Experts were certain that India was on the verge of the IPO revolution in November of last year, just before the first IPO launched by any startup in India.
Startups were lining up for IPOs, and many were working on draft red-herring prospectuses to get SEBI approval for an IPO.
The overwhelming success of the Zomato and Nykaa IPOs drew the attention of institutional investors, who began pushing their portfolio startups to go public.
Retail investors were excited about the IPO gains, which increased by 100 percent within a few days of listing.
Within just 6 months since the celebration, all the excitement among Indian startups towards IPO has started fading away. The table has turned!
Retail investors who bet heavily on new-age technology companies are now kicking themselves because many of them are trading below their IPO price.
In the wake of losses, the high valuation of startups for private placement at pre-IPO and IPO stage, and the issue pricing were subjected to close scrutiny.
Concerns were also raised about stricter regulatory and disclosure standards, owing to the fact that startups were a different cup of tea for retail investors than mature businesses in terms of traditional metrics.
Recognising these developments, the Securities and Exchange Board of India (SEBI) is now reviewing the disclosure norms with regard to issue price in the share sale of new-age tech companies. In a consultation paper, the regulator has sought public comments on ‘Disclosures for ‘Basis of Issue Price’ as it looks to re-examine the pricing issue. Thus disclosure norms assume extra significance because quite a few new-age technology companies are waiting in the wings to tap the capital market.
SEBI’s Current Regulatory Framework for Startup IPOs
According to the extant regulations, a company wishing to raise funds from the market through an initial share sale needs to disclose critical financial performance measures such as earnings per share (EPS), price to earnings (P/E), return on net worth (RoNW) and net asset value (NAV) of the company, including the comparison of such indicators with its peers.
These regulations under ICDR Regulations, para 9(K) of Schedule VI, are essentially for profit-making companies. New-age tech companies, however, file under 6(2) of Issue of Capital and Disclosure Requirements (ICDR) regulations.
Disclosures in ‘Basis of Issue Price’ particularly for a loss-making company are required to be supplemented with non-traditional parameters like key performance indicators (KPIs) and disclosure of certain additional parameters such as valuation based on past transactions or fundraising by the issuer company.
SEBI seeks additional information
It is indisputable that investors should have access to all the relevant information so that there is no information asymmetry between the entity going public and the investors. Against this background, the recommendations of SEBI’s Primary Market Advisory Committee (PMAC) on detailed disclosure regarding KPIs of the issuing company are being broadly welcomed.
Since the fortunes of new-age tech companies change faster due to their constant effort to scale up, the disclosures should be on a quarterly basis for the previous 12 quarters, up till the most recent quarter before the listing date.
It was reported that SEBI may ask tech startups to share details about their valuations, basis which they are issuing new shares, offloading existing shares, in the past 18 months before filing draft offer documents.
SEBI had proposed a consultation paper inviting comments from the stakeholders until March 5, 2022. Despite that, the increased scrutiny has raised concerns among bankers, lawyers, and startups, even though the proposal was open for public comments.
The proposal had stated that disclosure of key accounting ratios such as price-to-earnings ratio were not enough. Therefore, it mentioned that SEBI will audit and seek disclosure of ‘all material key performance indicators (KPIs)’, the same ones that were shared with pre-IPO investors in the last three years.
Basically, KPI for a startup could be the number of downloads for a tech startup – metrics that are disclosed but difficult to audit or link to a company’s valuation. This is exactly why SEBI had tabled the proposal since KPIs are sometimes completely unrelated to the way company valuations are calculated.
Most startups are not profit-making entities and, therefore, retail investors often struggle to get a true picture of the financial viability of the targeted company. They are also in the dark about the future prospects since there is not much public disclosure.
Another recommendation is the comparison of KPIs with that of Indian listed peer companies and/or global listed peer companies.
It is to be seen how startups respond to this suggestion. For instance, If Swiggy decides to go public, it would be interesting to see a comparison of its KPIs with that of rival Zomato.
Investors will need to be especially cautious if Ola Electric decides to enter the primary market and its KPIs are compared to Tesla's rather than, say, Indian auto rivals.
New-Age Tech firms Slump After IPO
The biggest setback came from Paytm IPO, which received a lukewarm response from the market. Still, it managed to attract a sizeable number of investors who poured in money in anticipation of huge listing gain by ignoring the warning of fund managers.
In November, Dazeinfo mentioned how Rakhi Prasad, one of the renowned fund managers, while speaking to Bloomberg, issued an alert to investors in regards to Paytm IPO. Within the first week of the Paytm listing, it became clear that Paytm is the worst listing in a decade.
Rakhi wasn’t alone who had many reservations against the startup IPO. Another investment advisor Abhishek Basumallick, Chief investment advisor – Intelesence Capital, was vocal too and openly expressed his concerns about the increasing number of Indian startup unicorns floating their IPO.
Fast forward to march, Paytm is trading all-time low. It is down by more than 65% than the issue size, making investors accumulate huge losses, without any sight for recovery in near future. The Big 4, including the most bullish JPMorgan, believes that Paytm will not be touching its listing price – forget issue price – anytime soon.