IPO Rating Made Compulsory

Now that SEBI has made it compulsory for companies to get a rating for their public issues, rating agencies like CRISIL, CARE, Fitch and ICRA are soon going to find themselves being blamed for investors losses. From now on, anyone who loses money on an IPO will try to pass the buck to the raters, whose fault it is. Not just blame for losses, if your neighbour makes more money on a company rated '2' than you do on a company rated '4', then too, you'll know whom to blame. Which is a pity, because used properly, the IPO rating can be a useful tool for investors.

Despite the fact that disclosure norms have improved, the sheer volume and complexity of IPO disclosures means that it needs serious time and application to learn to understand them. This is something that few investors can do. The idea behind the ratings appears to be that IPO prospectuses are too complex for lay investors to read and a rating given by a rating agency can be a guide. SEBI states that this rating is 'a service aimed at facilitating the assessment of equity issues offered to public. The grade assigned to any individual issue represents a relative assessment of the 'fundamentals' of that issue in relation to the universe of other listed equity securities in India.' SEBI has pointed out that this rating is not a buy or sell recommendation.

I think the best by-product of these ratings could be that the kind of companies who are likely to get a 1 or 2 rating may not show up in the IPO bazaar at all. However, the rating process is not expected to include any forensic work so if someone is faking or hiding information then that's not going to get caught.

Ideally, I wish IPO ratings were not needed at all but given the actual state of stock investing this is a positive development. My opinion is that if done properly, IPO ratings could develop not into a good preference indicator, but a useful avoidance indicator. That is, investors should use them more as a way of avoiding bad companies rather than selecting good ones.

Have your views over this. Just comment in you views, doubts, questions etc.