Mandatory IPO rating to be in phases

Sebi meet this weekend to also discuss physical delivery in options.

The Securities and Exchange Board of India proposes to roll out mandatory grading of initial public offers (IPOs) in phases.

The board meeting of Sebi, slated this weekend, is also likely to discuss physical delivery to boost trading in stock options.

According to sources, IPO grading, which is now optional, will be implemented on a mandatory basis for fresh initial public offers for six months.

They said Sebi was considering the proposal as it does not have any data or background for these companies unlike those already listed. Later, depending on the experience in IPOs, the rating would be extended to follow-on offers as well, said the sources.

Several companies have lined up IPOs and it was felt that some dubious companies may also use the bullish sentiment to charge higher premiums.

Already, recent listings are trading at a discount. IPOs of smaller denomination will be under greater scrutiny, since they attract more retail investors, sources said.

On physical delivery in stock options, sources said, it was aimed at reviving the illiquid derivatives category. Sebi was more likely to introduce a stock lending and borrowing along with physical settlement for options contract.

Currently, options trading in Nifty follows the European options model, which is non-exerciseable.

On the mandatory IPO grading, K Sivaprakasam, managing director and CEO of Credit Analysis and Research, said retail investors can assess fundamentals of IPOs in a much better way if gradings are done by an independent agency.

Prithivi Haldea of Primedatabase, however, has a different take. "In most issues, 50 per cent is allotted to qualified institutional buyers (QIB) there is also pre-IPO marketing done to them and these institutions only invest in IPOs after proper research that, in itself, is like validation and then retail investors come in. When the QIB subscription is less than 1 per cent or 1 per cent it means that the IPO is bad and retail investors should stay away from it. Mandating grading for IPO will make things difficult as the market is functioning properly with out any hassles."