The recent multiple demat account episode brought into light a few high networth investors who resorted to corner shares from IPO issues through multiple demat accounts posing as retail investors. The fraudulent parties sold the shares on the day of listing and earned premium on the speculation price. Sebi, in order to address the problem of multiple demat accounts, then took measures to make IPOs more transparent. The announcement by Sebi will provide investors, in the near future, with the benefit of having their issues rated by credit rating agencies approved by Sebi. By introducing IPO rating, Sebi intends to enable more realistic pricing of shares and help investors by providing more detailed information of the issue. According to Sebi, the fee for rating IPOs will not be borne by the issuer and Sebi has requested the Ministry of Company Affairs to fund the ratings of IPOs from its Investor Education and Protection Fund (IEPF). The fund constitutes unpaid dividends, application money, unpaid debentures and redemption fund. Sebi has listed CRISIL, Fitch Rating, ICRA and CARE as the rating agencies.
It is to be noted here that the rating of IPOs has been made optional and is not mandatory. The choice is left to the issuer. It is to be recalled that the plan to introduce the rating of IPOs was mulled by Sebi some two years back. In May 2004, Sebi planned to introduce mandatory IPO rating covering promoters, management record and past performance. But today, Sebi has decided to make IPO rating voluntary. It has raised debates and doubts among s and markets. An IPO rating is a one time relative assessment of fundamentals of the IPO at the time of issue and is meant to aid interested investors in their decision-making. The grading is normally on a five-point scale; a high score indicates stronger fundamentals. The general fundamental areas of rating are the issuer's management information, market conditions and potential growth factors. An IPO assessment carried out by an independent credit rating agency gives professional and independent assessment of the IPO. The assessment provides vital information about the company and also creates awareness about the fundamental strengths and weaknesses among the investors. The information provided by the rating agencies will help the investor in allocating his resources better and maintaining a good portfolio of stocks in his pocket. According to Sebi, the IPO grading will be expressed on a five-point scale and is a relative comparison of the assessed fundamentals of the graded issue to other listed equity securities in the country.
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