MUMBAI : New disclosures rules proposed by the markets regulator are likely to stymie the planned listing of many new-age technology startups, potentially prolonging the dry spell in the primary markets, bankers and lawyers said.
The Securities and Exchange Board of India (Sebi), in a recent consultation paper, proposed that new-age technology companies justify their pricing of shares for their initial public offerings to ensure transparency. The proposed rules came after a meltdown in stocks of some of these companies, eroding billions of dollars in investor wealth.
“It’s not going to be very easy to list new-age firms," said an investment banker with a private sector bank.
“Whenever there is a disclosure in the draft IPO documents, there has to be a back-up for the financial information these startups have provided; more importantly, auditors should be willing to certify it," he added.
These companies are, typically, mobile-first startups such as Zomato and Ola that use technology to disrupt traditional businesses.
The need for more disclosures was felt because many of these startups do not have a track record of profitability, as they tend to opt for scale over profits during their growth phase.
Investment bankers who spoke to Mint on condition of anonymity said Sebi has already started asking for more disclosures on the pricing of IPOs.
“Sebi has asked bankers the price-to-earnings (PE) multiple and valuation methodology, price per share, that has been used. They want to understand the pricing mechanism," the investment banker cited earlier said, seeking anonymity.
A managing director at a financial advisory firm said, “Many years back, there was a controller of capital issues, and pricing was regulated in that era. Pricing and valuations are inherently subjective. Seeking to regulate this can create more problems than it will solve. The disclosures, including risk factors, are quite detailed, and investors are expected to apply their minds before they apply for an issue, just as would be the situation while purchasing shares in the secondary market."
The Indian capital market in 2021 saw a slew of tech startups go public. In all, these companies raised nearly ₹43,283 crore to date. Companies that went public include Zomato, Paytm, Nykaa, Nazara Technologies and CarTrade.
While many of them looked promising in the process of going public, not many could meet investors’ expectations post listing. Today, most such listed companies are trading at half their peak valuations.
Currently, companies disclose earnings per share, price to earnings (PE), return on net worth (RONW) and net asset value, and comparisons of these accounting ratios with their peers.
Sebi said that such traditional parameters cannot be applied to the new-age startups. 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 and fundraisings, the regulator said.
These KPIs will have to be certified or audited by statutory auditors.
“Until now, these KPIs were tracked internally, but no one used to validate these KPIs. Therefore, evaluation of these things will be a time-consuming process. Many companies like Snapdeal, PharmEasy and Mobikwik are in various stages of going public. However, market volatility is keeping them away," said the investment banker cited earlier.
Another investment banker with a state-owned bank said, “In terms of disclosing KPIs if traditional companies faced such stringent norms, they would never become as big as they are now."
“Globally, too, such new-age companies require at least 10 years to make profits; such tight rules for the companies will demotivate them from even attempting to go public."
A lawyer said on condition of anonymity, “The Sebi consultation paper requires the companies to reveal KPI-related communications the company has had with the venture capitalists and funds in the past. This entire arrangement depends on companies revealing private information from the past, which by its nature is not verifiable. This will act as a major loophole, which companies can exploit while disclosing the information."
