close vigil Fundamentals of an IPO to be graded on a five-point scale Parameters to include performance of a company and quality of its promoters Fees will range from five to 10 basis points of the total issue size IPO grading will not consider the price of a security

Mumbai, March 25: Credit rating agencies will grade initial public offerings (IPOs) on a five-point scale that will include parameters like performance of a company and the quality of its promoters. The fees for such a rating will be between five and 10 basis points of the total issue size.

Last Thursday, the Securities and Exchange Board of India (Sebi) made IPO rating mandatory. Earlier, rating was optional for new issues.

Credit rating agency sources said the few “weak” IPOs that they have graded since August last year were largely done at the request of stock exchanges.

Though now it is mandatory for companies to get their issues graded, rating agencies are unlikely to alter the model that was followed earlier.

Therefore, the fundamentals of an IPO will be graded on a five-point scale. While Grade 5 indicates an issue with strong fundamentals, Grade 4 issues have above average, Grade 3 average, Grade 2 below average and Grade 1 poor fundamentals.

Crisil and Icra wish to follow this simple grading structure. There are a few differences in the rating parameters used by these agencies.

However, both of them will consider the business and financial prospects of a company relative to the industry, the quality of its management and its corporate governance measures.

However, IPO grading will not consider the price of a security. This has led to criticisms that an issue with strong fundamentals but aggressive pricing may not benefit an investor. Industry players aver that IPO grading should consider the price of a security to help investors take better decisions.

Crisil managing director and CEO R. Ravimohan told The Telegraph that while rating a new issue, it would look at the strength of a company on various fronts.

These include business process, management capability, corporate governance and accounting quality. Crisil is in talks with around 15 companies which approached it for a rating.

The fees charged would vary from five to 10 basis points of the issue size and it would also have suitable caps and floor, Ravimohan added.

According to Ravimohan, the huge database that Crisil has across all industries is a big advantage over others in rating new issues.