SEBI MAKES IPO GRADING MANDATORY

The Consumer Education and Research Centre (CERC), Ahmedabad, congratulates the Securities and Exchange Board of India (SEBI) on making IPO grading mandatory and on being the first regulatory jurisdiction in the world to introduce mandatory ratings. By recognising the specific needs of Indian retail investors and taking steps to protect them, SEBI has indeed lived up to the preamble of its statute.

Over the years, investors are being saddled with bulky prospectuses, with complex valuation techniques that are aimed at justifying over-priced IPOs without correlation to the current performance of companies raising public money. IPO grading by SEBI registered rating agencies will ensure that investors have a valuable tool to judge the fundamentals of a company. A clear assessment of a company’s fundamentals will hopefully make it easier for the prudent investor to decide the price that he/she is willing to pay for a particular company’s shares. We do recognise that IPO grading is only a tool to aid investment decisions and that investors’ would still need to make their own assessment about the fairness of the offer price. After all, even the best rated companies can be bad investments if they are over-priced.

We are happy that SEBI has recognised a long pending demand to provide retail investors with a tool for better understanding of IPOs. In fact, 17 SEBI registered investor associations had unanimously sought mandatory IPO gradings at meeting with the regulator held in the last quarter. CERC in particular has been advocating IPO grading for over three years.

We especially congratulate SEBI on tightening disclosure norms for realty companies in recognition of the fact that the exaggerated valuation of land banks was luring investors to this over-priced sector. The new disclosures requiring separation from actual ownership and mere contracts to purchase will put land banks and their valuation in proper perspective.

We would request SEBI to take the process a step forward at the appropriate time by asking stock exchanges to pay for the ratings. The two national bourses alone have over Rs 300 crore in their Investor Protection Funds and have expressed willingness to pay for the ratings.

Date : 28/03/2007
Place : Ahmedabad

Pritee Shah
Senior Director - CERC
Editor, INSIGHT — The Consumer Magazine