IPO grading move dismays industry
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Sebi's decision to make grading of IPOs mandatory has triggered a negative reaction in industry circles. Standard Chartered Mutual Fund head of investments Rajiv Anand said, "I am not sure what is being graded. One can rate various aspects of an IPO, but the IPO as a whole cannot be graded." The grades would be given on a scale of one to five.
Crisil MD and CEO R Ravimohan noted, "The assessment of the fundamentals of a company would be based on five parameters — earnings per share, financial risks, accounting quality, corporate governance and management quality." However, market players are pointing out that the grading process will not take into account price valuation, a key parameter in any stock investment decision.
Said Prime Database MD Prithvi Haldea, "The market does not work on fundamentals. A good company is a bad investment at a high price. The small investors, for whom the grading exercise is basically meant, would despite disclaimers expect a high graded IPO to quote above the offer price. The whole purpose of grading an IPO would be defeated if it cannot help an investor decide what stock to choose and at what price." Anand added, "How can valuations be graded by a rating agency? It is a subjective exercise and it is the most important aspect of an IPO."
Ravimohan pointed out, "Fundamental research will be provided by us. But we can't be talking about 'what price' and 'at what point in time' because that varies across investors, and it is difficult for a centralised agency to become so detailed. The question of 'at what price' will be answered by investment advisors. So we will answer whether the company is good or bad and investment advisors will answer whether to buy or not."
The grading fee will be borne by the companies. But the method by which a company would approach a rating agency — which company would go to which agency — is still not clear. Said ICRA managing director Naresh Thakkar, "The fees charged will be a nominal percentage of the size of the issue. The percentage will be similar to what we charge for our normal debt ratings."
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