Sebi proposes norms for greater clarity on IPO pricing

This is a part of the discussion paper floated by the regulator which has sought public comments latest by 5 March.

Sebi’s discussion paper comes as it recently observed that many new-age technology companies which do not have a proven track record for three years, are coming up with IPO’s which remain loss making for a longer period before achieving break-even as these companies in their growth phase opt for gaining scale over profits.

These norms come in the wake of startup listings such as that of Paytm where the prices saw sharp decline on the day of listing.

Sebi wants these NATCs to explain how they priced their issuance in detail, compare it to pre-IPO share sales, and publish all pre-IPO investor presentations, which will in turn help the investors make informed decisions.

In recent times many NATCs have entered the capital markets however, most of them are still trading at discount 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 could not be applied to the new-age tech companies.

Sebi, however, stated that 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 start-ups listing their 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 their 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 factors will essentially aid investors in making informed investment decisions when it comes to these new age companies,” said Sonam Chandwani, Managing Partner, KS Legal.

Sebi in the six page discussion paper said that the NATCs 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 IPO.

However, for those KPIs which the issuer company deems are not relevant for the proposed IPO, the issuer shall provide adequate explanation for considering those KPIs as not relevant with proper cross reference to a table disclosing the said KPIs.

“KPIs stated by the new age companies should be defined clearly, consistently and precisely. KPIs should not be misleading in any way”, Sebi said in the discussion paper.

Additionally, these KPIs have to be certified or audited by statutory auditors. The issuer company also has to draw comparison of KPIs with Indian listed peer companies or global listed peer companies, while the comparison of KPIs over time also will have to be explained.

IPO-bound companies will be mandated to report in the DRHP the cost at which shares were sold in secondary and primary agreements in the previous 18 months, if it resulted in a dilution of more than 5%.

Ketan Dalal managing director, Katalyst Advisors Pvt Ltd said

“The proposed disclosures with respect to KPIs made to the pre IPO investors and also disclosure of past share transfers and allotments ; 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) Sebi. Following which the recommendations of sub-group were discussed in meeting of PMAC which were then proposed to Sebi through this discussion paper.