| Sebi chairman M. Damodaran flanked by whole time member T.C. Nair (left) and executive director R.K. Nair (right) in Calcutta on Saturday. Picture by Kishor Roy Chowdhury
Calcutta, Dec. 16: IPO grading may soon be made mandatory.
Sebi chairman M. Damodaran said the regulator’s primary market advisory committee feels that unlisted companies should mandatorily get their maiden offers graded on a scale of one to five from any of the credit rating agencies registered with it and disclose the same in the red herring or abridge prospectus.
The grading would help investors take an informed decision on whether to invest in the company, he added.
Damodaran was addressing a workshop on the capital markets for business journalists here today.
“We share the primary advisory committee’s view on making IPO grading compulsory. But the Sebi board has not yet taken a decision on the issue,” Damodaran said. “The the board meets once in every two months. If the January board meeting fails to catch up with the issue, it would probably take it up in the March meeting,” he said.
“The gradings will also be displayed on the websites of the stock exchanges where the respective IPO issuers want to list their stocks and on the Sebi website,” Damodaran said.
The Securities and Exchange Board of India had amended its disclosure and investor protection guidelines, 2000 in April this year.
The revised norms introduced “optional” grading of public issues of unlisted companies by a credit rating agency.
The rating should be impartial and independent so that investors could comprehend the risk and reward of the issue in a nutshell and form their investment decisions accordingly.
But if the issuer company has to pay to the credit rating agency to grade their IPOs, there could be a conflict of interest and to avoid this, the cost of IPO grading is funded from the investor education and protection fund of the stock exchanges and Sebi.
“The cost of grading is not too much — between Rs 3 lakh and Rs 4 lakh and stock exchanges can easily absorb this in their kitty,” Damodaran said. “Besides, Sebi can also fund the same from its investor protection fund. If we are allowed to appropriate the fines and penalties imposed on errant companies to the IPEF account, there would not be any problem. Funds can also be mobilised from our Security Settlement Fund. Funding would not be a problem, but companies should comply with the clause,” he added.
Since April this year, 51 companies tapped the capital market raising about Rs 13,413 crore. Of this only 11 issues have got a grading, Damodaran said. Interestingly, these companies are little known ones and seven of them have a below-average grading of 1 and 2. Only four have an average grading of three.
Sebi has started a pilot project on this IPO grading in association with BSE and NSE, and three credit rating agencies Crisil, CARE and ICRA.
The market regulator is also expected to take a final decision on stock lending and allowing short selling by institutional investors.