Sebi proposes rules on pricing of IPOs
This is a part of the discussion paper floated by the regulator which has sought public comments latest by 5 March.
India’s market regulator plans to ask new-age technology companies to justify the pricing of shares for their initial public offerings to ensure transparency after a meltdown in stocks of some of these companies eroded billions of dollars in investor wealth.
A discussion paper issued on Friday by the Securities and Exchange Board of India (Sebi) has set 5 March as the deadline for the public to submit their comments. Shares of some new-age tech firms such as Paytm and Zomato have plunged since their listings.
The regulator wants new-age tech firms to explain in detail how they priced their shares for initial public offerings (IPO), compare it to pre-IPO share sales and publish all pre-IPO investor presentations to help investors make informed decisions.
Sebi has observed that many of these companies that do not have a proven track record of profitable operations for at least three years are launching IPOs. Such companies have generally been loss-making for a long period before achieving break-even as they opted for scale over profits during their growth phase.
Some made public listings in the past year, hoping to capitalize on a record rally in the stock markets. Most are, however, currently trading at discounted levels. Currently, companies only disclose earnings per share (EPS), price to earnings (P/E), return on net worth (RoNW), and net asset value (NAV), as well as comparisons of these accounting ratios with their peers, i.e., companies of similar size in the same industry.
Such traditional parameters, Sebi said, cannot be applied to the new-age tech companies. It said disclosures in the ‘Basis of Issue Price’ section, particularly for a loss-making company, must be supplemented with non-traditional parameters such as key performance indicators (KPIs) and disclosure of certain additional parameters such as valuation based on past transactions/fund-raising.
“New-age startups listing shares is not like traditional businesses, and this move is much needed because most startups are losing money. Before filing offer documents, such companies should disclose valuations based on new share issuance and acquisitions during the preceding 18 months. Current metrics may be insufficient to provide investors with a clear picture of a company’s financials. These new proposed reporting parameters will aid investors in making informed investment decisions when it comes to these new-age companies,” said Sonam Chandwani, managing partner, KS Legal.
In its six-page paper, Sebi said such companies should disclose all material KPIs shared with any pre-IPO investor in the three years before an IPO.
However, for KPIs that the issuer company deems not relevant for a proposed IPO, the issuer shall provide sufficient explanation for considering those KPIs as not relevant with proper cross-reference to a table disclosing the said KPIs, according to Sebi.
“KPIs stated by the new-age companies should be defined clearly, consistently and precisely. KPIs should not be misleading in any way,” the regulator said.
Additionally, these KPIs have to be certified or audited by statutory auditors. The issuer company also has to draw a comparison of KPIs with Indian-listed peer companies or globally-listed peers, while comparisons of KPIs over time also will have to be explained.
IPO-bound companies will be mandated to report in their draft prospectus the cost at which shares were sold in secondary and primary agreements in the previous 18 months if it has resulted in the dilution of over 5% stake.
On Sebi’s plans on disclosures about KPIs made to pre-IPO investors as well as of past share transfers and allotments, Ketan Dalal managing director, Katalyst Advisors Pvt Ltd, said, “The objective seems to provide to the investors significant information for the basis of the issue price and also information on recent past transactions. Such disclosures will certainly be helpful to investors in making IPO investment decisions.”
The “Basis of Issue Price” section was examined by a sub-group of the Primary Market Advisory Committee (PMAC) of Sebi. The recommendations of the sub-group were discussed in a meeting of PMAC, which were then proposed to the regulator through the discussion paper.
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