SEBI to tighten norms for loss-making firms floating IPOs. All you need to know

The Securities and Exchange Board of India (SEBI) has proposed to tighten disclosure standards for new-age companies that plan to float initial public offerings (IPOs) in an attempt to protect retail investors.

According to a discussion paper floated by SEBI on Friday, such companies will have to disclose more details pertaining to how they arrived upon the offer price for their IPOs.

What exactly has SEBI proposed?

SEBI has told companies to disclose details on fresh share issuance and share acquisition for 18 months prior to its IPO filing.

Such companies should disclose additional “non-traditional” information such as trends in key performance indicators (KPIs) over the past years, valuations in earlier rounds of fundraising and market conditions in order to give investors a more justified view of future profitability, such companies will need to disclose.

In a traditional way, which is more relevant in the case of profit-making firms, companies typically justify their IPO pricing and valuation based on accounting metrics such as earnings per share, price to earnings (P/E), return on net worth and net asset value and comparing such metrics with peer companies.

SEBI’s proposed norms would apply to what type of companies?

This proposal aims to cover only those companies which don't fulfil the three-year profitability track record, while the rules remain unchanged for others.

These rules will apply to IPO-bound loss-making companies, which would now be required to give a detailed justification after SEBI found a growing number of companies filing offer documents under regulation 6(2) — companies not having a track record and not having operating profit in the preceding three years.

What prompted SEBI to introduce these measures?

Many of these new-age technology firms do not have a listed peer. These norms are announced with a view to protect investors, especially retail investors. 

Due to the recent market correction, many of the recently listed new-age technology firms such as food delivery platform Zomato, beauty and fashion e-tailer FSN E-Commerce (Nykaa), One97 Communications (Paytm), PB Fintech (PolicyBazaar) and CarTrade have seen their shares collapse 35-50% since their listing.

But why do such companies make losses for a long period?

In its consultation paper, SEBI said that 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 onboarded 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, SEBI said

“The growth in such businesses comes from expanding into new micro-markets and adding or acquiring new customers/companies/technology etc. Thus, profitability targets are longer-term goals,” it added.