SEBI eyes new disclosure structure for IPOs of loss-making companies

SEBI, the national markets regulator, has advised loss-making new-age tech companies wishing to list their shares to publish information in the offering documents about the key performance metrics used to determine the issue price. According to a consultation paper, these companies should disclose information about their valuations based on new stock issues and acquisitions over the past 18 months before filing draft offering documents.

Currently, the “Basis of Issue Price” section of an offering document covers information about traditional metrics such as key accounting ratios. These include the company’s earnings per share (EPS), price-to-earnings ratio, return on net worth and net asset value, and how these accounting ratios compare with its peers. According to SEBI, these metrics are generally descriptive of companies that are making profits and do not relate to a loss-making company.

The move comes against the backdrop of many new-era companies, which do not have a track record of operating profit for at least the previous three years, exploiting the IPO route to raise funds. These companies typically remain loss-making for a longer period before breaking even, as they opt for ways to increase scale of operations rather than profits in the early years. The Securities and Exchange Board of India (SEBI) has invited public comments on the consultation paper until March 5.

These parameters may not assist investors in making investment decisions with respect to a loss-making issuer. “It is obvious that the information provided in the “Basis of the issue price” section, especially for a loss-making company, must be supplemented by 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 in the consultation paper. In addition to disclosing financial ratios in accordance with current requirements, SEBI has proposed that the issuing company also disclose Key Performance Indicators (KPIs) that were taken into account/affected to arrive at the “Issue Price Basis”.

The KPIs indicated by an issuing company must be described and defined in a clear, consistent and precise manner and must not be misleading. In addition, all KPIs must be certified or audited by auditors. In addition, SEBI suggested that the comparison of KPIs with Indian listed peers and/or global peer listed companies (if any) should be disclosed in the offering document and that the comparison of KPIs over time should be disclosed. explained. In addition to the KPIs, it was proposed to an issuing company to disclose the valuation of the issuing company on the basis of the secondary and primary sale, in the 18 months preceding the date of filing of the DRHP/RHP.

An issuing company must disclose relevant KPIs over the three years prior to the IPO and an explanation of how these KPIs contribute to forming the “issue price basis”. Additionally, an issuing company must disclose all material KPIs that have been shared with any pre-IPO investor at any time during the three years prior to the IPO. However, for KPIs that the issuing company deems irrelevant to the proposed IPO, the issuer should provide an adequate explanation with appropriate reference to a table disclosing said KPIs.

This is subject to conditions where the acquisition or sale is equal to or greater than 5 percent of the issuing company’s fully diluted share capital in a single transaction or a group of transactions over a short period. With respect to the valuation of an issuing company based on the sale or secondary acquisition of shares and the primary or new issue of shares, SEBI has suggested that the floor price and the ceiling price be multiplied by the weighted average cost of acquisition (WACA) based on the primary/secondary price. the transaction(s) must be disclosed in tabular form.

SEBI also said an issuing company should provide a detailed explanation of the offering price along with a comparison of the issuer’s KPIs and financial ratios such as EPS, return on net worth and net asset value for the last two full fiscal years and the interim period. , if any, included in the offering document. This will allow investors to have a comparative view of KPIs and other financial ratios for the same period, the regulator said in the consultation document.

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  • SEBI eyes new disclosure structure for IPOs of loss-making companies
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