SEBI: Proposes non-traditional parameters for disclosing ‘Basis of Issue Price’
A. Objective
The objective of this proposal is to seek comments from the public on SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations), regarding provisions relating to disclosures for ‘Basis of Issue Price’ section in offer document.
B. Background and Current Regulatory Framework
In terms of SEBI ICDR Regulations, issuer is required to make disclosure of critical accounting ratios viz. earnings per share (EPS), price to earnings (P/E), return on net worth (RoNW) and net asset value (NAV) of the Company, including comparison of such accounting ratios with its peers i.e. companies of comparable size in the same industry.
It is observed that the above parameters are typically descriptive of companies / issuers which are profit making. Thus, these parameters may not aid investors in taking investment decision w.r.t. loss making issuers.
C. Issues and Deliberations
It is seen that lately there is an increase in filing of offer documents for IPOs by companies not having track record of operating profit in preceding three years.
Mostly such filings are by issuer companies which are new age technology companies (NATCs). NATCs 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 boarded on these companies on the premise of future potential and accordingly the company strives for long-term market leadership rather than short-term profitability considerations.
Present requirement for ‘Basis of Issue Price’ section in offer document covers disclosure of traditional parameters such as disclosure of key accounting ratios. However, disclosures in ‘Basis of Issue Price’ section, particularly for a lossmaking company, are required to be supplemented with non-traditional parameters like key performance indicators (KPIs) and disclosure of certain additional parameters such as valuation based on past transactions / fund raising by issuer company.
D. Disclosures for ‘Basis for Issue Price” section in Offer Letter
Apart from disclosing the financial ratios as per the requirements, the Issuer Company shall also make the disclosures on the key performance indicators (KPIs) of the business of the Issuer Company that have been considered / have a bearing for arriving at the basis of issue price-
Disclosure of relevant KPIs including material KPIs made before the pre-IPO Investors during the three years prior to the IPO.
Issuer Company shall disclose all material KPIs that have been shared with any pre-IPO investor at any point of time during the three years prior to IPO.
All KPIs to be certified / audited by statutory auditors.
Comparison of KPIs with Indian listed peer companies and/ or global listed peer companies (wherever available).
