Sebi relents, may soon scrap mandatory IPO grading

Written by fe Bureau | Mumbai | Updated: Dec 18 2013, 13:56pm hrs
More than seven years after introducing the concept of grading initial public offers (IPOs), the capital market regulator has said that the mandatory requirement would be soon done away with. This is expected to be welcomed by industry participants who have questioned the rationale of the grading ever since it was introduced.

There is a unanimous view now that IPO grading should not be compulsory. We will consider that... we are likely to take itup in one week or 10 days, said Securities and Exchange Board of India (Sebi) chairman UK Sinha at a seminar on investment banking.

While grading was introduced as voluntary in April 2006, it was made mandatory for all public issues by the capital markets regulator in May 2007. While introducing the concept of IPO grading, Sebi had said that it would help retail investors take more informed investment decisions.

In an interview with The Indian Express in June, Sinha had said that IPO grading has not been able to the serve its purpose. The IPO grading has not served the purpose that it was supposed to. I think we need to have more dialogues with people and then come to a solution, he said.

Interestingly, even as Sebi provided some respite to investment bankers by accepting their demand of scrapping IPO grading, it said that bankers need to be more careful with pricing and should not criticise Sebi for over-regulation.

You think the market is over-regulated, but I think it is the other way around. People take advantage of this freedom. Our approach is that first we give freedom and if the freedom is misused or abused, instead of being properly used, then we step in. I do not think we are over-regulated, said VS Sundaresan, chief general manager, Sebi. In 2009 and 2010, there were a total of 52 issues and if one invested R100 in each issue, the principal should have been R5,200. It is worth R2,800 now, added the Sebi official.

This is not the first time that the capital market watchdog has pulled up the investment banking community on issues related to lax due diligence and aggressive pricing.

Exactly an year ago at a similar conference organised by AIBI, Sinha had compared the investment banking business with matchmaking, saying that it seemed bankers highlighted only the good qualities of a company while choosing to ignore risk factors.

What does the Indian matchmaker do He goes out and tries to sell all the good qualities of the bridegroom. Are we doing the same with companies that are not ready (for an IPO) he had said.

Meanwhile, Sebi will also soon tweak the shelf prospectus norms to make more companies take advantage of the facility. Filing of shelf document helps the company do away with filing of a document every time before raising capital from the market.

The other area is related to shelf prospectus. After the Companies Act (is passed), we want to expand the eligibility of companies which can issue shelf prospectus, said Sinha.