Business Daily from THE HINDU group of publications
Monday, Jul 17, 2006
Markets - Credit Rating
"Issuers should not always expect to get the highest grading. It is not always possible and a grading in the middle level is also good enough."
Chennai , July 16
ICRA, the rating agency, believes that pressure from organised investors will result in more IPOs getting graded.
ICRA has graded one IPO and has got the mandate for at least two more, with discussions on with a couple of more issuers, according to Mr P.K. Choudhury, Managing Director.
Unlike credit rating, where the emphasis is on the financial aspects, grading IPOs focuses more on technical and industry issues - long- to medium-term outlook for the industry, quality of management, track record, how transparent the management is, and corporate governance issues.
Management quality is not restricted just to the board of directors and CEO, but covers the operational managers or second-rung leadership of the company, he said.
ICRA's IPO grading runs on a scale of one to five, with five being the highest level.
"Issuers should not always expect to get the highest grading. It is not always possible and a grading in the middle level is also good enough," he told Business Line.
Rating agencies are by nature conservative, and both the issuers and investors should accept that not all issues would get the highest grading possible, he added.
The response to the IPO grading product launched by ICRA has been quite positive.
This will help issuers who do not enjoy a tremendous brand but have a fundamentally strong company. Grading IPOs is an initiative by the SEBI and is voluntary. An IPO grading, according to Mr Choudhury, will be a test of the rating agencies' analytical skills as it gets immediate validation at the market. The grading will add value to an investment decision by investors.
He believes that pressure will come from investors, especially organised investors, for issues to get graded, as it happened in the case of credit rating. "The push from investors is much more important that regulatory requirement."
ICRA has graded the IPO of SRS Entertainment Ltd and is in the process of grading IPO of another company, in the hospitality sector.
Besides the IPO grading product, Mr Choudhury expects good response to another of ICRA's products - rating of SMEs.
This product was launched some time back but is being revived as ICRA believes that there is tremendous potential in the SME sector.
"Our anxiety always was that sometimes the quality of information, or even the availability of information in case of SMEs, may not be up to our requirement," he said; this is changing, he added.
SMEs are getting sophisticated information systems and becoming more transparent, because of which ICRA expects tremendous potential for its product.
However, the cost of rating SMEs is a major issue. Without giving exact figures on how much it would cost to rate an SME, Mr Choudhury said that ICRA would either have to cross-subsidise rating SMEs or adopt a cluster approach.
If more than one SME in a geographical location plans to go in for rating, then the costs could be distributed among them.
Even a sectoral approach - where a number of SMEs in a particular sector go in for a rating, so that research costs would go down - is another approach that ICRA was looking at.
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