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The share prices of the new age technology companies such as Nykaa (FSN E-Commerce), Paytm (One97), Zomato have crashed recently after the stock market corrections. Investors who purchased these shares at the time of their IPOs have suffered huge losses since their shares have plummeted by 35-50 percent. The investors blame these companies for their losses because of their irrational valuations and in response to this, the capital market regulator, the Securities and Exchange Board of India (SEBI seeks to tighten IPO rules for these new age technology companies.
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The recent tensions between the Russia-Ukraine have sent shock waves to the global stock markets and because of this reason the value of equity of investors in these technology companies has significantly dropped. Nykaa and Zomato which showed significant results at the time of their listing reaching gains at 78% and 53% respectively have been at receiving end because of this situation.
The stock market experts have attributed this lowering of tax to the irrationally high valuations and the investors are not in the mood for investing in new-age technology companies.
The investors expect to get higher returns on their investments with the amount of risk they bear for these technology companies. It is on record that many of these technology companies have not been in profits for a very long period of time and instead facing losses. They have not shown even signs of break-even. This track record of the companies does not in any way justify the sky-high valuations. This is the result why many investors have dumped their equity. This is the main reason why SEBI seeks to tighten IPO rules.
In order to control the rising inflation in USA, their Central Bank will soon be taking steps to control the interest rates. Coupled with low interest rates, the geopolitical tensions prevailing in the market the market is not expected to rise for a sometime. These developments are scaring the investors which will force them to sell their stock in these companies and try to make an exit before the market crashes.
Following are the ways by which SEBI seeks to tighten IPO rules:
All this information of the companies will help SEBI determine whether the price sought by the company from the investors is justified or not.
The current laid down by SEBI related to IPO require the companies to make disclosure related to return on net worth (RoNW), earnings per share (EPS), net asset value (NAV), price to earnings (P/E). Since these new tech based companies are already reeling under losses, they are not able to comply with these rules.
Most of these companies are already under losses and have launched their IPOs taking the advantage of the stock market in the upswing. However, after the market corrections, these companies are being traded at discounted levels.
SEBI wants these companies to identify the Key Performance Indicators and get them certified by statutory auditors. These indicators have to be compared by the issuer from its listed peers both within and outside India.
Many of these technology companies do not provide any basis of their pricing or valuation of their shares. All that they state is that the valuation has been arrived by the investors and merchant bankers. SEBI[1] now wants these companies to justify their share price valuations similar to how shares for corporate issuances are valued.
The investors in order to save themselves from the losses due to falling share prices of these new companies are adopting the strategy of averaging out their share price by buying the shares when the market is down so as to cover the loss made by investing in them initially. However, the market experts have advised against in investing in these companies since these companies are not expected to make profits in near future. So to prevent the investors from making huge losses by investing in already loss making companies, SEBI seeks to tighten IPO rules for these new companies.
Read our Article:Investment in IPOs through Mutual Funds. Should you do it?
Prabhat has done his BA LLB (Hons) and has been writing research papers since his law school days. His interest in content writing made him pursue a career in legal research and content writing. His core areas of interest are indirect taxes, finance and real estate.
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