The logo of the Securities and Exchange Board of India (SEBI) is pictured on the premises of its headquarters in Mumbai
Image Courtesy: Shailesh Andrade

SEBI proposes new disclosure framework for IPOs of new-age Startups

Securities and Exchange Board of India (SEBI), the market regulator, has proposed that new-age technology startups preparing for IPOs provide their key performance metrics used to determine the issue price in the offer documents beforehand.

The logo of the Securities and Exchange Board of India (SEBI) is pictured on the premises of its headquarters in Mumbai
Image Courtesy: Shailesh Andrade

According to a consultation document, SEBI may seek that such tech startups disclose details about their valuations based on the new share issuance including acquisitions in the last 18 months before filing preliminary offer documents.

The decision comes on the heels of many new-age startups seeking to raise capital through the IPO channel. According to the paper, they do not have a track history of operating profit for at least in the past three years. In recent weeks, the stocks of many new-age technology firms have fallen by an average of 50 percent from their peak levels.

Tech startups like Nykaa, Paytm, and Zomato, went public. Despite their high values, many companies had successful debuts. However, in less than a month of 2022, things have quickly changed for them.

“The market regulator does not have any say in pricing as of now. Traditionally, companies have been pricing their shares at the time of IPO debut, based on price-to-earnings ratio, earning per share, and return ratios. However, the same cannot be applied for new-age tech startups,” according to market experts.

Such companies typically remain loss-making for a longer period of time before hitting break-even, as they concentrate expansion of operations over profitability in the initial years. The Securities and Exchange Board of India (SEBI) has extended the deadline for public feedback on the consultation paper by March 5.

SEBI in the consultation paper said, “It is obvious that disclosures in ‘Basis of Issue Price’ section, particularly for a loss-making company, are required to be supplemented with non-traditional parameters like key performance indicators and disclosure of certain additional parameters such as valuation based on past transactions/fundraising by issuer company.”

Currently, the ‘Basis of Issue Price’ core component of an offer document specifies common criteria such as key accounting metrics. These include the company’s price to earnings ratio, earnings per share (EPS), return on net worth, including net asset value, as well as a comparison of such accounting measures with its competitors. According to SEBI, these metrics are generally descriptive of profitable firms and do not apply to a loss-making firm. These factors may not help investors make investment decisions in the case of a loss-making issuer.

The market regulator has also suggested that the issuer company disclose the Key Performance Indicators (KPIs) that were considered/have an influence on the ‘Basis of Issue Price.’ An issuer company shall provide relevant KPIs over the three years preceding the IPO, as well as a clarification of how these KPIs contribute to the ‘Basis of Issue Price.’ Furthermore, an issuer company must disclose any material KPIs disclosed with any pre-IPO shareholder at any time during the three years preceding the IPO.

However, for those KPIs that the issuer firm believes are unnecessary to the proposed IPO, the issuer should offer a sufficient explanation, including a cross-reference to a table containing the relevant KPIs. An issuer company’s KPIs should be disclosed and stated properly, consistently, and exactly, and they should not be misleading. Furthermore, all KPIs must be certified or audited by an independent auditor. SEBI has also proposed that KPI comparisons with Indian listed peer firms and/or global listed peer companies be mentioned in the offer document and that KPI comparisons over time be acknowledged.