Mumbai, March 22: Investors may no longer have to agonise over their decisions to invest in initial public offerings (IPOs). The cherry-picking ritual may have just got a little easier.
The Securities and Exchange Board of India (Sebi) today made it mandatory for companies coming out with IPOs to get their issues evaluated by a credit rating agency. The decision was taken at a board meeting of the market regulator.
The Sebi board took several other key decisions as well. It permitted institutional investors to short sell in the market — in line with an announcement to this effect made by finance minister P. Chidambaram in his budget speech — and tightened disclosure standards for real estate IPOs.
First of its kind
India will perhaps be the only country in the world where IPOs will be compulsorily graded. “It does not exist in other reasonably developed jurisdictions,” Sebi chairman M. Damodaran said.
Damodaran told reporters after the board meeting at its headquarters here that the decision had been taken after considering the ground realities in India.
Corporate houses have been lining up a spate of issues and the regulator has been keen to head off the prospect of a sequel to the mid-nineties scam when unscrupulous promoters of companies raised money from the public and disappeared.
Damodaran revealed that the IPO grading will be effective immediately and companies filing their draft prospectus with the regulator beginning tomorrow would have to get their issues rated. IPO rating has been optional till now and almost none of the corporate houses have opted for it.
The companies will have to bear the fees of the credit rating agency. The plan is to initially go in for a simple IPO grading. After some experience is gained in this area, the total equity offering of a company could also be graded.
The other major decision taken by the market regulator, which was long awaited by the stock markets, related to short-selling by institutions. After Chidambaram announced in the Union budget that short-selling will be allowed, Sebi said it also authorised this practice on the lines of the statement made by the finance minister and that a stock lending and borrowing mechanism would also be put in place. The Sebi chairman said the system would be put in place as both the stock exchanges have indicated their state of readiness.
Responding to concerns about incorrect valuations given by real estate companies, the market regulator announced stringent disclosure norms. Real estate companies will have to disclose their land bank details accompanied by details such as the ownership status and agreement to purchase among others.
Moreover, real estate companies coming out with an IPO have been barred from making any future projections of their land value. Instead they have been told to give only the present value.
Even after coming out with IPOs, real estate companies will have to periodically make continuous disclosures.
“There should be clear evidence that land bank is a land bank and there should not be any projections that is not rooted in reality,” Damodaran added.
The Sebi board also permitted companies to send abridged annual reports to their shareholders. Moreover, PAN had been made mandatory in the case of preferential allotments as well. The regulator will also use electronic and other means while issuing summons to persons being investigated.