Sebi to make IPO grading voluntary

Formal announcement likely in a week

About seven years after introducing ratings of initial public offerings (IPO), the Securities and Exchange Board of India (Sebi) might make the concept voluntary.

“There is a unanimous view that IPO grading should not be compulsory. We will consider that,” Sebi Chairman U K Sinha said at a conference organised by the Association of Investment Bankers of India. He added the board would make a formal announcement on the matter in a week.

Sebi had made it mandatory for companies to secure an IPO grade from at least one credit rating agency for all offer documents filed on or after May 1, 2007. “The IPO grading process is expected to take into account the prospects of the sector in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business(es) and capitalise on the opportunities available, as well as the company’s financial position,” said to a Sebi note.

IPOs are graded on a five-point scale, with grade 1 being the lowest. The grade does not take into account the valuations or the price at which the shares are offered. ‘Mandatory IPO grading: Does it help pricing efficiency’, a recent study by Indian Institute of Management-Ahmedabad’s Joshy Jacoby and Sobhesh Kumar Agarwalla, said certification didn’t result in more efficient pricing of IPOs. “There is no evidence to support IPO pricing improvement due to the introduction of IPO grading. This is contrary to the evidence reported by some earlier studies. This suggests the failure of grading as an IPO certification,” said the report, dated December 2012.

Currently, IPO grading is voluntary for companies listing on SME platforms. Scrapping of IPO grading won’t impact rating agencies, as its share in their revenue is very small.

Separately, Sebi is planning to expand the list of companies that can raise funds by filing a shelf prospectus (A type of offer where securities can be sold without a separate prospectus for each set). “We want to expand the eligibility of companies that can issue shelf prospectus,” Sinha said.