 "Grading of IPOs did not help investors")
Most observers feel that it is actually a good move. For one, while the ratings did evaluate the company, they did not comment on the pricing. As a result, investors were never sure if the pricing, a key part of the decision-making process, was good or not.
Most financial planners, as a result, aren’t very upset. “IPO grading was never required. You can't grade a product like equity where the prices change every day and one invests in the business, which is the risk, and gets paid a premium for the same. The premium or gains are not assured in equities anyway. You can grade, maybe bonds, where the price is constant and the grading will help you know if the bond issuer can pay the interest promised,” says certified financial planner Malhar Majumder.
Arun Kejriwal of Kris Securities partially agrees. But he describes this move as one step forward and two steps back. “If you check problem-stricken scrips you will notice that it is mostly the same set of investors who will be stuck with investments in these scrips. Savvy investors have always managed to avoid such scrips not because of grading but because they are well versed. Additionally, how does Sebi care about who invests in IPOs?” he says.
Grading does not promise reasonable IPO pricing or a good stock performance post-listing. Moreover, very few retail investors take the pain of looking at grading before investing. Therefore, it was not really needed.
At best, it was a hitch when it came to the evaluation of poor-performing companies because these might not have gone for voluntary grading. But retail investors shouldn’t be looking at such companies anyway. It is also good news for merchant bankers when compared to lower grades as they would be able to push issues without grades easily.
However, Equentis Capital director Vikram Dhawan says that IPO grading should not have been done away with. He feels that the process, instead, should have been made more comprehensive. For instance, in developed markets they follow a standard in terms of following only an S&P or a Moody's. In India, though there are CRISIL and Care Ratings, nobody provides peer-to-peer comparison of sectors or stocks with the ones in the international markets. Thus, it does not give enough perspective, he says.
The grade, basically, indicated an assessment of business fundamentals and market conditions in comparison to other listed equities at the time of the issuance. These ratings are generally assigned on a five-point scale, with a higher score indicating a stronger company. It was mandatory for the red herring prospectus to have all the grades by the rating agencies. Companies could not reject the grade but were allowed to opt for another agency.