Sebi makes IPO Grading Voluntary
With the approval of the proposal by the Securities and Exchange Board of India (Sebi) for making grading of Initial Public Offerings (IPOs) voluntary, the companies planning to come out with IPOs no longer need to rely on Credit Rating Agencies for getting rated against what is a mandatory rule at present.
Sebi explained that the move was only taken after comprehensively considering the requests placed by various investor associations and Association of Investment Bankers of India (AIBI).
However, with this step originating out of the regulatory body, some questions have also found resonance in the market. Will the decision knock down the investors in the stock market by any means?
If we go by what market analysts have to say, the latest resolution is a good move.
Although, ratings do help in evaluating a company before it hits the market in from of an IPO, there is nothing to learn in terms of pricing of offerings. Therefore, investors were always unsure about the real benefits of the grading process to them. Grading however, does let us know if a company is stronger in fundamentals or not.
As per observers in the market, it’s not possible to grade a product such as equity whose price keeps changing every day. There is no way to guarantee a fixed premium for the same. So, for them, IPO trading wasn’t ever required in the first place. However, the mechanism finds usage in case of bonds as here a fixed interest is paid by the issuer to the buyer. Analysts believe that the retail investors rarely go with the offerings just on the basis of grading. They take their cues from the market.
The present ruling can nevertheless help merchant bankers which can push through offering without having to worry about grades. So where was the need of grading mechanism? Was there any?
CRISIL and CARE Ratings are the two rating agencies in India which rate companies. Nobody else in the market provides peer- to- peer comparison for stocks or sectors with those in the international markets. So, complete outlook is missing to say the least.