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Wednesday, November 29, 2023

Sebi proposes new IPO rules that may spoil the game for startups

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The Sebi wants technology firms to justify their pricing of stocks for their initial public offerings. The rules were proposed after a meltdown in shares of some of these businesses.

In a recent consultation paper, the Securities and Exchange Board of India (Sebi) urged that new-age technology companies justify their share pricing for initial public offerings to maintain transparency. The new limits came in the aftermath of a stock market catastrophe in some of these companies, destroying billions of dollars in investor equity.

A private-sector bank’s investment banker predicted, “It’s not going to be easy to list new-age enterprises. Whenever there is a disclosure in the draught IPO filings, there must be a backup for the financial information these companies have provided; more critically, auditors must be willing to validate it.”

These are usually mobile-first firms like Zomato and Ola that leverage technology to challenge traditional businesses. More disclosures were thought necessary because many of these firms do not have a track record of profitability, preferring size over profits throughout their growth phase.

According to investment bankers who spoke on the condition of anonymity to Mint, Sebi has already begun requesting greater details on IPO pricing.

“Sebi has asked bankers to provide the price-to-earnings (PE) multiple and valuation methodology, as well as the price per share, that was employed.”

In 2021, a flood of tech businesses will go public on the Indian capital market. To date, these companies have raised roughly 43,283 crore.

Zomato, Paytm, Nykaa, Nazara Technologies, and CarTrade are among the companies that have gone public. While several of them were promising during the IPO process, few were able to match investors’ expectations after the IPO.

According to Sebi, such traditional characteristics cannot be used to new-age businesses. According to the regulator, the ‘Basis of Issue Price’ section 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, especially for a loss-making company.

Statutory auditors will be required to certify or audit these KPIs. Many companies, including Snapdeal, PharmEasy, and Mobikwik, are in the process of going public.

“However, market volatility is keeping them away,” stated the earlier-mentioned investment banker. Another investment banker with a state-owned bank stated, “In terms of publishing KPIs, traditional enterprises would never become as big as they are now if they faced such severe regulations.”

Globally, such new-age enterprises require at least ten years to turn a profit; such stringent requirements will discourage companies from ever seeking to go public.

An attorney stated, “The Sebi consultation document requires the companies to provide KPI-related conversations the company has had with venture capitalists and funders in the past. This entire arrangement is predicated on firms giving private information from the past, which is, by definition, unverifiable. This will create a significant gap that firms can exploit while revealing the information.”

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