Mandatory grading of IPO not warranted : Assocham

New Delhi, May 25 (UNI) Mandatory grading of all initial public offers (IPO) will confuse investors and will hurt the economy, an industry chamber said here today.

It added the grading will have an impact on the small and medium enterprises (SME), against whom grading would be typically biased.

Industry chamber Assocham today expressed its reservation over the recent guideline issued by SEBI, making it mandatory for all IPOs to get a grading.

The chamber feels such a high-impact guideline has been put into force without any discussion with the industry.

The chamber is of the view that there are no conditions precedent for the introduction of this measure. The present entry barriers of stringent entry norms, vetting by SEBI, due diligence by the stock exchanges have served the market well.

It added further the present systems should be strengthened rather than adding one more layer.

The chamber pointed out that grading is only an assessment of fundamentals of a company, and does not express any opinion on the offer price.

Assocham stated the assessment of fundamentals is highly subjective. Moreover, fundamentals of a company can change significantly after its IPO. Since grading is not a continuing assessment, it would only confuse the investors.

Despite the disclaimers and investor education, and given the market's huge dependence on the rating agency's symbols, the chamber said that most small investors would be guided substantially by the grades.

This would lead to a scenario where investors would reject low-grade IPOs and invest in high-grade ones and when subsequently the low-grade IPOs do well after listing, they will complain about the opportunity loss.

In case an investor losses money on a high-grade IPO, they will blame the regulator and the rating agencies for misguiding them, said Assocham.

According to the chamber, it is not safety, but the attractiveness of a company at a particular price for capital appreciation that drives the investment decision in the equity market. Grading is substantially based on a company's past track record while IPOs impact the future.

Besides, it said lack of clarity on the grading process is another area of concern. Though the job would be done by rating agencies, no uniform grading methodology and parameters have been prescribed.

According to the industry body hundreds of companies have become very big only after their IPOs. Grading would be a huge roadblock for entrepreneurship, especially when funding for SMEs is very scarce.

UNI