We have enough problems with the way stocks in general and IPOs in particular are seen and devoured by retail investors. Almost like fast moving consumer goods, IPOs have over the past two years been consumed at the speed of thought — a company only has to announce its IPO plan and it dreams of 100 per cent plus returns for Rs 1 lakh minus investors. The money pours in, the issue gets oversubscribed, and while listing gains have narrowed down and in some cases even fallen, the trend so far has been positive in a market that raised Rs 10,808 crore (45 per cent of all the money raised in the primary market) last year.Meanwhile, risk factors have become sales pitches. Information overdose has become a weapon of mass deception that needs an accountant-lawyer to decode. At the end of which market regulator Sebi neither recommends nor approves the information contained in the prospectuses. And if this were not enough, Sebi now wants to add to its array of products a new animal called ‘IPO Rating’. That is, marry a set of alphabets with a group of numerals and plug them into the guarantee-free prospectus, ostensibly to help investors take a decision on whether an IPO is worth investing in. That, perhaps and illustratively, a Triple-A rated IPO is better than Double-B; a P1 better than P3; or some such equally indecipherable code, best known to its creators, the companies rated, and a tiny community of financial analysts.Who’s advising Sebi chairman, M. Damodaran? Surely not finance professionals, else he would have known that in a well-structured primary market the IPO will list at offer price. That there is a premium shows that either the process is wanting or that companies, in all nobility, are deliberately underpricing their issues so that investors make listing gains (ha!). Damodaran wants these ratings done on an optional basis to provide information to first-time investors and enable them in their decision. I fail to see how this will happen. I have three objections.One, just how are these issues going to be rated? Any number-cruncher worth his spreadsheet will vouch for the sheer intellectual delight of rating IPOs — it’s complex, it’s layered, it’s sector-specific, time-specific, price-specific. This was a fad in the earlier IPO booms of the mid-’90s, when I had personally rated hundreds of issues, 74 of them in one record-breaking week. I had done this for two organisations and there was enough competition. We had gone in for stars (one to five), another had chosen grades (A through E). As an insider, I can testify to the utter subjectivity of the exercise — assigning weights to managements, track records, projections, the business and so on. When one analyst’s Triple-A is another analyst’s Triple-C, and the rating exercise involves objectivising subjectivity, just what that end product is going to be, or how enabling, is anybody’s guess.Two, while retail investors see an IPO as a separate product from a listed stock, in essence the two are the same — they carry the same risk, demand the same amount of information, and are products that are aimed at institutions rather than people with day jobs or night enterprises. A listed stock represents a company just the same way as an IPO does. Behind that price is a group of people working together, turning mind or matter into profits, and it is the future expectations of these profits that the price represents. So, is Damodaran now going to get all 5,000-plus listed companies rated? Tell investors which stocks to buy and at what price? I sincerely hope not.Three, what happens if the rating is wrong? Say, a Triple-A assigned IPO that opens 20 per cent below issue price? The first fine print will be: “Stocks are rated for the long term.” Well, then, how long is long term? One year? Three years? Five, ten? Suppose the IPO is still an underperformer, will retail investors have the right to sue the rating agency or Sebi and get their money back with interest? No, they will meet the second fine print that will ensure responsibility is kept at an arm’s length — just as Sebi ratifies neither the accuracy nor the adequacy of information in prospectuses.Just where is this hare-brained idea moving towards? Perhaps the creation of bureaucratic paperwork for Sebi and revenue model for potential rating agencies. And to say that this rubbish will be financed by the Investor Education and Protection Fund is audacious. While the fund must stop behaving like a retired household, trying to maximise returns from its windfall endowment, there are better uses to which this money can be put than finance IPO ratings. This is one ‘world’s first’ India can do without.gautam.c@expressindia.com
