After over six years in existence and being accorded to over 300 public issues, IPO grading is all set to be turned into a voluntary option instead of being a mandatory requirement, as it is now.
Sebi’s primary markets advisory committee (PMAC), in a recent meeting, recommended that the grading should not be mandatory, a source close to the development told The Indian Express.
“We hope Sebi will take this up in their next board meeting and IPO grading will be made voluntary,” the source said. Under IPO grading, credit rating agencies provide grades between 1 and 5 based on the fundamentals of the company planning a public issue.
While grading was introduced as voluntary in April 2006, it was made mandatory for all public issues by the capital markets regulator in May 2007.
However, since its inception, the concept has faced criticism from almost all quarters over the utility of grading for retail investors.
Experts say that once it is made voluntary, no issuer is expected to approach the rating agencies for grading of an issue. “While the issuer will have to pay for the same, the issue will also face the risk of a low grading,” said a market expert.
Earlier in June, in an interview with The Indian Express, Sebi chairman UK Sinha had said that IPO grading has not been able to the serve its purpose. “The IPO grading has not served the purpose that it was supposed to. I think we need to have more dialogues with people and then come to a solution,” he said.
A look into the performance of the 104 IPO’s since January 2010 shows that 82 issues are trading below their issue price. Also, only 7 out of the 28 issues that got the higher grading of 4 and 5 are trading above their issue price.
While refusing to comment on PMAC developments, chairman of PRIME Database, Prithvi Haldea, who has been arguing against the IPO grading for long, said, “This clearly shows that the higher ratings on fundamentals does not necessarily mean a better performance at the stock market and hence it has hardly been of any help to the retail investors.”
IPO grading only comment on the fundamentals of the company and not on the pricing of the issue, which is the most important factor in an IPO and also that a high grading may prompt the issuer to price his issue higher among others.