The Hindu Business Line : SEBI's grading of IPOs evokes mixed reactions

Debate over norms
`Rating agencies need to have value perspective'
Equities seen as risk-prone since they are sentiment-driven
External issue rating not seen anywhere in the world

Mumbai , Sept. 13

A slew of equity offerings are set to hit the market by 2006-end even as the SEBI has tightened grading norms for IPOs.

More than 10 fresh issues are likely to hit the market by the end of the year, including Gail India (Rs 1,100 crore), XL Telecom, Minar International, Lumax Auto, DCB, Gayatri Project, ICRA, Richa Knits, Sien Industries and Gwalior Chemicals.

Waiting on the sidelines are the issues of DLF Ltd and Parasvnath Developers Ltd, which were withdrawn recently.

The year 2007-08 may see more than 10 companies looking to raise around Rs 20,000 crore from equity offerings. They include BSNL, Air India, Hutchison Max, Idea Cellular, Power Finance Corporation, Escorts, REC, Reliance Communication, BSE, LG Electricals, Fortis Healthcare and Gujarat State Petro.

While some merchant bankers believe that SEBI norms have kept out fly-by-night operators, others are not so sure whether grading reflects the "true value" of companies.

The opinion is that grading is done at the draft prospectus stage and as such there is a "disconnect" with the price of the issue.

"Rating agencies need to have a value perspective instead of grading an IPO on fundamentals alone. The retail investor needs to know whether he is paying the right price for an issue or not," said Mr Nimish Shah, Managing Director, Fortune Financial Services India Ltd.

Fortune Financial is currently advising Ahmedabad-based Asahi Sangion and Delhi-based HAL Offshore on their forthcoming issues. The companies are on the verge of filing their DRH with SEBI. Fortune Financial is also advisor to the Parasvnath Developers issue.

Mr Rashesh Shah, CEO and Managing Director of Edelweiss Capital Ltd, thinks that pricing of an IPO is market-led.

"There are two issues that come into play while grading an IPO. One is quality, the second price. The stress should be on grading the company - its qualitative aspects. The grading should, in essence, be a `balance sheet sense' of the company. It will act as an added investment tool for the investor."

A small section of the merchant banking community contends that unlike the bond market, equities are more risk-prone as they are sentiment-driven. As such, a particular rating assigned to a particular company may not be indicative of market performance, going forward.

A senior director with a leading investment bank said: "Rating will not determine value. On a relative basis, what it will do is give a sense of what the company and its management are all about. A rating or grading will establish parameters over a period of time, which will be a good indicator for investors. That said, it must be mentioned that there is no practice of external ratings for equity offerings elsewhere in the world."

In addition, as the grading process is currently optional, the established or the very small companies may not opt for it, given the cost factor involved.

"The critical issue today is price and the grading will not give any indication of whether the issue is fairly priced or not. More than clarity on earnings per share, the management needs to enhance PE perception," said Mr Nimish Shah.

Even as the debate on grading of IPOs continues, investor interest in new issues remains high.

Many believe that investors have regained confidence following the debut of the Tech Mahindra issue at a premium to its offer price.

The SEBI has initiated the concept of grading equity offerings to inform investors on the slew of companies seeking to tap the capital market.