Mandatory grading of IPOs

Some days back there were reports on SEBI deferring decision on mandatory grading of IPOs. BL report here

The Board of the Securities and Exchange Board of India (SEBI) on Saturday deferred a decision on mandatory grading of initial public offers (IPOs) pending presentation of a credit rating agency's experiences on this issue.

"Factoring in whatever inputs of the rating agency that are relevant for decision making, the SEBI Board will make a final call on grading of IPOs and whether there ought to be any time limit as recommended by the Primary Market Advisory Committee (PMAC)," Mr M. Damodaran, SEBI Chairman, told newspersons here.

He said that "a credit rating agency" had sought an opportunity to make presentation before the Board on the experiences gained by it in IPO grading in the recent months.

ET today has a report on industry reactions, in which i found one sensible observation that too from an unnamed head of investment banking at a US-based firm (in bold in the extract below).

IPO grading is fine, but with conditions, say marketmen: SEBI’S decision to defer mandatory grading for companies going public has evoked a mixed response. While a section of market watchers feels that the process is biased against the smaller firms, another section feels that making the grading mandatory would lead to fine tuning of the grading parameters so as to provide a level-playing field.
“As the grading process is not compulsory, it is only the small companies that are forced by the exchanges or Sebi to go for IPO grading. However, I think that it (grading) should be made mandatory so that all companies go for it. I think the process has led to better companies hitting the primary market and even the investment bankers are selective in their approach. Making it mandatory would result in more transparency and the criteria of grading. This will make everybody more comfortable with the process,” says an investment banker who does not wish to be named.
Ajay Dwivedi, CEO, Crisil Research and Information Services, does not feel that the grading parameters discriminate against the smaller companies. “It was a pilot project and we have learnt a lot from this. The current exercise of fundamental assessment of the company is correct and it should not be tailored in a way that weak companies get high grade, in spite of what the critics say,” Mr Dwivedi says.
The biggest argument against IPO grading is since it does not comment on the pricing aspect, prospective buyers are unable to decide if it makes sense to subscribe to the issue at that price. “Grading is done at the draft prospectus stage and as such there is no connection with the price of the issue,” said the head of investment banking at a US-based firm.
“Moreover, rating of equities does not make sense. It is a risky asset. Somebody, who does not understand, should invest through MF rather than relying on grading. The grading without price comparison is irrelevant and makes no sense. Mandatory grading is out of question as it would not serve any purpose,” he said.

To grade equity is to fool investors into believing that equity is somewhat like bond.