The move is viewed to take on challenges of ongoing share meltdown
Mumbai, NFAPost: Amid the blood bath on the bourses, the Securities and Exchange Board of India (Sebi) has proposed to seek more justification and transparency from new-age technology companies when it comes to pricing their share in initial public offerings (IPOs).
According to Arvian Research, the draft proposals floated by the market regulator in a discussion paper
is approved, companies will have to provide a relatively detailed explanation of how they have priced their issue, compare that to pre-IPO share sales, and also disclose all the presentations made to pre-IPO investors.
The move comes following a meltdown in shares of such companies amid a hawkish pivot by the US Federal Reserve and other central banks. New-age tech stocks have plunged an average 50% from their highs in recent weeks.
The regulator says metrics, such as price-to-earnings (P/E) multiples, earnings per share (EPS), and return ratios — used to justify the basis of pricing for IPOs by traditional companies — cannot be applied to new-age companies, which are mostly loss-making entities.
As a result, the regulator believes the disclosures made under the ‘Basis of Issue Price’ section in an offer document need to be “supplemented with non-traditional parameters” and other key performance indicators (KPIs). The issue assumes significance; lately, there has been an increase in IPO filing by companies with no profit-making track record.
Industry players said KPIs could be metrics, such as subscriber addition, market share, and long-term growth targets. It has been proposed that start-ups disclose the presentations they make to private investors in their IPO document.
“Disclosure of relevant KPIs made before pre-IPO investors during the three years prior to the IPO. Explanation of how these KPIs contribute to form the basis for issue price,” Sebi has proposed.
The regulator has said all the KPIs should be defined clearly and not be misleading. Further, KPIs would be required to be certified by a statutory auditor. Wherever possible, KPIs will be compared with those or listed peers both domestically and abroad.
“New-age tech 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. Investors are on board with these companies on the premise of future potential and accordingly, these companies strive for long-term market leadership rather than short-term profitability considerations,” Sebi has said in a discussion paper.
Further, IPO-bound companies will have to disclose the cost at which shares are sold in secondary deals, as well as primary deals in the past 18 months, if that led to a dilution of more than 5%.
“Often it is seen that the IPO is priced several times higher than the price at which shares are issued to private investors in months leading up to the IPO. Going ahead, companies will have to provide a detailed rationale for the change in share price over a short-period of time,” said an investment banker.
He added that Sebi had a hands-off approach to IPO pricing. But given the sharp fall in share prices, the regulator wants more justification when it comes to pricing the issue.
The discussion paper has been floated based on the recommendations made by a sub-group of Sebi’s Primary Market Advisory Committee (PMAC). The regulator has sought public comments on various new proposals by March 5.
