Leadership in IPO Grading

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					IPO Grading & Broker Grading
- Risk management tools unique to Indian Capital Markets



  D. R. Dogra
  MD & CEO
  Credit Analysis & Research Ltd (CARE) - India
About CARE
             Full Service Rating Agency                                                         Major Shareholders


                                   Banks and FI

                    IPO Grading
                                     ratings
                                                     SME/SSI                                          IDBI Bank
                                                      ratings
                                                                                            Canara                 First
      Structured
                                                                 Corporate
                                                                                             Bank                 Leasing
        Finance
                                                                  ratings
        Ratings


                                                                                       State
   Sub-                                                                                                                    Tata
 sovereign
                                                                     Infrastructure   Bank of
                                                                                                                          Group
                                                                                                     CARE
                                                                         ratings
  ratings
                                  Services                                             India

                                                                     Corporate
    Issuer
                                                                    Governance
    Rating
                                                                      ratings           IL&FS                          Sundaram
                                                                                        Group                           Finance
             Insurance/                                   Construction
             CPA ratings                                    Grading
                                            Fund credit
                                                                                                ING Vysya    Federal
                            Grading of
                               MTI
                                              Quality
                                              rating
                                                                                                  Bank        Bank
About CARE
                                                                  Major Shareholders

    Second Largest Rating Agency in India
    Track Record of more than 16 years
    Comparable Transition Matrix / CDR
    Team of more than 225 analysts & growing
                                  Cumulative Debt Rated

                            500
                            450
                            400
              USD Billion




                            350
                            300
                            250                             472
                            200
                            150                      240
                            100           143
                             50
                                   125
                              0
                                  2006   2007       2008   2009
                                          Calander Year
About CARE
             Leadership in ABS & MBS
   More than USD 20 Bn of pools rated in FY’10
   Largest securitization in Asia (ex-Japan) and
    Largest Single CLO rated in India
   Highly stable ratings

           Leadership in IPO Grading
  More than 40% market share
  Graded diverse entities ranging from SME’s to
   Large Corporates
About CARE
                    Leadership in Financial Sector
          Rating of 50 Indian Banks & FIs
          Substantial rating coverage of NBFCs & HFCs
          Sub-Sovereign ratings – All rated Indian States have a
           CARE Rating

                   Leadership in Several Other Sectors
         Construction & Real Estate
         Power Transmission
         Shipping & Shipyards
         Hospitality Sector
         Steel & Steel Products
         Textiles
         Cement
Risk Management Tools – IPO & Broker Grading

   Overall Logic – Emerging Markets need these
    unique products which support investor
    decisions
   Also should be used as investor protection
    tools
   Intervention     – Regulatory intervention
    required in initial years to build these products
    after which market acceptability builds & then
    even without regulatory requirement market
    understands their utility
Indian Capital Markets

              Growing equity markets with increasing market
               capitalization as well as turnover


                         Segment Turnover (BSE & NSE)                                                             BSE Market Capitalization & No. of Securities
        4500
                                                                                                           7000                                                                        1200
        4000
        3500                                                                                               6000                                                                        1000




                                                                                                                                                                                              Market Capitalization
                                                                                         No of Securties
        3000                                                                                               5000
                                                                                                                                                                                       800




                                                                                                                                                                                                   (USD Bn)
 Year




        2500
                                                                                                           4000
        2000                                                                                                                                                                           600
        1500                                                                                               3000
                                                                                                                                                                                       400
        1000                                                                                               2000
         500                                                                                                                                                                           200
                                                                                                           1000
           0
               2001   2002   2003   2004          2005       2006   2007   2008   2009                       0                                                                         0
                                                                                                                  1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
                                             USD BN
                                                                                                                                                   Year
                                           Cash     Derivatives                                                                BSE Market Cap (USD Bn)    No of Securies Lised - BSE



         Source: SEBI, NSE, BSE
Indian Capital Markets
    Companies tapping the primary equity markets with frequent
     IPOs

                                                  IPO's
                   10000                                                            120
                    9000
                    8000                                                            100




                                                                                          No of IPO's
                    7000                                                            80
          USD Mn




                    6000
                    5000                                                            60
                    4000
                    3000                                                            40
                    2000                                                            20
                    1000
                       0                                                            0
                           1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
                                                     Year

