The Hindu Business Line : Will it make the grade?

At one level, the Securities and Exchange Board of India deferring a decision on making grading of Initial Public Offers (IPOs) of shares mandatory is purely procedural, pending the presentation by a rating agency of its experiences in grading IPOs, as suggested by the SEBI Chairman. But in a situation where there weren't too many offers graded in the first place under the present system of discretionary grading, it is difficult to see what value a rating agency's experience in undertaking the exercise can bring to bear on SEBI's final decision. Perhaps, the delay is merely reflective of the sense of caution that is guiding SEBI's action, considering the radical proposal. It is, after all, attempting to put in place a mechanism not contemplated in a capital market anywhere.

One need not, therefore, grudge whatever time SEBI feels it ought to take in arriving at a decision. If retail exposure to the stock market were predominantly through mutual funds or provident/pension funds then such a grading would be superfluous. Institutional investors can be expected to bring to bear their fund management expertise on primary market investment decisions. But, unfortunately, SEBI's earlier attempts at steering retail investors to equity exposure through the mutual fund route met with popular resistance, forcing the regulator to reserve a portion of all public offers for retail investors. Direct retail exposure to equity is thus here to stay.

In the event, SEBI must decide soon in favour of such grading as it advances the cause of rational investment decision-making as opposed to one based on sentiment or second guessing the after-market behaviour of IPO stocks which is what retail investors are prone to doing. Of particular interest is the expert committee recommendation that the grading by a rating agency would be paid for from the corpus of investment protection funds available with stock exchanges/official agencies responsible for company law administration. Insulating rating agencies from the pressures of issuer companies is the best guarantee of objective evaluation of investment prospects by them. The system of the Reserve Bank of India/Comptroller and Auditor General appointing auditors for public sector banks/enterprises from its panel of professional accountants has done more for audit independence than any number of professional codes of conduct incorporated under law.

A similar situation could evolve in the case of grading of equity instruments. True, many issues remain to be considered. How, for instance, can such grading be linked eventually to the pricing of the issue as to constitute an investment recommendation? Alternatively, what norms of professional conduct should rating agencies be subjected to? But these can be debated and a regulatory response fashioned in the light of actual experience.

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