Status note on “Mandatory IPO grading”

1.0 Objective

1.1 This Memorandum seeks to place a status note on the above subject for
information of the Board.

2.0 Background

2.1 On December 30, 2005, SEBI Board agreed to introduce IPO grading on
optional basis in Indian Primary Market, cost of which was proposed to be
borne by Investor Education and Protection Fund (IEPF) of MCA or Investor
Protection Funds (IPF) of Stock Exchanges. The decision of the Board was
implemented vide a circular issued on April 24, 2006, providing for IPO
grading at the discretion of the issuer company.

2.2 On December 4, 2006, in the meeting of SEBI Primary Market Advisory

Committee (PMAC), the issue of IPO grading was discussed. PMAC
recommended that in order to take the process forward, SEBI may consider
mandating on an experimental basis, IPO grading for all the IPOs in respect
of offer documents filed for the next six months. This recommendation of
PMAC along with the proposal to amend the circular dated 28/10/2004
regarding comprehensive guidelines for IPF to enable use of IPF for defraying
cost of IPO grading, were placed before the Board, in its meeting held on
February 17, 2007 vide Board Memo No. 9/ 2007. The said item was
deferred.

2.3 The Board Memo No. 9/2007 was then taken up in the Board Meeting held on
March 22, 2007 wherein Shri R. Ravimohan, the then Managing Director and
Chief Executive Officer of CRISIL, made a presentation. Relevant minutes of
the Board meeting in this regard, are reproduced below :

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 “Shri Ravimohan briefed the Board about what the IPO grading seeks to do
viz. give the investors an easily understandable parameter about the
fundamentals of the company but not on the pricing or investment value of the
stock. He explained that it is essential to have a critical mass of graded
issues of a wide range of companies for the development of a universe which
would enable investors to make appropriate comparisons while taking an
investment decision. He also mentioned that over time,
based on experience gained, it is their intention to develop the product as
“equity grading” of the company as a whole.

After detailed discussion, the Board decided that IPO grading for unlisted
companies desirous of listing their shares on stock exchanges pursuant to
public issue be made mandatory and that the cost of the grading be met by
the issuers. The Board also indicated that based on the experience gained,
the decision may be reviewed in future.”

2.4 Pursuant to the above, vide circular dated April 30, 2007, SEBI made IPO
grading mandatory for all IPOs where draft offer documents were to be filed
with SEBI on or after May 1, 2007. Since then, about 100 IPOs have been
graded by different credit rating agencies.

3.0 Details of steps taken for review of the policy decision as desired by the
Board

3.1 In view of the decision of the Board to review policy of “ mandatory IPO
grading”, SEBI, in order to have a feedback on the impact of the IPO grading
done so far, placed the matter before PMAC in its meeting held on November
4, 2008. In the said meeting, CRISIL and Shri Prithvi Haldea, Managing
Director, Prime Database, made presentations. The presentations
highlighted various aspects of IPO grading as a concept, its utility as
perceived by various entities and different ways to measure utility of IPO
grading.

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3.2 After deliberations, PMAC members were of the view that it is too early to
form a conclusive view about effectiveness of the present policy of
“mandatory IPO grading” and therefore, the status quo may be maintained in
this regard. PMAC also recommended that the present status of (i) the issuer
paying for IPO grading exercise and (ii) IPO grading not being a comment on
issue price, may continue. PMAC has however taken note of certain issues
in this regard viz (i) “ performance matrix” for credit rating agencies, which
may bring intended discipline amongst credit rating agencies doing grading
(ii) need for surveillance on grades as is done in case of credit ratings etc.
These issues would be further deliberated in the ensuing meetings of PMAC.

3.3 This is submitted for information of the Board.

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