The Securities and Exchange Board of India (SEBI) has proposed amendments to the valuation methods adopted by new-age technology companies, such as introducing key performance indicators (KPI) besides existing disclosures in an IPO prospectus.
The markets regulator has issued a consultation paper after poor post-listing performances by several newly listed technology companies.
Following discussions in a primary market advisory committee sub-group, SEBI has recommended companies disclose the valuation of the company based on primary issuance or secondary sale of shares (equity/convertible securities), excluding gifts, in the 18 months before the date of filing the prospectus and provide detailed explanations for setting the offer price or cap price as a multiple of the primary issuance price or the secondary transaction price.
While the “basis for issue price” section of an IPO prospectus requires companies to disclose critical accounting ratios, such as earnings per share, price-to-earnings ratio, return on net worth, net asset value, and peer comparisons, those metrics are not as relevant for new-age technology companies with no track record of operating profits in the preceding three years.
New-age technology companies focus on achieving scale rather than reporting profits because they are in a growth phase. The growth in such businesses comes from expanding into new micro-markets and adding or acquiring new customers, companies, technology, etc. Thus, profitability targets are longer-term goals.
Some other disclosures recommended by the markets regulator include:
(1) KPIs presented to pre-IPO investors during the three years before the IPO and an explanation of how the KPIs contribute to form the basis for issue price;
(2) All material KPIs are shared with any pre-IPO investor at any point during the three years before the IPO. However, for KPIs the issuer company deems irrelevant to the proposed IPO, the issuer shall provide adequate explanations with cross-references to a table disclosing those KPIs.
The markets regulator has sought comments on whether there is a need to disclose those KPIs in the basis-for-issue-price section in the offer document. If so, whether KPIs should be certified or audited by statutory auditors only, or whether KPIs can also be certified or audited by an independent chartered accountant.
The SEBI is also seeking comments on whether comparisons with global peers will be appropriate because some of the KPIs would be relevant only for the country or economy in which they operate.
