The Hindu Business Line : The wisdom of IPO rating

The Securities and Exchange Board of India (SEBI) is being pilloried by a section of the media as well as by a segment of financial punditry for daring to do what they think is something unworkable — rating of IPOs.

Arguments against

The leitmotif of their song is shares are a different kettle of fish. While debentures and deposits, according to them, are amenable to credit rating, shares by their very nature are not. A great deal of subjectivity, they aver, would be involved in rating an IPO so much so that rating by two different accredited agencies could well be diametrically opposite.

Long-term outlook for the industry, the global market and players therein, the nature of consumers, taxation policy and a host of other factors impinge on rating an IPO, defying scientific rating, according to them.

SEBI, they apprehend, would be rushing in where angels fear to tread. Share is a minefield; steer clear of it seems to be their refrain. The rating agencies should not steer clear of it so long as people do not steer clear of the primary market.

Deposits vs shares

In the context of mandatory rating of debentures and deposits, the very wisdom of rating was called into question when rating-shopping — going for multiple rating and publishing the best — became rampant. SEBI deftly tackled the problem by mandating publication of all the ratings when multiple rating is resorted to. The point is the baby should not be thrown out with the bath water.

True, share is not the same as debenture or deposit. But that does not mean, we should cast our investors to wolves. A modicum of guidance would be of immense help to them, especially when there is an indiscriminate scramble for IPOs and companies are walking away with the prices discovered through the book-building process.

The rating, if and when ushered in, should mandate use of clear language like `Recommended', `Highly Recommended', `Not Recommended', `Premium Of... ', `Not Justified', etc., rather than use cryptic alphanumeric symbols. As it is, IPOs are carried through untrammelled by a company in league with its merchant banker, which practically is its handmaiden.

The presence of a dispassionate observer — the rating agency — would halt promoters on the rampage in their tracks. In fact, SEBI should insist on multiple rating of an IPO precisely to even out the element of subjectivity, which admittedly could bedevil the rating exercise.

Far from derailing the issue, diametrically opposite ratings could well have a sobering and chastening effect on a market that is mindlessly gung-ho about every company.

Safety net

The critics also say that rating an IPO is pointless given the absence of regime of safety net. While a regime of safety net — promoters and merchant bankers standing by to buy the shares from public if the market quotations go below the offer price during the statutory period — brooks no delay, the ushering in of rating need not be held up merely because of the absence of such regime, especially given the fact that rating agencies themselves are not mandated to standby and spring open the safety net. Indeed, such responsibility should not be thrust upon them lest all the agencies turn their backs on rating IPOs.

That no other country has hitherto dared to rate an IPO also need not warrant going slow by SEBI. By breaking new ground, SEBI may well have the gratification of seeing more developed markets following suit.

(The author is a Delhi-based chartered accountant.)