Proposed IPO pricing disclosure rules could spoil the party for startups

The Securities and Exchange Board of India (SEBI), in a recent consultation paper, had proposed that new-age technology companies justify their pricing of shares for their initial public issue to ensure transparency. The proposed rules came after a slump in the shares of some of these companies, which caused billions of dollars in loss of investors’ wealth.

“Listing new-age firms will not be very easy,” said an investment banker with a private sector bank.

“Whenever there is any disclosure in the draft IPO documents, there should be a backup for the financial information provided by these startups; More importantly, auditors must be prepared to substantiate it.”

These companies are, typically, mobile-first startups like Zomato and Ola that use technology to disrupt traditional businesses.

The need for more disclosures was felt as many of these startups do not have a track record of profitability, as they opt to scale profits during their growth phase.

Investment bankers who spoke to Mint on condition of anonymity said Sebi has started asking for more disclosures on the pricing of the IPO.

“SEBI has asked bankers about the price-to-earnings (PE) multiplier and valuation method, cost per share, which has been used. They want to understand the pricing mechanism,” the investment banker had said earlier, seeking anonymity.

The managing director of a financial advisory firm said, “Many years ago, there was a controller of capital issues, and in that era pricing was regulated. Pricing and valuation are inherently subjective. Trying to regulate it Doing so can create more problems than it solves. Disclosures, including risk factors, are quite detailed, and investors are expected to apply their brains before applying for an issue, as in the secondary market. It happens when buying shares.

Several tech startups went public in the Indian capital market in 2021. Overall, these companies have 43,283 crore so far. Companies going public include Zomato, Paytm, Nykaa, Nazara Technologies and CarTrade.

While many of them looked promising in the process of going public, many could not meet the expectations of investors after listing. Today, most such listed companies are trading at half their peak valuations.

Currently, companies disclose earnings per share, earnings to price (PE), return on net worth (RONW) and net asset value, and the comparison of these accounting ratios with their peers.

SEBI said such traditional norms cannot be applied to new age startups. The ‘Issue Price Basis’ section, with disclosure of valuations based on non-traditional parameters such as key performance indicators (KPIs) and some additional parameters, such as past transactions and fundraising, especially for loss-making companies should be complementary. said the regulator.

These KPIs have to be certified or audited by statutory auditors.

“Until now, these KPIs were tracked internally, but no one validated these KPIs. Hence, evaluating these things would be a time-consuming process. are in various stages. However, market volatility is keeping them away,” the investment banker had said earlier.

Another investment banker at a state-owned bank said, “If traditional companies are faced with such stringent norms in terms of disclosing KPIs, they will never be as big as they are now. “

“Even globally, such new-age companies need at least 10 years to make profits; Such stringent rules for companies will also discourage them from trying to go public.”

A lawyer on condition of anonymity said, “Sebi’s consultation paper requires companies to disclose KPI-related communications that the company has done in the past with venture capitalists and funds. This entire arrangement relies on companies disclosing personal information from the past, which by its very nature is not verifiable. This will act as a major loophole, which can be exploited by companies while disclosing information.”