The Hindu Business Line : Companies must get initial public offers graded

Mumbai March 22 Companies will now have to mandatorily get their initial public offers graded, the Securities and Exchange Board of India has decided.

In doing so, the Indian capital markets regulator has created, perhaps, an international precedent of sorts.

"This is a first in the securities market. IPO grading does not exist in any other reasonably developed jurisdictions," said the SEBI Chairman, Mr M. Damodaran, at a news briefing here today, immediately after the SEBI Board approved the decision.

There is no international experience on the basis of which you can formulate a policy, but "what has been taken into account is ground realities," he said.

The large number of issues coming into the market has raised some concerns, he said. "There could be a possibility of some of the problems of the early nineties — the problems of vanishing companies — surfacing," he said. The decision was taken on the basis of the recommendations of SEBI's Primary Markets Advisory Committee.

Rating agency CRISIL made a presentation on the issue to the SEBI Board, stating that the grading procedures will not remain a simple IPO grading product indefinitely, said Mr Damodaran. "Over time, and based on experience gained, this would mature into grading of the total equity offering of the company and not a particular offering at a particular point of time."

"When there are a large number of issues that have been graded, you would see the development of a universe which will enable a framework for investors to make appropriate comparisons rather than judge each issue in isolation," said the Chairman. As of today, three rating agencies CRISIL, ICRA and CARE are participating in the pilot project.

SEBI has tightened disclosure standards for real estate IPOs. Issuers must now provide land bank details accompanied by ownership status or purchase agreements, said Mr Damodaran.

"In other words, there must be a clear evidence that the land bank is a land bank in reality." And, when there is only an agreement to develop land, there must be a complete disclosure of details including existence of any revocation clause, he said. "All such agreements have to be made available for inspection. Post the IPO, there would be continuous disclosures regarding the agreements."

There should be no projection of land value or project value, and indications of market value should be based only on present valuation, not future projections, he said.

Short selling

The SEBI Board also authorised short selling by institutions. "It is giving effect to the announcement made in the Budget," said Mr Damodaran.

The Finance Minister had said that institutions would be allowed short selling settled by delivery, and securities lending and borrowing to facilitate delivery.

The implementation will happen "fairly quickly" said Mr Damodaran. The stock exchanges have indicated their state of readiness, he noted.

TECHNOLOGY FOR SUMMONS

SEBI will "adopt technology" (such as use of email) for issuing summons to persons being investigated. There would also be summons serviced by third parties.

ABRIDGED ANNUAL REPORTS

The listing agreement will be amended to allow companies to send abridged annual reports to their shareholders to save use of paperand costs. This was decided since considerable information regarding these companies is already available in the public domain, said Mr Damodaran.

PREFERENTIAL ALLOTMENT, PAN

The use of PAN is being made mandatory for preferential allotment of shares, as in the case of most of the transactions in the capital markets.

SEBI will give some flexibility to statutory/Governmental boards/authorities in regard to raising capital from the markets. The flexibility would be in terms of minimum promoters' contribution, their minimum holding prior to public offering as well as the minimum holding post public issue.

CAP ON AD VALOREM FEES

SEBI has decided to introduce a cap on the ad valorem fee for companies that it introduced a few months ago. This will benefit the large public issues.

DELISTING OF SECURITIES

The Board of SEBI will discuss in May the issue of delisting of securities and whether there is any need for any change in procedure. The question was whether we should stay with reverse book building as at present or move to some other alternative ways of facilitating things," said Mr Damodaran.

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Companies must get initial public offers graded