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Monday, March 26, 2007

IPO Grading – What is SEBI up to ?

The Securities and Exchange Board of India (SEBI) made it mandatory for companies planning initial public offers to get rated by agencies and tightened disclosures for real estate IPOs.

The regulator also said real estate firms must provide ownership or purchase agreement details to justify their claims about land holdings, to prevent firms from exaggerating their real assets. While announcing this on Thursday, Mr.Damodaran, Chairman also said the Board has approved short-selling by institutions as indicated in the Union budget on Feb.28.

While Damodaran didn't detail the reasons for the decisions, market players said the performance of some newly listed shares that are trading below their offer price could have led to the move. For instance, Parsvnath Developers Ltd. and Akruti Nirman Ltd. made a strong debut on the markets but are now available below their IPO prices.

SEBI’s decision to make IPO grading mandatory has triggered a negative reaction in Industry circles on the following lines –

a) The five principal grades represent Earnings, Accounting, Management, Financial risks and Corporate Governance, but leaves out the primary aspect viz. price / valuation which is the key parameter of the issue. The rating agencies themselves admit their grading does not mean a “recommendation” or a comment on valuation of the stock.

b) Even a good company could be a bad investment at a high price. However for the small investors’ interest which the grading exercise apparently aims to protect remains unserved since despite disclaimers, (s)he would expect a graded IPO to quote above the market price.

c) If the purpose of grading is to improve the disclosures, the Lead Managers / Merchant Bankers are clearly not doing their job despite the high fees they charge. Now by introduction of grading, SEBI has enabled Merchant Bankers to conveniently shift the blame for a badly diligenced IPO to Rating Agencies who have graded the issue. Eventually it will lead to a blame game between Merchant Bankers and Rating Agencies and SEBI will have to arbiter truce – while the small investor had been disdained all along.

Have we forgotten the Rs.12 billion ( $ 272 MM) CRB Capital Markets scam ? It happened despite the The A+ rating given by CARE for its Fixed Deposits *scheme* and upfront cash incentives of 7-10% attracted investors in hordes to Bhansali's schemes. Incidentally the same Debt rating agencies are empowered to grade IPOs now. Déjà vu ?

The industry vividly remembers the reason behind introduction of debt rating then which was also to introduce an element of transparency and enhanced disclosure standards by the issuers – which at least was a global mechanism. But IPO grading is totally unheard of anywhere else and is a First-From-India initiative. [ By the way, the prestigious IOSCO conference is scheduled to be held for the first time in Mumbai, India between 9th -12th April, 2007 – We need something to crow there, don’t we ? ]

Why are we pioneering something which others before us have considered and discarded because of its futility ? Are we still deluding that IPO grading could be a panacea for improving IPO quality – or worse, a guarantee for stocks quoting at a premium to issue price upon listing ? Why wouldn’t we recognize that risk is the reason why equities quote at a premium / discount and it can’t be mitigated by regulation beyond a point ? Why can’t we leave price discovery being a function of demand and supply which has it always been and will be ? Why are we trying to increase the cost of IPO by adding another fee based, subject to disclaimer, no responsibility undertaken exercise in futility ?

Ask me. There are only investors in any market, no specie called the `small’ investor. Everyone who comes to stock market is greedy. Small or big, (s)he has an ambition and a risk appetite to match it. (S)He may not be savvy to talk tall about portfolio analysis or risk management, but (s)he knows where to draw the line in own ways. (S)He will come to market no matter how hard you may try to dissuade or warn. For them, no template is graven in stone. It's a rage or just plain greed. You can't hold it back.

Whom are we trying to protect ?

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