The Securities and Exchange Board of India’s (SEBI’s) decision to relook the disclosures put out by companies to explain the basis of the pricing may have been prompted by the crash in post-listing prices of some start-ups, but more information to potential investors is always welcome. Quite a few new-age technology companies, or NATCs as they are called, are expected to hit the markets over the next few months, and there is much that can be learnt from the issuances of the past few months. Typically, issuers are required to disclose some critical accounting ratios, including the earnings per share (EPS), the return on net worth, net asset value and the PE ratio in the draft red herring prospectus; many of them also put out a comparative picture of these metrics vis-a-vis their peers. However, most new-age players are loss-making and list under 6(2) of the ICDR (Issue of Capital and Disclosure Requirements) meant for those companies that don’t have a financial track record and have not posted an operating profit in the preceding three years.
The regulator’s discussion paper proposes that, in addition to the financial parameters, NATCs should disclose some details of the KPIs (key performance indicators). Indeed, information on the key operating metrics—and the historical trends—is important, even critical. To ensure that the data is authentic, SEBI wants it should be audited. This is an excellent suggestion as it would increase the credibility of the numbers. In the absence of profits, the KPIs would help investors gauge to what extent the valuations being demanded by the companies are warranted. Given that the valuations are way above those for the rest of the pack, NATCs must work harder to justify them. For instance, Sebi is right in asking them to explain why they are using certain KPIs and disregarding others. Moreover, wherever relevant, companies need to show where they stand vis-a-vis global peers. Some colour on the local competition would, of course, be called for.
Going by the trend so far, companies seem to be reluctant to share the KPIs post listing, citing competitive pressures. If the pricing is to be based on the KPIs, investors must be assured of a regular flow of information for at least a couple of years post listing. Simply talking about them, and briefly, on analyst-calls isn’t good enough; the information needs to be put up on the website so that it can be widely accessed.
The regulator’s point that the NATCs disclose the valuations at which they have raised funds from investors in the past is well taken. One has noticed, in several instances, that the IPO’s valuation is way above that earned by the company in the just-preceding round of funding. Even where NATCs do put out the information on the valuations in the previous rounds, these are often buried somewhere deep in the DRHP. Given these are loss-making entities where profitability is several years away, the jump in the valuation needs to be justified. Indeed, for many, even the break-even point is some time away.
To be sure, the pricing of an IPO must be left to the issuer; we cannot go back to the CCI regime. Also, if investors have burnt their fingers in any of the stocks that have seen a steep fall in their prices post listing—including One97Communications, Cartrade, Fino Payments—they should have been prepared for the risk. One could argue SEBI should have allowed a listing of NATCs only after the businesses mature. However, since that is no longer an option, the regulator must ensure investors have access to quality information.