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A job half done
September, 07th 2006
What the rating agencies are doing now is only half the job. The job left unfinished is that of appraising the price of an IPO it is not enough to appraise the company alone. -------------------------------------------------------------------------------- There is no point in impliedly saying that the company is good but you decide for yourself whether the price it is asking for its shares is reasonable or not. -------------------------------------------------------------------------------- There have been quite a few ratings done by accredited rating agencies ever since the Securities and Exchange Board of India (SEBI) pioneered and ushered in the optional regime for rating IPOs (initial public offerings). The rating agencies are appraising the IPOs on a scale of five but stopping well short of going the whole hog. It is all fine to say that a company has got a rating of four. The investors' purpose, however, will not be served unless they are also told whether they should go ahead and subscribe to the IPO at the price asked for. Ambiguous signals In the event, what the rating agencies are doing now is only half the job. The job left unfinished is that of appraising the price it is not enough to appraise the company alone. By leaving the issue of price unappraised, as it were, the signal given is ambiguous. Investors have had no option, much less a say, thus far in the matter of pricing of an IPO with the price already having been discovered in a price discovery exercise called book-building in which only the qualified institutional buyers (QIBs) and high net worth individuals (HNIs) are allowed to participate. While it would admittedly be difficult to give them a say in this process by the very nature of things, the least SEBI can do to comfort them is to mandate the compulsory rating of IPOs and take this forward by ordaining the rating agency to comment on the offer price as well with a clear-cut recommendation to the retail investor to go ahead or not at the asking price. A five out of five rating, for example, does not ipso facto justify a mind-boggling premium of, say, 20 times the face value. There is no point in impliedly saying that the company is good but you decide for yourself whether the price it is asking for its shares is reasonable or not. Comment on offer price The reason why SEBI has refrained from mandating comment on the offer price is perhaps to spare the raters the blushes in case the market does not bear out the rating agencies on the price front given the fact that the price quoted in the bourses is not only a function of fundamentals of the company but also of the demand-supply equation for its shares at a given point of time. Be that as it may, it still does not justify the `incomplete' recommendations, if one may say so, of the rating agencies which refrain from taking a call on the offer price. What the rating agencies can perhaps do is to comment on the price subject to the rider that it is based on the fundamentals of the company, industry and economy alone. For good measure, they should be allowed to save their skin by saying that, more often than not, more than the fundamentals it is the demand-supply equation that tilts the scales in favour of or against a particular scrip. S. Murlidharan (The author is a Delhi-based chartered accountant.)
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