                                           No of IPO's      IPO (USD Mn)

             Source: SEBI, NSE, BSE
Indian Capital Markets - Unique Features

  Number of listed entities in India is very large compared to
   other emerging markets (or even developed markets)
  The average market cap. in India is the lowest amongst
   emerging market
                                           Avg. Market Cap & No of Lised Companies in Emerging Markets
                                                                       (2008)

                                        4500                                                                                      6000
                                        4000
              Companies (in USD M)
              Market Capitalization /




                                                                                                                                  5000
                                        3500




                                                                                                                                         No. of Listed
                  No. of Listed




                                                                                                                                         Companies
                                        3000                                                                                      4000
                                        2500
                                                                                                                                  3000
                                        2000
                                        1500                                                                                      2000
                                        1000
                                                                                                                                  1000
                                         500
                                           0                                                                                      0
                                               Russia   Mexico   China      Brazil    Taiwan      Korea        Malaysia   India

                                                                              Countries
                                                                 Average Market Cap   No of Listed Companies


            Source: NSE
Why IPO Grading

  In an emerging market there will be several
   smaller players accessing the capital markets –
   some good some bad. (Specially true in India)
  A comparative tool on a simple to understand
   scale
  SEBI has rightly made the grading compulsory
   as an investor protection measure
What is IPO Grading
    An independent and professional assessment of equity issues
     offered to public
    An opinion on the “fundamentals” of the issuer
    Relative assessment of the issue in relation to the universe of
     other listed peers
    Scale -
                        Grade                   Definition
                   CARE IPO Grade 5   Strong fundamentals.
                   CARE IPO Grade 4   Good fundamentals.
                   CARE IPO Grade 3   Average fundamentals.

                   CARE IPO Grade 2   Below Average fundamentals.
                   CARE IPO Grade 1   Poor fundamentals.
IPO Grading Methodology - Key Factors

  Business Fundamentals & Prospects
  Financial Position Analysis
  Project Risk
  Promoter Background & Management
   Evaluation
  Compliance and Litigation History
  Corporate Governance Practices
IPO Grading – CARE’s Experience

  Graded more than 60 entities
  Wide coverage from different industries
  CARE has the largest market share in IPO
   grading. More than 40% market share
How IPO Grading is Different

  Equity reports may vary depending on who is
   preparing these (sell-side or buy-side)
  There is high information asymmetry in equity
   research as sophisticated investors have
   different level of information than retail
  IPO Grading is on a scale which is
   comparable across sectors and is available to
   all investors. Its focus is on fundamentals.
IPO Grading – Risk Management Tool

  Categorization of exposures: IPO grading
   allows categorization of a portfolio’s exposure
   based on fundamentals.
  Uniquely important in a growing market where
   all types of companies & business access
   capital markets
  However pickup after it became mandatory
   (incentives for voluntary grading low initially)
Broker Industry
        Highly Fragmented
                    19 recognized exchanges
                    more than 8500 brokers and more than 62000 sub-brokers
                    Top 10 have around 20% market share.
                    No of brokers constant but sub-brokers going up
                      Number of Stock Brokers in India                                                                                                              % Share of Top Brokers




                                                                                               % share of top x members in cash segment
 70000                                                                                                                                    45
 60000                                                                                                                                    40
                                                                                                                                          35
 50000
                                                                                                                                          30
 40000                                                                                                                                    25
 30000                                                                                                                                    20
                                                                                                                                          15
 20000
                                                                                                                                          10
 10000
                                                                                                                                          5
     0                                                                                                                                    0
        99


                00


                        01


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                                                                                                                                              99


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     19


             20


                     20


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                                                                                                                                                   20


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                                                                                                                                                                   20


                                                                                                                                                                            20


                                                                                                                                                                                    20


                                                                                                                                                                                              20


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                                                                                                                                                                                                              20


                                                                                                                                                                                                                      20


                                                                                                                                                                                                                              20
                                     Brokers (Cash)    Sub-Brokers (Cash)                                                                                          Turnover share of top 10     Turnover share of top 25

