The Securities and Exchange Board of India (Sebi), the market regulator, has recommended tightening disclosure criteria for new-age companies planning initial public offerings (IPOs).
According to a discussion paper released by Sebi on Friday, such companies will be required to give more information about how they arrived at their IPO offer price. This plan attempts to cover only those businesses that do not have a three-year track record of profitability, while the standards for the rest of the industry remain unaltered.
The news comes as the stock prices of several newly-listed technology businesses have fallen in recent months following their first public offerings.
According to Sebi’s discussion paper, the present IPO regulations only compel companies to disclose “traditional parameters” such as key accounting ratios. However, because new-age businesses are typically loss-making, the regulator felt more disclosures were necessary.
During IPOs, the Sebi proposed that such companies disclose their key performance indicators (KPIs). Most start-ups employ statistical models such as gross merchandise value (GMV) to forecast income. Private equity and venture capital investors commonly use such KPIs to purchase holdings in unlisted start-ups.
“The issuer company shall disclose all material KPIs that have been shared with any pre-IPO investor at any point of time during the three years prior to the IPO,” said Sebi’s discussion paper adding that the companies shall also make disclosure of “Valuation of Issuer Company based on secondary sale / acquisition of shares (equity/convertible securities) excluding gifts, in the 18 months prior to the date of filing of the DRHP / RHP where either acquisition or sale is equal to or more than 5% of the fully diluted paid-up share capital of the issuer.”
To be clear, these new suggestions will only apply to enterprises that have not been profitable in the previous three years and are seeking an initial public offering.
Since mid-2021, Indian markets have seen a surge of IPOs by technology companies. Zomato, the food delivery service, was the first to go public, followed by Policy Bazaar, Paytm, and Nykaa. However, all of these firms’ stock prices have fallen since their initial public offerings, prompting market participants to complain that the IPOs were overpriced, leaving little money on the table for both IPO and post-IPO investors.
“The new-age technology companies generally remain loss making for a longer period before achieving break-even as these companies in their growth phase opt for gaining scale over profits,” Sebi said. “Investors are on boarded on these companies on the premise of future potential and accordingly the company strives for long-term market leadership rather than short-term profitability considerations.”