SEBI

SEBI moots new disclosure norms for start-up IPOs

The capital markets regulator has proposed strict pricing norms for start-up IPOs. SEBI has proposed for more justification and transparency from the new age tech-companies in respect of pricing their share in IPOs. A discussion paper was issued by SEBI inviting public comments by March 5 2022. Let us discuss more on this development.

Proposed Rules for start-up IPOs

SEBI has proposed rules wherein it seeks from new age tech-companies to provide a detailed explanation on how they price their shares for IPOs, compare it with pre-IPO share sales and publish pre-IPO investor presentations to assist investors in making informed decisions.

 SEBI’s Observations

It has come to the notice of SEBI that most of the new age tech-firms do not have any track record of profitable operations for minimum last three years and such companies have been launching IPOs. These companies have been loss making for a longer duration before achieving break-even because they opt for scale over profits during their growth phase.

Some of them have made public listings in the last year seeking to capitalise on a record rally in the stock market however a majority of them are currently trading at discounted levels. As of now, companies disclose earnings made per share, price to earnings, return on net worth and net asset value and comparison of these accounting ratios with their peers like companies having similar size in the similar industry.

SEBI^[1] said that such traditional parameters cannot be applied to the new age tech-firms and it further said that disclosure in the basis of issue price section especially for the loss making company should be supplemented with parameters that are non-traditional like key performance indicators and disclosure of few additional parameters like valuation based on past transactions/fund raising.

Disclosure on KPIs

SEBI has proposed rule in which the issuer company will be required to make disclosures on KPIs of the business of issuer company that has been considered/have a bearing for arriving at the basis of issue price. SEBI has proposed that the issuer shall provide-

• Disclosure all material KPIs shared with any pre-IPO investor in 3 years before an IPO.
• However, in case of KPIs which the issuer company deems not relevant for a proposed IPO, the issuer needs to provide explanation for considering those KPIs as not relevant with proper cross reference to the table disclosing the said KPIs.
• KPIs stated by the Issuer  Company must be described and defined clearly, consistently and precisely. It should not be misleading.
• Additionally, the KPIs need to be certified or audited by statutory auditors. The issuer company also needs to draw a comparison of KPIs with the Indian-listed peer companies or globally-listed peers, and comparisons of KPIs over time will also have to be explained.

Disclosure by Issuer companies

As per SEBI issuer companies will be required to make disclosure on-

• Valuation of Issuer Company based on the secondary sale/acquisition of shares (equity/convertible securities) excluding gifts, in the 18 months before the date of filing of the DRHP/RHP [wherein either acquisition or sale is equal to or  higher  than  5 per cent of  the  fully  diluted  paid-up  share  capital  of   Issuer Company, in  a  single transaction or a group of transactions in a short period of time];
• Valuation  of  Issuer  Company  based  on  the primary/new  issue  of  shares (equity/convertible securities) in the 18 months before the date of filing DRHP /RHP [equal  to  or  more  than  five per cent of  the  diluted  paid-up  share capital of the Issuer Company (calculated on the pre-issue capital on the allotment date),  in  a  single  transaction  or  a  group  of  transactions  in  a  short period]

Conclusion

The section- “Basis of Issue Price” was examined by a sub-group of the Primary Market Advisory Committee of Securities and Exchange Board of India. The recommendations of the sub-group were discussed in a meeting of Primary Market Advisory Committee. Then the recommendations were proposed to the regulator through the discussion paper.

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