The Hindu Business Line : Crisil, ICRA to offer IPO grading services

LEADING rating agencies Crisil Ltd and ICRA Ltd are set to launch the grading of initial public offerings (IPOs) in the domestic market, after market regulator SEBI decided to allow grading of IPOs to provide investors with additional information and investment guidance tool.

However, an official of Fitch India, the third leading rating agency in the country, said it is not going to offer new services immediately.

The ICRA Managing Director, Mr P.K. Choudhary, said the rating agency was getting prepared for the new services. In fact, in the early 1990s, ICRA was doing grading of IPOs, which did not take off after issuers felt it was an "expensive process".

"The grading of IPOs will become popular once the issuers and its users understand the benefits derived from such gradings," Mr Choudhary said.

Similarly, Crisil Ltd is also gearing up to provide IPO gradings, which will be carried out through its separate research subsidiary, Crisil Research and Information Services Ltd, said Mr Ajay Dwivedi, CEO, Crisil Research and Information Services Ltd.

"Crisil has developed the grading concept," he said, adding that by providing the new services through Crisil Research and Information Services, there will be "complete analytical separation between the rating activity, which is debt-oriented, and IPO grading, which is equity-oriented."

"Though we have not yet publicly announced any IPO grading, we have done several pilot exercises internally," Mr Dwivedi said.

The grading of IPO, according to SEBI, will be expressed on a five-point scale and is a relative comparison of the assessed fundamentals of the graded issue to other listed equity securities in the country.

"As the IPO grading does not take cognisance of the price of the security, it is not an investment recommendation. Rather, it is one of the inputs for the investor to aid in the decision making process. All other things remaining equal, a security with stronger fundamentals would command a higher market price," SEBI had said.

The third leading rating agency Fitch India is "not rushing in" to offer the IPO grading service and prefers a wait-and-watch policy, according to Mr R. Jayakumar, Chief Operating Officer of Fitch India.

Meanwhile, industry officials said grading of IPOs might be a "tricky" affair as it could give a false sense of security to the public. "Grading of IPOs is not done internationally by global rating agencies such as Standard & Poor's and Moody's. The grading of IPOs may shift the responsibility of merchant bankers (in bringing out good IPOs) to the rating agencies," said a merchant banker.

Global rating majors Standard & Poor's is the majority stakeholder in Crisil Ltd, while Moody's is the single biggest stakeholder in ICRA Ltd. Similarly, the third global player Fitch IBCA (which acquired another rating agency Dun & Bradstreet in 2000), also does not provide grading of IPOs internationally.