Sucheta Dalal :Getting It Wrong
Sucheta Dalal

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Getting It Wrong  

July 28, 2009


Sometime in the middle of July, the rating agency, CRISIL, released a report that said 10 out of the 13 issues made in 2009 to qualified institutional participants (QIPs) raising Rs12,500 crore are trading below their offer price. Only Unitech’s first QIP, made in a bad market, gave a positive return and one-fourth of the QIPs are trading at a 20% discount. Given their performance as well as the economic uncertainties that persist, CRISIL predicts a significant decline in QIPs as a source of money. Sure enough, issuers seem to have turned their attention to global depository receipts (GDRs) and the slew of initial public offerings (IPOs) that hope to raise Rs6,000 crore in the next six months.

QIPs allow qualified institutional buyers (QIBs) to get shares at a discount to the market price, that too without high transaction costs or a lock-in. Yet, they seem to have got it all wrong. Importantly, since these QIBs include mutual funds (in fact, 10% of the issue has to be allotted to mutual funds), they have been getting it wrong on behalf of retail investors, who have trusted their expertise.

If QIBs cannot get their investment timing right and have lost money in the short-term, how do market intermediaries, lobbying for the scrapping of IPO ratings, argue that such ratings are not working? Indeed, the process of generating IPO ratings must be improved and not scrapped only because a lobby of market intermediaries and data aggregators insist that they are not working.

IPO ratings were a faulty experiment foisted upon investors by the Securities and Exchange Board of India (SEBI). The SEBI board, high-handedly, ignored the plea of investor associations that IPO grading fees must come from investor protection funds and not issuer companies. This would have controlled costs and mitigated allegations about bias. More importantly, rating agencies would have been answerable to investors rather than companies to whom they offer an array of rating, consultancy and advisory services.

Now, just as the primary market seems set to revive, the lobbying to scrap IPO grading has turned shrill again. Funnily, the same ‘experts’ who want IPO grading scrapped, want investors to read prospectuses in detail and also look to investment actions of QIBs for guidance. But then CRISIL’s analysis shows that QIBs have got it wrong in 75% of their QIP investments. Also, the lobbyists ignore the fact that investors may have lost money in IPO investment, but since an independent agency is wading through the offer document, issuer companies have not vanished, despite a major market crash and a global economic crisis. That alone should be an argument for strengthening the rating process.

-- Sucheta Dalal