SEBI soon to make IPO grading voluntary

Capital markets regulator Securities and Exchange Board of India (SEBI) is likely to make the initial public offer (IPO) grading voluntary and a formal announcement on the same is expected later this month, SEBI chief UK Sinha said on Tuesday.

“There is a unanimous view that IPO grading should not be compulsory. We will consider that… we are likely to take it up in one week or 10 days,” Sinha said while speaking at a conference organised by the Association of Investment Bankers of India.

The move is expected to be welcomed by the industry participants who had raised concerns over the grading mechanism ever since it was introduced.

It will also cut the cost of going public for firms marginally at a time when the primary market is virtually at a standstill.

However, it is unlikely to affect revenues of rating agencies, given the fact that it contributes a very small chunk to their revenues.

The capital market watchdog had made it compulsory for the companies to get an IPO grade from at least one credit rating agency for all offer documents filed on or after May 1, 2007. The IPO grade, which is measured on a five-point scale with one being the lowest, does not take into account the valuations or the price at which the shares are offered. 

As per the IPO-grading system, a company planning to launch IPO is required to disclose all the grades it receives for its IPO in its draft prospectus and use them in advertisements for the public.

“The IPO grading process is expected to take into account the prospects of the sector in which the company operates, the competitive strengths of the company that would allow it to address the risks inherent in the business(es) and capitalise on the opportunities available, as well as the company’s financial position,” SEBI had said in a note back then.

The norms had provided some leeway for smaller firms listing on SME platforms of the stock exchanges. At present, IPO grading is not mandatory for the firms listing on such junior markets of the national bourses.

(Edited by Joby Puthuparampil Johnson)

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