Financial Insights

SEBI plans tougher pricing norms for IPOs amid new-age stocks’ free-fall

As new-age stocks like Zomato, Nykaa and PolicyBazaar fall, the Securities Exchange Board of India has planned to set up a new mechanism that will ensure transparency in their IPO pricing. One of the proposed plans is to seek detailed justifications from companies, explaining the pricing and valuations that they seek from investors to SEBI.

Some of the recent figures are: Paytm share price fell 61% from its IPO price, Zomato 13%, PolicyBazaar 23%, Nykaa 24% & CarTrade 64%. As these shares tanked, they ruined the wealth of several investors as the markets remain extremely volatile. To ensure such falls do not repeat in the future, SEBI has planned certain steps that will ensure fair valuations and transparency in their pricing.

If the planned rules are implemented, companies will be required to detailed explanations on their pricing methods for the proposed shares, compare these prices to pre-IPO share sales and disclose all presentations made to pre-IPO investors. Furthermore, the regulator added that metrics like P/E multiples, EPS, Return ratios, etc. cannot be applied on new-age companies as opposed to traditional companies since most new-age companies are loss-making. As such, the regulator believes that the disclosures made in ‘Basis of Issue Price’ section of the offer document need to be supplemented with non-traditional parameters and other KPIs.

New-age tech companies generally remain loss-making for a longer period before achieving break-even as these companies in their growth phase opt for gaining scale over profits. Investors are on board with these companies on the premise of future potential and accordingly, these companies strive for long-term market leadership rather than short-term profitability considerations,” SEBI said in its discussion paper.

Moreover, SEBI has said that the KPIs must be defined clearly, not be misleading, be compared with industrial peers and be certified by a statutory auditor. Adding on, IPO bound companies will have to disclose the cost at which shares are sold in any secondary deals as well as primary deals in the past 18 months if it led to a dilution of more than 5%.

Highlight by Aman Agarwal.

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