Small IPOs may have to be rated

MUMBAI: While the Securities and Exchange Board of India (Sebi) does not make it mandatory for companies to have their IPOs graded by a rating agency, BSE is learnt to be insisting that some smaller companies get their issues rated.

This was indicated by merchant bankers handling the public issues of some small companies. “(In the absence of a rating) the exchanges have been taking longer than usual to grant approval for listing,” they said.

A booming stock market is usually a fertile ground for many dubious promoters looking for a fast buck through an IPO. Perhaps not willing to take the rap for fly-by-night companies that get listed and subsequently flounder, the BSE is raising the bar.

The companies which got their IPOs rated ended up with poor grades. Naturally, not many are keen on being rated.

The problem facing small companies is that there is no mechanism of credit enhancement, which makes it difficult for the issuer to improve on the rating.

In a debt issue, if the company does not get investment rating, it can take a letter of comfort or guarantee from a better-rated company, which in turn enhances the issuer’s credit rating. However, a similar arrangement is not possible for an IPO.

Confirming the move, a senior official from a rating agency said, “Sebi and the exchanges want to encourage rating of IPOs because they are worried about fly-by-night operators.” Despite repeated efforts, BSE did not respond to ET’s query on whether the exchange is insisting on grading of small issues.

According to Delhi-based research firm Prime Database’s Prithvi Haldea, there is no merit in grading public issues. “It can be misleading as rating agencies do not take a call on the possible valuation that the company will fetch after listing. Equities are all about market perception. So there is no need for rating such instruments. Investors can judge the quality of any issue on the basis of disclosures made in the prospectus,” said Mr Haldea.

According to market sources, three companies have recently been asked to rate their issues after they filed their offer documents with Sebi. Two of them — Shree Ashtavinayak Cine Vision (issue size Rs 52 crore) and Minar International (Rs 85 crore) — are yet to come out with their respective IPOs even after three months of filing offer documents. Rating agency Crisil has assigned grade 2/5 (2 on a scale of 5) to these issues. In April, Icra had rated the IPO of SRS Entertainment as grade 2/5.