SEBI’s scraps IPO grading; Many questions unanswered

Why was SEBI so keen to scrap mandatory IPO grading (as demanded by corporates) instead of making them effective and pulling up rating companies for shoddy rating?

Market regulator Securities & Exchange Board of India (SEBI) has scrapped the idea of mandatory grading for initial public offering (IPO). As Moneylife has pointed out, this move by SEBI is anti-investor. The market regulator has responded to this by saying, "...the decision (to make IPO grading voluntary) was taken in its board meeting on 24 December 2013 and to allege that SEBI did not bother to consult investor association is baseless, erroneous and misleading".


As Moneylife has pointed out IPO grading was advocated by investor activists and associations around 2003 and was reluctantly mandated by SEBI in 2007, only to be dropped six years later. This shows how powerful companies and market intermediaries, once again, used a depressed primary market to successfully lobby for a dilution of investor protection measures.


Here is the article of Sucheta Dalal, managing editor of Moneylife SEBI Scraps IPO Grading, the clarification from SEBI and reply from Ms Dalal...


The Moneylife article argued that Indian institutions have scant regard for history, so SEBI did not bother to consult investor associations who had fought long and hard for IPO grading. Nor did it bother to examine whether the grading process could be made more meaningful or adequately publicised. Thanks to pressure from powerful corporate lobbies, the IPO grading process was hobbled at the very inception. Investor groups wanted IPO grading to be independent and rating agencies to be paid from the large pool of badly utilised investor protection funds with stock exchanges and the ministry of corporate affairs. This did not happen.


SEBI has written to clarify that the issue of IPO grading was discussed in the meeting of the investor associations held at SEBI on August 21, 2013, in which the investor associations opined that mandatory IPO grading should be discontinued, as it is not serving any purpose in the present form and may be made optional. In fact it was one of the agenda items for the meeting, proposed by an investor association, reads: "Whether GRADING given to IPO/FPO by credit rating agencies is of any help to investor?..... OR should such grading not be altogether done away with?"


While SEBI’s clarification is helpful, the IPO grading issue is a much bigger and SEBI has too many questions to answer.  On this issue, Sucheta Dalal has replied as follows:


1. I was among the activists who worked hard for the introduction of IPO grading. The IPO grading was supposed to be funded through the Investor Education & Protection Fund of Ministry of Corporate Affairs. It was shot down at the last stage by the powerful corporate lobby which influences the MCA. I was a member of the MCA's Investor Education & Protection Fund for six years since its inception and had a ringside view to this lobbying.


2. I then worked at having it introduced through SEBI. The resistance from corporate India was clear all through.  I was a member of SEBI's primary market advisory committee for several years and had a ringside view to this too.


3. To counter corporate objections, the IEPF had discussed with CRISIL, when the late Ravi Mohan was its CEO, how to keep costs low and ensure that grading will not require any further work from the corporate house but will be based entirely on the IPO document. After all, the IPO prospectus is a legal document and is expected to contain all information that an investor needs in a comprehensible manner. Any details that are not available in this manner would impact the grading. Thus, we had worked at countering two issues:  First that IPO grading would involve more work by companies and more clearances. Second, that IPO grading would involve an expense by companies.


4. Those days the IEPF had over Rs385 crore (it is Rs1,000 crore plus today) of unclaimed investor funds, which is being squandered away in advertisements or on seminars and workshops conducted by lobbying associations of chartered accountants and company secretaries. In fact, investor associations have been thrown out of IEPF, underlining the poor state of investor protection and activism in India. Ravi Mohan had agreed to charge as little as Rs2 lakh per rating. All this was junked. 


5. When SEBI finally passed the IPO grading idea, it mischievously ensured that companies will have to pay for the ratings and there was no check on costs.  SEBI itself set up an investor protection fund and the two national stock exchanges have a few hundred crores each in their investor protection funds. This money is used to fund and sponsor seminars and workshops, usually to the benefit of media and not investors. There is no cost-benefit analysis of these events. Only a small part of such huge funds was needed to make the IPO grading independent but this was avoided.  Instead, SEBI has been spending a lot of time in marshalling research and arguments to drop the IPO grading idea.  As a student of statistics, I know that research can always be arranged to give you the conclusions that are wanted. 


