If you are an investor, don’t base your decision solely on the grading assigned to initial public offerings (IPOs) by rating agencies.
MUMBAI: If you are an investor, don’t base your decision solely on the grading assigned to initial public offerings (IPOs) by rating agencies.
In a recent circular, the Securities and Exchange Board of India (Sebi) had said that companies could get their IPOs graded by Credit Rating Information Services of India Ltd (Crisil), Credit Analysis and Research Ltd (CARE), Icra or Fitch Ratings.
Though Sebi, in its circular, specifies that IPO grading is optional, the Bombay Stock Exchange’s (the designated stock exchange) listing committee is said to take a call on whether an IPO requires a grading or not, before approval is granted to list on the exchange. The exchange did not comment on this.
The gradation measures the issuing company’s level of performance or its fundamentals vis-à-vis the entire universe of listed companies.
“The comparison straddles sectors and market caps, and is not made only against peer IPOs or listed peers, since there is an equal opportunity for an individual to invest in already listed securities and in the IPO,” said Ajay Dwivedi, chief executive officer of Crisil Research and Information Services Ltd.
Two weeks ago, Crisil had published the results of the first two IPOs it graded. It assigned ‘2/5’ to the proposed Rs 52-crore IPO from Shree Ashtavinayak Cine Vision, and the Rs 135.6-crore issue from Minar International.
This was the first time Crisil was rating an IPO. The first one was done by Icra, when it gave the Rs 95 crore issue from SRS Entertainment a 2/5 grading. A 2/5 rating means that the companies have been assessed as having “below average fundamentals”.
“But these gradings alone should not be the parameter on which a person makes a choice on whether or not to invest in an IPO. The returns he expects, individual risk appetite, etc, which are not taken into account in the grading that we assign, also need to be considered,” added Dwivedi.
IPO grading is unique to India and was introduced by Sebi to provide investors an independent, reliable and consistent assessment of the fundamentals of new public issues.
The offering may be especially useful to retail investors who are seeking to invest in companies that are unknown in the equity markets.
The grading provided by the aforementioned agencies would be a significant addition to the tools currently available for assessing the investment attractiveness of IPOs.
IPO grading by these agencies assesses the company's business and financial prospects, management quality and corporate governance.
However, to reiterate what was mentioned earlier, one's investment in an IPO should not be based entirely on the IPO grading assigned to it.
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