There are a lot of new-age companies that are not performing up to the mark in the market. They have no track record of having an operating profit in most of their years of working, yet routing towards IPO to raise funds. However, the Securities and Exchange Board of India has made changes in the rules and wants disclosure regarding the performance of these new-age technology companies. According to SEBI, companies might be asked to make disclosures about their revenue and turnover based on the issuance of new shares and acquisition of shares over the past 18 months before filing offer documents. This is going to be the new SEBI IPO disclosure norms for loss-making companies.
An IPO is known as the Initial Public Offering where a privately owned company displays its shares on a stock exchange and makes them available for purchase by the general public. Most of the people think IPO to be a money-making opportunity. High-profile companies become centre of attraction and grab headlines with huge share price gains when they go public.
Current Norms v. Changed Norms
Currently, the Basis of Issue Price in the offer document covers nothing much but disclosure of parameters like earnings per share, net worth, the net asset value of the company, and so on.
According to SEBI, the issuer company shall be asked to disclose all of their relevant KPIs during the three years before the IPO and a statement explaining how these will contribute to the forming of the Basis of the Issue Price.
But according to SEBI’s consultation paper, it should be supplemented with modern and non-traditional parameters like key performance indicators as well as some additional parameters like valuation based on past transactions by the company.
Companies might also require to provide explanations for those KPIs that are not relevant for the IPO. The KPIs should be certified by the auditors. SEBI also advised that the comparison of KPIs with both Indian and International Companies should also be mentioned in the offer document.
What made SEBI introduce these measures?
If you are wondering what made SEBI introduce IPO disclosure norms for loss-making companies then the answer is simple, such new-age companies cannot show their track record of performance. Most of the new-age technology firms do not have a listed peer. These norms were introduced so that investors, especially retail investors could be protected.
As the market was corrected recently, many of the new-age technology companies like Zomato, Nykaa, Paytm, Policy Bazaar, and Car Trade witnessed a massive fall in their business. The shares of such companies collapsed 30-35% since their listing.
What could be the reason why companies make losses for a long period?
One of the major questions that worry everyone is why are companies making a loss for such a long period? To which SEBI replied that the new-age tech companies are more focused on gaining scale over profits due to which they remain in a loss-making phase and do even achieve a big break. Thus, they do not witness any growth but rather face heavy losses.
The companies do not make tactics, they just aim for long-term market leadership whereas they should look for short-term profitability considerations.
SEBI further added that growth can be achieved by expanding the business into new micro-markets that would focus on certain particular objectives. Thus, profitability targets should always be longer-term goals.
Valuations based on secondary primary sales
The companies might also have to disclose certain valuations based on secondary as well as primary sales within 18 months before the date of DRHP. This comes under a few conditions where the acquisition or sale is equal to or more than 5% of the fully paid-up share capital of the firm in single or multiple transactions.
How is this going to help the investors?
One of the most important things to ensure in this entire procedure is safeguarding the investors. SEBI said that an issuer firm should regularly offer a complete explanation of the offer price along with a comparison of the issuer’s KPIs and other financial elements like EPS, net worth, and net asset value of the last two full financial years as well as the interim period, all of this should be included in the offer document. This would help the investors in developing the trust that ultimately would strengthen the roots of the business. This would also enable investors to have a comparative view of the KPIs and other financial elements for the same period.
Thus, this was all about the new SEBI IPO disclosure norms for loss-making companies. These steps were important to take as SEBI noted the new age companies do not have a minimum track record of having any operating profit at least in the preceding three years. It was high time that such rules were brought to the market and were applied strictly to balance out and correct the working of market procedures. Only if such necessary steps were taken in the current time, can the future of the market and companies can be secured.
CS Urvashi Jain is an associate member of the Institute of Company Secretaries of India. Her expertise, inter-alia, is in regulatory approvals, licenses, registrations for any organization set up in India. She posse’s good exposure to compliance management system, legal due diligence, drafting and vetting of various legal agreements. She has good command in drafting manuals, blogs, guides, interpretations and providing opinions on the different core areas of companies act, intellectual properties and taxation.
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