Mandatory IPO Grading: Reflections from the Indian Capital Markets
Icfai Journal of Corporate and Securities Law, Vol. 5, No. 4, pp. 8-22, November 2008
20 Pages Posted: 26 Mar 2008 Last revised: 23 Mar 2009
Date Written: February 26, 2008
Capital market regulators have hitherto insisted on a disclosure based regime, with respect to Initial Public Offerings (IPO), to provide investors with more and more information so that they can evaluate their investment options in a better way. However, more disclosure creates information overload for unsophisticated investors and this coupled with limited decision making capacity of such investors results in bad investment decisions. This calls for innovative regulation which would increase the probability of effective utilization of the disclosed information by such investors.
Taking cognizance of this problem, the Securities and Exchange Board of India (SEBI) has introduced a novel concept of mandatory IPO grading for assessment of 'fundamentals' of issuer companies by Credit Rating Agencies. The assigned grades will act as an additional investment guidance tool for the unsophisticated investors who are wary of prolix disclosure documentation. The issue has immense international significance in view of the fact that it is a unique regulatory stance without precedent in any jurisdiction across the globe.
In this paper, we make an attempt to explore and explain the concept and its underlying rationale and to provide an objective evaluation of the costs and benefits associated with it.
(I) WHAT IS IPO Grading? (II) Legal Framework for IPO Grading (III) The Raison d'etre for IPO Grading A) Counteracting Information Overload B) Tackling Information Asymmetry (IV) Arguments against IPO Grading A) Can an IPO be graded? B) Spelling Doom for Small & Medium Enterprises? C) Dubious Credibility of Credit Rating Agencies (V) Another Instance of 'Tunnel Vision' Regulation? (VI) Conclusion
Keywords: Initial Public Offering, IPO Grading, Credit Rating Agencies, Small and Medium Enterprises, grading, Securities and Exchange Board of India, SEBI, SME, India, capital market, regulator, disclosure, information asymmetry, market for lemons, information overload, investor protection, SEC
JEL Classification: K20, K22, K23, K29
Suggested Citation: Suggested Citation