The Hindu Business Line : `IPO gradings help investors take appropriate decision'

WITH investor protection being the buzzword today, the regulatory agencies have been looking at various mechanisms for the purpose, including initiating equity/IPO grading.

According to Mr Amul Gogna, Executive Director, ICRA Ltd, "The bases of worthwhile investing are reliable information and analysis. IPO gradings can serve as a bridge between what is expected by the investor and what is on offer."

According to analysts, "The grading would be a reliable tool in the hands of investors, helping them take appropriate investment decisions, if done from an independent and specialised agency. It can add to the level of comfort of investors, particularly the retail or small investors, who on their own may not have the expertise, resources or the time to evaluate the quality of the offering."

While agreeing that there is no specific obligation in equity, Mr Gogna said, "but there are expectations." The expectations are a function of a plethora of factors, which stem from the underlying fundamental characteristics of the company offering the equity, and the timing or pricing of the offering. The grading can and should focus on the fundamental factors that drive performance and in turn returns to investors, which may or may not be in line with their expectations in the absence of grading-like information.

Empirical research on past performance and calibration of prospects could benchmark expected performance, which can be translated into a grading opinion, he said.

On whether it is a mere analysis of the prospectus, Mr Gogna told Business Line, rating of IPOs goes much beyond the prospectus. "The prospectus is only a reference document. Grading of IPOs seeks to bring value-added opinion to the investor, which can only be provided after a hands-on analysis, verification and validation of numerous quantitative and qualitative factors," he said.

Regarding why the investors should believe in the gradings, he said, "Investors know that a specialised, independent agency providing these gradings does this for a living. Investors' confidence and belief are essential for the survival of the agency and in the light of that, the gradings assigned by such an agency, in its own interest, can only be credible."

It is commonly argued that price is a dominant factor in IPO or equity investing. Speaking about how grading is relevant even though it focuses only on the fundamentals, he said, "The obsession with price is perhaps the cause of most ills in our equity markets. By that, I don't mean price is irrelevant, but an investor would benefit more by going deep into the issue. The grading based on level, growth and quality of earnings inherently captures the pricing factor by measuring the efficiency of the deployment of the quantum of capital raised, which in turn is a function of the price. So, the grading can be a comment on the price of the issue even while being based on fundamentals."

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