A Rating Below 3 On A Scale Of 5 Could Leave Your Funds In Trouble
WHEN you invest in public issues with a rating of less than three on a scale of five, beware: you are handing over your hard-earned money to a poorly-managed company. According to IPO raters, companies with a rating of one and two not only have bad business models, but also weak senior managements.
In certain cases, rating agencies assign remarks like 'frequent change in ownership structure', 'below average independent directors' and 'payment defaults', among several other smaller remarks, while grading an IPO. According to raters, there is more to such remarks, as they actually mean 'weak promoter structure', 'dubious management' or the company has been a historical defaulter of debt repayments.
Raters like Crisil, CARE and Icra ascertain the background of promoters, quality of independent directors, legal cases against key management personnel, accounting & reporting standards, management quality and compliance & litigation history while rating the company.
"We do a thorough check on the promoter, top management personnel and independent directors while grading a company. Poor accounting practices, weak management and compliance and a long litigation history could impact the overall ranking of the issue," said DR Dogra, MD and CEO, Care Ratings.
Quality of independent directors still remains a major problem in small- and mid-sized issues. In most cases, an independent director is either a distant relative of the promoter, a friend or a close relative of a senior company official. Echoing Mr Dogra, Chetan Majithia, head-Crisil Equities said: "The inability of independent directors to exercise adequate oversight over management is one of the major factors for lower governance assessments in a few IPO companies.
Frequent change of external auditors, presence of large number of inactive promoter group members and a long list of subsidiary companies without any functional roles also weigh down on ratings. Rating agencies also check the antecedents of promoters.
