IPO pricing by loss making companies - Reactive policymaking 101


By CA Vijaykumar Puri ~ Partner, VPRP & Co LLP, Chartered Accountants


a close up of a computer screen with numbers on it
a close up of a computer screen with numbers on it

Ever wondered how the shares of loss-making companies are priced?

Well yes, seems like SEBI has started wondering too.

But not before these huge IPOs have caused massive losses to the public.

Zomato is near its issue price, Paytm has eroded 2/3rds of investor wealth, so on and so forth.

Last Friday, the securities market regulator has come out with a consultation paper to tackle the issue of pricing of such IPOs.

First – what is currently being done?

At present, only few ratios like Earnings Per Share (EPS), price to earnings, return on net worth etc are required to be disclosed.

What is the problem identified by SEBI?

They say that these parameters are typically descriptive of companies which are profit making and do not relate to a loss-making firm.

What does the consultation paper propose?

In addition to the current ratios, additional disclosures of Key Performance Indicators (KPIs) to be made-

- relevant KPIs during the three years prior to the IPO and an explanation of how these KPIs contribute to pricing

- KPIs to be audited/ certified

- disclose all material KPIs that have been shared with any pre-IPO investor at any point of time during the three years prior to the IPO.

- Details of “immaterial” KPIs and their justification

- Comparison of KPIs with national/ global listed peers

It is far from being a law yet and is only open for the public comments.

Apart from KPIs, an issuer firm has been proposed to make disclosure of valuation of issuer company based on secondary and primary sale, in the 18 months prior to the date of filing of the DRHP/RHP.

This is subject to conditions where either acquisition or sale is equal to or more than 5 per cent of the fully diluted paid-up share capital of the issue firm in a single transaction or a group of transactions in a short period of time.

With reference to valuation of an issuer company based on secondary sale or acquisition of shares and primary or new issue of shares, Sebi has suggested disclosure of floor price and cap price being times the Weighted Average Cost of Acquisition (WACA) based on primary/ secondary transaction(s) should be disclosed in a tabular form.

SEBI also said that an issuer firm should offer a detailed explanation for offer price along with comparison of the issuer 's KPIs and financials ratios such as EPS, return on net worth and net asset value for the last two full financial years and the interim period, if any, included in the offer document.

This will enable the investors to have a comparative view of the KPIs and other financial ratios for the same period, as per SEBI.

This is another instance where the regulator has woken up after the public has been fooled.

Having said that, this is definitely a step in the right direction.

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