"It is time for the regulator to take a relook to the entire grading system. The whole purpose on grading is to guide investor towards the right issue, however, with such high graded issues trading at a discount, IPO investors are left wondering about dependability on grading," SMC Capitals Equity Head Jagannadham Thunuguntla said.

1. Better IPO grade may not ensure good investor returns
19 Aug 2009, 2029 hrs IST, PTI
NEW DELHI: A better IPO grading may not be a guarantee for healthy long-term returns
for investors with many a company that entered the primary market with good rating in the
last two years are now trading well below their offer prices on the bourses.
Market regulator Securities and Exchanges Board of India (SEBI) made it mandatory for
businesses to grade their Initial Public Offers (IPOs) in May 2007, mainly aimed at helping
investors with investment decisions related to stocks.
An analysis of the current market valuation of the companies, which came out with public
offering after May 2007, shows that irrespective of the grades given, a major chunk of them
saw wealth erosion in the range of 20 to 70 per cent.
According to brokerage firm SMC Capitals, the cumulative market capitalisation of 63
public issues after May 1, 2007, is currently trading lower at an average of 39 per cent.
"It is time for the regulator to take a relook to the entire grading system. The whole
purpose on grading is to guide investor towards the right issue, however, with such high
graded issues trading at a discount, IPO investors are left wondering about dependability
on grading," SMC Capitals Equity Head Jagannadham Thunuguntla said.
SEBI has made it mandatory for all companies to grade their IPOs from one of the credit
rating agencies -- Icra, Crisil, Fitch and CARE -- registered with it.
There are five categories of grading: Grade 1 -- Poor fundamentals; Grade 2 -- Below
Average fundamentals; Grade 3 -- Average fundamentals; Grade 4 -- Above average
fundamentals and Grade 5 -- Strong fundamentals.
As many as nine out of the ten IPOs so far (since May 2007) with 'Grade 4' are trading at a
price lower than that of their offer price.
As per SEBI norms, companies are required to obtain grading from at least one rating
agency and disclose the grades in the prospectus and advertisements, among others, related
to the IPO.

2. Noting that India is the only country to have a mandatory mechanism of grading of equity
instruments, Thunuguntla said, "regulators should refocus as to whether the main purpose
of grading is delivered or not".
On the other hand, certain analysts feel that the main purpose of IPO grading is confined
to the primary market and not look at it as to how the scrip performs in the secondary
market.
"The main purpose of IPO grading is to enlighten investors about a new public issue.
When it trades in the secondary market, the scrip will move according to broader market
sentiment," primary market tracking firm Prime Database's CEO Prithvi Haldea said.