6. The rating agencies justify their fees by asking questions and add to the time element too. After SEBI started suspecting that IPO grading is useless, did it pull up the rating agencies for the quality of grading? Was such action, if any, shared with the investors? Did it make an attempt to improve the quality of ratings or make them independent of companies who paid the rating agencies? Surely SEBI is aware that independence of rating agencies is a matter of international debate! Were the above facts presented to your board?


7. Given the events described above, clearly, SEBI is primarily and wholly responsible for ensuring that IPO grading idea was hobbled from the start.


Moneylife: SEBI’s excuse for scrapping mandatory grading is the reported findings of ‘various studies’ that a large number of investors are ‘not influenced by grades’; that plenty of low-grade IPOs received a big response from retail and institutional investors and, thirdly, that IPOs with high grades yielded more losses. In a clear contradiction of these claims, media reports also say that SEBI’s action was ‘a move to uplift the dormant primary market’. It is also unclear how SEBI rejected yet another study which shows that, over time, IPOs with higher grades yielded better price multiples.


The fact is under SEBI’s flawed system, companies were paying for their own rating—leading to charges about shoddy ratings—especially when India’s top rating agency, CRISIL gave Reliance Power a 5-star grade at the peak of the bull run of January 2008.


However, the grading did protect genuine investors, who had no time, or ability, to wade through bulky offer documents to find out what the companies wanted to hide. The simple 5-point grade, based on an expert evaluation of fundamentals by a rating agency, at least, acted as a fact check, even if it did not cover price risk.


SEBI: In this connection it is clarified that SEBI had examined the said study which stated higher grades yielded better price multiples and also noted that the organisation which undertook the said study also highlighted that "IPO grading should not be 'mandatory', but 'recommended' or 'encouraged'.


About 'grading did not protect investors...', it is clarified that the author has not presented any facts in this regard. However, one of the studies on IPO grading highlighted the following:


"The retail investors, for whom IPO grading was introduced, subscribed fully or overwhelmingly subscribed to their portion in as many as 73 out of 86 (85%) 'lower grade' IPOs (IPOs with Grade 1 or 2 were referred as 'lower grade' IPOs). Thus, the study shows that the retail investors are not taking any cues from grading and even QIBs have refused to acknowledge grades. The QIBs have subscribed fully their portion in as many 'lower grade' IPOs. This indicates that grading has not been a factor in investors' decision making process".


Sucheta Dalal:

1. It must also be remembered that SEBI’s mishandling of IPO market in mid-1990s led to hundreds of vanishing companies all after they had raised hundreds of crores form the IPO riddled with false and misleading statements. The vanishing companies scam led to the demand for IPO grading so that fundamental facts and details will, at least, be checked out.


2. With just about three IPOs in the entire calendar year 2013, shouldn’t SEBI be trying to FIND retail investors and understand why they have lost faith in the equity markets? Surely this was more important than dropping IPO grading which was introduced as an investor protection measure after five years of hard work by investor associations?


3. Did SEBI consider way to make IPO grading meaningful and independent by paying raters through its own Investor Protection Fund? Did it consider asking rating agencies to look at price and timing so that the rating is more meaningful? Did SEBI ever question high ratings such as CRISIL’s 5-star rating for the Reliance Power IPO, which killed the credibility of IPO ratings? Your letter indicates that quality of ratings was the issue rather than the need for ratings.


The fact is, SEBI has too many questions to answer for systematically burying IPO grading instead of trying to make it work.


You may also want to read…

SEBI Scraps IPO Grading


Regulator vs Investor Association


With IPOs in doldrums, will SEBI ever understand investor disenchantment


SEBI gets power to search and seizure any premises





3 years ago

thanks for the maiden effort of moneylife especially from ms.Dalal madam hats off please take my case of POA and fight for justice we request as an individual investor affected and victimised by IIFl as well as from Reliance securities we need your help



In Reply to sreenath 3 years ago

? ? ?


