Credit Ratings and Ipo Pricing
Electronic copy available at: http://ssrn.com/abstract=1609817
CREDIBILITY OF THE IPO GRADING: TIME TO RETHINK
KARTIKEY MAHAJAN
&
MALLIKA ANAND
Prologue
Initial Public Offer (hereinafter as ‘IPO’) in the new regime (which started as an innovation) has to be mandatorily graded by a Credit Rating Agency (hereinafter as ‘CRA’). This optimization of the IPO by the Securities and Exchange Board of India (hereinafter as ‘SEBI’) has been seen as a market innovation to ensure the credibility of the offer and to protect and guide the investor. The motivation for the proposal of the mandatory IPO Grading by SEBI lies in the legal mandate of
‘investor protection’ cast upon it under Sections 11 and 11A of the SEBI Act, 1992.1 This step of investor protection if carried out effectively would make India as one of the most transparent and efficient capital markets of the world. However with the results produced, this is truly not the case. Part I analyses the meaning and various dimensions of IPO grading. Part II critically examines the concept of IPO grading with respect to CRA’s, including the various arguments which the analysts hold against it and that of the authors. In Part III, the authors brings forth the analysis by exhibiting the inconsistency in the results of the grading system and the final part is the conclusion. I. IPO Grading –Meaning and Importance
SEBI is the first market regulator to introduce the concept of IPO grading. From being an optional process at its inception it has become a mandatory process from May 2007. IPO grading is a service that provides an ‘independent’ assessment of fundamentals regarding quality of
1 Tarun Jain & Raghav Sharma, Mandatory IPO Grading: Reflections from the Indian Capital Markets, ICFAI
Journal of Corporate and Securities Law, Vol. 5, No. 4, pp. 8-22, November 2008.
Electronic copy available at: http://ssrn.com/abstract=1609817 equity shares offered to aid comparative assessment that would prove
CREDIBILITY OF THE IPO GRADING: TIME TO RETHINK
KARTIKEY MAHAJAN
&
MALLIKA ANAND
Prologue
Initial Public Offer (hereinafter as ‘IPO’) in the new regime (which started as an innovation) has to be mandatorily graded by a Credit Rating Agency (hereinafter as ‘CRA’). This optimization of the IPO by the Securities and Exchange Board of India (hereinafter as ‘SEBI’) has been seen as a market innovation to ensure the credibility of the offer and to protect and guide the investor. The motivation for the proposal of the mandatory IPO Grading by SEBI lies in the legal mandate of
‘investor protection’ cast upon it under Sections 11 and 11A of the SEBI Act, 1992.1 This step of investor protection if carried out effectively would make India as one of the most transparent and efficient capital markets of the world. However with the results produced, this is truly not the case. Part I analyses the meaning and various dimensions of IPO grading. Part II critically examines the concept of IPO grading with respect to CRA’s, including the various arguments which the analysts hold against it and that of the authors. In Part III, the authors brings forth the analysis by exhibiting the inconsistency in the results of the grading system and the final part is the conclusion. I. IPO Grading –Meaning and Importance
SEBI is the first market regulator to introduce the concept of IPO grading. From being an optional process at its inception it has become a mandatory process from May 2007. IPO grading is a service that provides an ‘independent’ assessment of fundamentals regarding quality of
1 Tarun Jain & Raghav Sharma, Mandatory IPO Grading: Reflections from the Indian Capital Markets, ICFAI
Journal of Corporate and Securities Law, Vol. 5, No. 4, pp. 8-22, November 2008.
Electronic copy available at: http://ssrn.com/abstract=1609817 equity shares offered to aid comparative assessment that would prove