IPO Pricing: SEBI Proposes Disclosure of More Metrics in DRHP
With a large number of new-age technology companies considering public listing, SEBI has proposed mandating the list of key performance indicators (KPIs) in addition to financial ratios while making disclosures in the “ Issue Price Basis” section of the offering document.
Under existing rules, companies planning an IPO are required to disclose critical accounting ratios, including earnings per share (EPS), price-to-earnings (P/E) ratio, net worth performance (RoNW) and net asset value (NAV) with a comparison of these accounting ratios with its peers, i.e. companies of comparable size in the same sector.
Loss-making start-ups
“It is observed that the above metrics are generally descriptive of companies that are making profits and do not relate to a loss-making issuing company. Thus, these metrics may not assist investors in making investment decisions with respect to loss-making issuers,” SEBI said in a consultation paper released Friday.
This assumes significant given the large number of start-ups filing offering documents for IPOs. Most of these companies do not have a history of operating profits over the previous three years.
“New-era tech companies typically stay loss-making for a longer period of time before breaking even, as these companies in their growth phase opt for growth over earnings. Investors are brought into these businesses based on future potential and hence the business strives to be a long-term market leader rather than short-term profitability considerations. The growth of these companies comes from expanding into new micro-markets and adding or acquiring new customers/companies/technologies, etc. Thus, profitability targets are longer-term goals,” SEBI said in the document.
Globally, IPOs follow a disclosure-based regime and prohibit any future projection for the marketing of the show. Thus, the basis of the issue price is based on traditional parameters such as P/E ratio, NAV, etc. ; KPI trends over the past few years; evaluations carried out during the first fundraising; and market conditions.
In India, the current requirement for the “Basis of Issue Price” section in the offering document only covers disclosure of traditional parameters such as disclosure of key accounting ratios.
“It is obvious that the information provided in the “Basis of issue price” section, especially for a loss-making company, must be supplemented with non-traditional parameters such as key performance indicators and the disclosure of certain additional parameters such than valuation based on past transactions/fundraising by the issuing company,” SEBI said.
Published on
February 18, 2022