MC Exclusive: SEBI gets strict with KPI disclosures to ensure fair IPO valuations

The intent of the regulator is to ensure that public shareholders who plan to participate in the company’s IPO are not made to subscribe for shares at a valuation that is exorbitantly high

The Securities and Exchange Board of India (SEBI) has started taking a strict view on the Key Performance Indicators (KPIs) related disclosures made by new-age companies, especially start-ups and digital majors, that are planning to enter the capital markets through an initial public offer (IPO).

According to people familiar with the development, the capital market regulator is seeking detailed explanation related to the change in KPIs when compared to the company’s recent fund-raising activities and whether the change justifies the valuation being sought during the public issue.

The intent of the regulator is to ensure that public shareholders who plan to participate in the company’s IPO are not made to subscribe for shares at a valuation that is exorbitantly high when compared to company’s earlier fund raising especially if there has been no corresponding change in the KPIs.

“The idea is that there has to be some correlation between the valuation being sought in an IPO and the stake sales done earlier to PE/VC players and hence the enhanced scrutiny,” said a person familiar with the development.

“SEBI is not against the company seeking a certain valuation as it does not want to get into the pricing part. What it wants to ensure is that the valuation is justified on the basis of a corresponding change in the KPIs,” he added.

This assumes significance as SEBI in September 2022 introduced the concept of KPIs and made it mandatory for companies to disclose such metrics, including the price at which past transactions were done.

Data related to all primary and secondary transactions during the 18 months prior to the IPO had to be disclosed.

Also Read: SEBI steps up scrutiny on disclosure of KPIs by startups planning IPOs: Sources

“This is a natural progression of sorts as first the regulator made it mandatory for companies to disclose KPIs and then took another step ahead by ensuring all KPIs that are disclosed to a particular investor or set of investors have to be disclosed to everyone. Now, it is focusing on the change in KPIs to justify the valuations,” said another person who is involved in the IPO filing process.

An email query sent to SEBI remained unanswered.

Manshoor Nazki, Partner, IndusLaw, believes that the reason for increased scrutiny on the KPIs is due to SEBI’s focus on companies, especially non-traditional new age companies, and how IPO valuation for them is arrived at.

“Since many of these new age companies do not have listed peers, KPI becomes an important tool for SEBI to understand if the valuation is justified, and if increase in valuation corresponds to the growth in KPIs. Companies will need to do a lot more work in identifying KPIs, and making sure that KPIs are shared with investors in a structured manner for easy identification later on,” he adds.

Incidentally, the regulatory framework was largely triggered by the listing of online majors like Zomato, Paytm and Nykaa among others in 2021 and the ensuing massive fall in their respective share prices post listing.

“We are in a disclosure-based setup and the regulator is clear that all relevant data should be there in the public domain for investors to make decisions,” says Pranav Haldea, MD, Prime Database, a primary market tracking firm.

“Both KPIs and past transaction data showing the valuation at which funds were previously raised are extremely important from that perspective. This also assumes significance given the likely huge IPO pipeline of such PE/VC backed companies going forward,” adds Haldea.

The recent past has seen instances of refiling of IPO documents on account of enhanced scrutiny by the regulator. The most high profile case was that of FirstCry that faced additional disclosure demands and had to withdraw its draft red herring prospectus (DRHP) only to refile it.

Also Read: FirstCry may refile draft IPO papers by midnight with additional KPIs, December financials

Experts believe that the issuer and merchant banking community is waking up to the enhanced disclosure regime and taking steps to ensure that all relevant disclosures are properly made in the draft document so that the overall IPO process does not get delayed.

“The disclosures in offer documents will need to be made after undertaking extensive data collection and combing through that data to identify KPIs. Disclosure by themselves should not change to a large extent, but they could now include more KPIs than before and issuer become more conservative,” says Nazki.