Sebi set to make IPO grading non-mandatory

The Securities and Exchange Board of India (Sebi) is likely to make grading of intial public offers (IPOs) of equity shares non-mandatory in about 7 to 10 days.

“ There is a unanimous view now that IPO grading should not be compulsory. We will consider that,” said Sebi Chairman U K Sinha, speaking at the conference organised by Association of Investment Bankers of India on Tuesday.

IPO grading is the grade assigned by Sebi approved rating agencies like Crisil, CARE, Icra, Fitch Ratings, etc to the IPOs, which represents a relative assessment of the fundamentals of that issue in relation to the other listed peers.

Such grading is generally assigned on a five-point point scale, with a higher score indicating stronger fundamentals and vice-versa.

Though the IPO grading helps investors to assess the fundamentals of the company, including management evaluation, corporate governance issues and business related factors, it does not consider “pricing of issue”, which is arrived at by merchant bankers much later near to the IPO opening dates.

IPO grading was started in April 2006 as an optional feature, but was made mandatory in May 2007. The concept has not served its purpose as market experts have been critising it for its lack of efficacy.

Take the case of companies like Bharti Infratel, Specialty Restaurants and MCX India that got listed in 2012. Though all these companies had received strong IPO gradings of over 4, these are still trading much below their issue price.

Sebi’s primary markets advisory committee, too, had recently recommended that IPO grading should not be mandatory.