3 years ago

Merchant Banker price the issue according to the promoters.(By charging huge premium). Merchant banker should be made accountable too as they are part of the lobby with companies who come out with IPO. You can also do a study or data anaysis like the IPO which have got lower grade rating have been subscribe from which part of the country. Is it just benami or not you could easily check. If the same investor is subscribing to these below rated issue and then selling them at a later date.

Yerram Raju Behara

3 years ago

credit rating has never been a subject matter of inquest in this country. The country did not learn lessons from the recession debacle of 2007 originating in the US. US amended its laws to bring more transparency and accountability to the rating agencies and this is yet to happen in India. All the international premier rating agencies set their foot in India and carrying on their business merrily. Apart from restoring the best practice of IPO grading from the Investor Protection Fund drawn from the Ministry of Corporate Affairs that is currently being used for Investor Education as suggested by Sucheta Dalal rating and grading should be done on principles of transparency and accountability for healthy investments to grow.


3 years ago

Rating/grading is useless when investing in equities. And investors ought to accept full responsibility for their actions.

Thus scrapping of IPO grading is a step in the right direction.

Vaibhav Dhoka

3 years ago

Before SEBI it was CCI who would veto public issues.It was time very few complaint came,but sooner SEBI reigned capitol market it was BOON to companies broker and other intermediary.Cheating and frauds rules the market and looser is and was always INVESTOR.This action from SEBI is anti investor and was to come back sooner or latter.SEBI's failure is main reason why small investors are shying away from CAPITOL market.

SEBI bars Shree Sai Spaces & Creations from collecting money from investors

SEBI has barred Shree Sai Spaces and Creations and its directors from mobilising funds from investors and launching various collective investment schemes

Market regulator Securities and Exchange Board of India (SEBI) has asked Shree Sai Spaces and Creations Ltd and its directors not to collect funds from investors for its existing project or scheme. SEBI also barred the company from launching any new scheme, to dispose any properties and assets it purchased from public funds and to divert any funds which are kept in bank accounts or in the custody of the company.

The company had launched various collective investment schemes without obtaining certificate of registration from SEBI.

In an order, SEBI said, Shree Sai Spaces and Creations  was found to be engaged in fund mobilising activity from public by floating ‘collective investment schemes’ as defined in Section 11AA of the SEBI Act.

SEBI also barred the company and its directors Shree Sai Spaces and Creations and its directors, Suresh Srivastav, Laxmi Shrivastav, Ritesh Shrivastav, Vivek Kumar Suresh Srivastav and Rajkumar Laxman Konde, for contravening the provisions of Section 12(1B) of the SEBI Act and Regulation 3 of the SEBI (Collective Investment Schemes) Regulations, 1999.


Maruti Suzuki Q3 net profit up 36% despite lower sales

During the December quarter, Maruti Suzuki posted 36% jump in its net profit to Rs681.15 crore due to fall in raw material cost

Maruti Suzuki India Ltd (Maruti Suzuki), the country's largest carmaker reported a 36% jump in its third quarter net profit due on lower raw material cost.

For the quarter to end-December, the unit of Japanese Suzuki Motor Corp, said its net profit rose to Rs681.15 crore from Rs501.29 crore even as its total revenues, including sales, declined 3% at Rs10,619.68 crore from Rs10,956.95 crore, same period a year ago.

“Higher localisation, favourable foreign exchange and cost reduction initiatives by the company contributed significantly to net profit,” the carmaker said in a regulatory filing.

During the quarter, Maruti Suzuli said its raw material costs reduced by 16% to Rs7,020.36 crore compared with Rs8,376.04 crore a year ago period, due to lower commodity prices but some of it was offset by weaker rupee.  

The company said during the December quarter, its sales remained under pressure in both domestic and exports markets. While its exports fell 38%;  there was a slight gain in automotive market share in India, which moved up 2.5% to 42.8%.

During the December quarter Maruti Suzuki sold 2.88 lakh units, 4% fewer than 30.1 lakh units a year ago period. While its exports fell 38% to 19,966 units from 32,496 units a year ago period.

Maruti Suzuki India closed Tuesday 8.12% down at Rs1563.20 on the BSE, while the Sensex closed marginally down at 20,683.

For more stock results, check out this page


We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)