  Source: SEBI, NSE, BSE
Broker Industry

    Around 50% registered as sole proprietorship.
     A lot of registered brokers are doing their own
     trading.
                 Distribution of Brokers - Legal Forms



               Corporate                         Proprietorship
                 47%                                 50%




                             Partnership
                                 3%
Broker Industry

    Regulatory Environment
      Well regulated by SEBI
      Internal Audit made compulsory

      Exchanges also audit a % of brokers

    Entry Barriers Low
        For NSE minimum net-worth required ranges
         from USD 0.22 M to USD 2.22 M
Why Broker Grading

  Given the fragmented industry structure,
   broker grading will help differentiate between
   ‘seemingly’ similar brokers.
  Retail investors do not have capability to
   assess the intermediary & may be lured by
   lower brokerage, portfolio management offers
   etc.
  Useful for several stakeholders – Investors,
   Regulators, Exchanges
Broker Grading – Users
  CARE’s Broker Quality Grading (CBQ)

                                                   REGULATORS
                                                  CBQ    is    a   independent
                                                  assessment and can be used
                                                  as additional check on the
   CBQ can be used as an                          intermediary operations
   input while empanelment
   of new brokers & review of
   existing brokers

   INSTITUTIONAL
                                                                                 EXCHANGES
   INVESTORS
                                        Trade           BROKER
                                      Execution                                  CBQ can supplement the
   RETAIL INVESTORS
                                                                                 due diligence & review
                                                                                 carried on by exchanges
      CBQ      can   assist      in                                              for the registered brokers
      deciding quality of       the
      “local broker”
Broker Grading – Definition

    Definition: CARE’s Broker Quality Grading (CBQ)
     is an opinion on the quality of service and the
     robustness of operations of the graded broker.

                Scale
     Grading
     CBQ – 1            Highest
     CBQ – 2
     CBQ – 3
     CBQ – 4
     CBQ – 5            Lowest
Broker Grading - Methodology

  Based on operational setup and franchise
   strength of the broker
  Parameters divided in 4 broad categories-
      Operational Scale & Setup
      Risk Management Systems

      Compliance

      Financial Strength
Broker Grading Methodology - Key Factors

  OPERATIONAL SCALE & SETUP

     Promoters
     Distribution Setup & Trading Platforms
     Market Positioning
     Research
Broker Grading Methodology - Key Factors

  RISK MANAGEMENT SYSTEMS
   Independence & experience of Risk management
    team
   Credit Risk - Client exposure limits, Deviation
    policies
   Business Risk - Independence of business lines-
         (Proprietary Trading, Investment Banking, Broking, etc)
   Market Risk - Monitoring capital adequacy & margins
   Operational Risk - Disaster Recovery systems,
    Internal Audit
Broker Grading Methodology - Key Factors


  COMPLIANCE
    Compliance Setup- Importance of compliance function &
     experience of compliance team
    Track Record
Broker Grading Methodology - Key Factors

  FINANCIAL STRENGTH

   Profitability & Stability of Income - Income
    Volatility, Diversification of revenues
   Capital Adequacy
   Liquidity
How Broker Grading is different

  Stock Exchange Audits, Internal Audit information is
   not disseminated to all investors.
  Focus of ‘Surveys’ is different than Grading. It is a
   feedback from investors.
  Empanelment criteria is not on a uniform scale. Also
   not public.
  Broker grading is comprehensive as it looks at
   operational & financial aspects. Also provides
   information on a comparable scale
Broker Grading – Risk Management Tool

  Reduce Opportunity Losses: Use CBQ as a tool to
   reduce intermediation risk which can lead to
   opportunity losses
  Trade Distribution: Along with empanelment of the
   broker, institutions can distribute % of trade between
   brokers based on CBQ
  Reduce Systemic Risk: Regulator can make it
   compulsory so that at a systemic level intermediation
   risk is reduced. Also since CBQ will be public, it will
   reduce information asymmetry
Concluding Remarks

  IPO Grading can be expanded to existing
   listed entities to build a comparable universe
   of graded entities. Equity research has
   different objectives.
  Broker Grading should also be made
   mandatory – as it is useful for the investor but
   incentives for voluntary grading are low
  In other emerging markets similar products
   can be deployed to protect investors
Thank You

				
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posted:9/28/2012
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