WORTHINESS OF INITIAL PUBLIC OFFERINGS
SEBI (Stocks regulatory control authority in India) has laid down strict disclosure norms for companies entering the primary market, a lack of time and/or ability on the part of the investors to interpret this information has often resulted in a bad judgment. This is where â€˜IPOâ€™ (Initial Public Offer) grading comes in.
IPO grading done by Credit Rating Agencies (CRA) – CRISIL, Fitch ratings India Private Ltd., ICRA Ltd, and Credit Analysis & Research Ltd. (CARE), involves an in-depth assessment of the various tangible and intangible parameters of the company. It assesses not only the future prospects of the industry to which the company belong, its project risks, financial strength, operating performance etc., but also the managementâ€™s capability, its accounting policies, corporate governance practices, etc. In sum, it can be safely said that the grade can be used to ascertain the future growth potential of the company, and, hence should be taken into account while arriving at the â€˜subscribeâ€™ decisions.
After assessing all the relevant information, CRA awards grades on a scale of 1 to 5. The higher the score the stronger are the companyâ€™s fundamentals. The top three scores signify strong, above average and average fundamentals and the lowest two convey below average and poor fundamentals.
The process of IPO grading typically requires 2-3 weeks for completion. However, prudent companies initiate the grading process about 6-8 weeks before the targeted IPO date to provide sufficient time for any contingencies.
A company must mandate a CRA for the grading exercise. This agency will then ask for all the information that it feels is relevant for providing a grade.
On receipt of the required information, the CRA holds discussions with the companyâ€™s management and visits the companyâ€™s operating locations, if required.
It then prepare an analytical assessment report. This report is presented to a committee comprising senior executives of the concerned grading agency, who discuss all the relevant issues and assign a grade.
Lastly, the grade is communicated to the concerned company along with an assessment report outlining the rationale for the grade assigned.
No scope for acceptance or rejection
A company which has opted for IPO grading does not have a choice about accepting or rejecting the grade. The grade must necessarily form a part of the issue prospectus.
IPO grading â€“ the benefits
For the investor
1. This tool provides an independent assessment of the companyâ€™s fundamentals. It can be used to assess upcoming public offers of companies that are entering the equity markets for the first time, especially, since there is no track record of its market performance.
2. Since, the CRA reveals the factors which it took into account while awarding the grade, an investor who is overwhelmed by the information provided in the prospectus can read a little more about these specific factors.
An IPO grade is a symbolic representation of the CRA assessment of the fundamentals of the concerned company at that particular point of time. Hence, if the company is rated, then, the rating should be an aspect which should be considered at the time of making the decision of whether to subscribe to the issue or not. Further, an IPO grade is not a certificate of statutory compliance or a view on the companyâ€™s future stock price.