the grading. Fitch is currently not considering it.

Mumbai March 23 The Securities and Exchange Board of India's announcement making grading of initial public offerings mandatory has been seen as a positive step for investors.

"Investors can make their own judgments following the rating. There might be incidents where the company is sound and gets a good rating but debuts in a volatile market and the investors may lose out on money. However, they will still hold on to the stock based on the fundamentals," said Mr R. Ravimohan, Managing Director and CEO, Crisil.

The rating agencies do not see any slowdown in the number of IPOs, hitting the markets after this announcement. "Though some amount of filtering will happen and for the right reason," said Mr Ravimohan.

IPO grading consists of the grading of fundamentals of companies, said an official with a leading rating agency. "It tells whether the company is fundamentally good or bad. The grading is not a recommendation to buy or sell and does not comment on the pricing at all. The grading is to give some sort of indication about the company to investors and compare it with other companies in that group," he said.

The rating agencies will not comment on the price band or the valuations of the company.

The process of IPO grading started with a pilot project three or four months ago. The BSE and NSE have insisted that some of the companies go in for grading under the pilot project.

Crisil, ICRA and Care have already said that they will do the grading. Fitch is currently not considering IPO grading. The company said it would wait for the processes to evolve and see whether it provides benefits to investors and later take a view on it.

Investors, particularly retail investors, will benefit the most from the rating, the rating agencies say.

Mr Anjan Ghosh, General Manager and Head, Corporate and Infrastructure Sector Ratings, said, "The grading is an additional input available from an independent rating agency to help the retail investor in his decision."

The most important question that needs to be answered is "Has the rating generated value for stakeholders?"

"Rating will certainly facilitate those companies which are not very well known to tap the markets. The guidelines of disclosure of information by the companies to the rating agencies have not yet been evolved. However, there will be a confidentiality clause," said Mr Naresh Takkar, Managing Director, ICRA Ltd.

Grading process

The grading process will include market checks, plant visits and practise of due diligence. The valuation of the company will be based on business fundamentals of the company, its financial strength, the industry prospects, accounting strengths and group issues such as management strength, and so on. The rating agency will also look at the corporate governance practised by the company.

The rating process will take around two to three weeks' time, according to the grading agencies.

The rating agency may ask for information from the company, which is not available in the draft red-herring prospectus. However, this information will be strictly confidential.

The fees for grading will be taken in advance from companies so as to avoid any vested interest, said Mr Ghosh.

New Concept

On whether the product will find acceptance, since India is one of the first countries to go in for such grading, Mr Ghosh said, "It is a new concept and we need time for players to see value in it." However, rating agencies say it is not a move to keep companies away from entering the market.

Merchant bankers said it was a challenging issue, which would eventually help to strengthen the capital markets and help the investors as to what is right and wrong.

"From the regulatory perspective, there is a need for a standardised set of disclosures when companies are entering the markets. However, the final outcome of the grading is still unknown," said Mr Ravi Menon, Managing Director and Company Head, HSBC Securities and Capital Markets.