In a move that could benefit investors, the capital market regulator, Sebi, has now made grading of Initial Public Offering (IPO) mandatory. From now on, Sebi-registered credit rating agencies, such as CRISIL, ICRA and CARE will grade the various forthcoming IPOs on a five-point scale—from grade 5 (indicating healthy fundamentals) to grade 1 (indicating weak fundamentals). An IPO will be graded based on a particular agency's assessment of a company's fundamentals. It will mainly take into account five parameters: Earnings per share, financial risks, accounting quality, corporate governance, and management quality. Moreover, the rating process will also involve market checks, plant visits, and practice of due diligence by the companies. Thus, the rating awarded to an IPO will reflect the company's general health in terms of these qualitative and quantitative factors. Investors can follow ratings awarded to IPOs and make their own judgments. It will enable the investors to have an independent option from credible entities on the business strengths of the companies.
In 2006, around 80 companies raised about Rs.198.60 bn in IPOs, which is more than double of the Rs. 99.90 bn that was raised in 2005. Some investors gained a lot, particularly with the companies in high-growth sector. Energy transportation major Gujarat State Petronet, which operates the second-largest pipeline in India, raised $84 mn through IPO last February and saw its shares immediately jump up by 75% during its first day of trading. An IT service firm Tech Mahindra, majority-owned by Mahindra & Mahindra and one of the country's biggest exporters of software, also initiated its IPO in August last year and has doubled its shares since then. |
