The Credit Rating Information Services of India Ltd is ready with its rating system for initial public offerings and is awaiting the Securities and Exchange Board of India's approval. The agency has submitted a 'IPO Scoring & Fundamental Report' to the markets regulator.

Crisil will to adopt a scoring system where it will evaluate the strength of an IPO on a ranking of five or 10, R Ravimohan, managing director and CEO, said. "We are ready to start rating IPOs, which will help investors in deciding where to invest their funds," he added.

Even though Icra, another leading rating agency, has not been asked by Sebi to work on the product, it had developed a similar product about six years back.

"Sebi's initiative for providing equity investors with independent opinion of professional bodies such as credit rating agencies will be a great help to investors, who are usually quite vulnerable and are always in need of independent research based opinion," P K Choudhury, managing director of Icra, said.

There are two key aspects in evaluating an IPO: the fundamental strength of the company and the prospects of the investor.

Ravimohan told Business Standard: "It is impossible for anyone to rate the prospect of investors making money in an IPO so we will keep that aspect out of our scoring system."

Crisil will assess the fundamentals of the company based on five key parameters: business prospects, financial risks, governance practice adopted, accounting quality and management quality.

Sebi will be the first regulator in the world to make mandatory rating of IPOs. "There are some variants of the product in other markets, for pre-sale equity reports done by equity broking houses. However, no regulator has initiated rating of IPOs in any part of the world," Ravimohan said.

When Sebi approached Crisil some time back for the product, the rating agency had been already working on the product for about six months, he added.

Responding to the feasibility of rating/grading IPOs, Ravimohan said: "We only need to see how to evaluate management capability. Getting access to management will be desirable. Else we will design the product based on outside information."

Crisil will also evaluate the size of the issue and purpose of funds. This will enable investors to make an informed decision, Ravimohan said.

Citing the two unknown variables in equity  --  risk and return, Choudhary said as there is no contractual obligation to give a return, a rating agency can always assess the future earning prospects (return) and the vulnerability (risk) of such prospects under different changing circumstances. This will not be 'buy/sell/hold' recommendations or an attempt to predict the secondary market prices, he added.

Further, as in the case of debt instruments the market risk in equities cannot be evaluated. "One cannot know how prices will move during the period of investment should stock markets witness high volatility," said Ravivmohan.

Nevertheless, grading of IPOs on a scale of five or ten will add value as the exercise will combine the information disclosure and the robust database on the operating conditions, he added.