India tightens IPO valuation survey, shocks list-watching startups
NEW DELHI:
India has tightened controls on publicly traded companies by questioning how key internal company metrics are used to arrive at valuations, troubling bankers and companies fearing delays in listing plans, sources with close knowledge told Reuters .
India’s push comes after the flop listing of SoftBank-backed payment firm Paytm’s $2.5 billion IPO in November, sparking criticism over the lax oversight of loss-making firms’ pricing problems at what some believe to be high valuations.
The Securities and Exchange Board of India (SEBI) expressed concern last month about proposing tougher disclosures, saying that more and more new-age tech companies that “remain loss-making for an extended period of time” may be filing IPOs and traditional financial disclosures. not help investors.”
But even before the proposal is finalized, in recent weeks the SEBI has asked many companies to have their non-financial metrics — KPIs or key performance indicators — audited and then explain how they were used to help value an IPO. come. said five banking and legal sources.
Typically for a tech or app-based startup, KPIs can be numbers such as number of downloads or average time spent on a platform – metric sources listed are public but challenging to monitor or link to valuation of a company.
The SEBI asks us to “justify the valuation”, said an Indian lawyer who advised several companies monitoring IPOs, adding that it “created uncertainty and increased compliance costs”.
SEBI did not respond to a request for comment.
In major markets, including Hong Kong, regulators are pursuing practices that subject companies to stricter oversight of their business practices and financial data. Still, they usually don’t perform detailed checks on valuation metrics.
A February document containing comments from SEBI to an Indian IPO-linked company, seen by Reuters, asked for an “explanation of how KPIs are the foundation” for arriving at the IPO issue price, adding that they were “by a statutory auditor must be certified”. †
Indian digital healthcare platform PharmEasy, which filed documents for an $818 million IPO in November, is one company hit by one such investigation: a source with direct knowledge said the company raised concerns with SEBI about auditing and the providing such details and probably to get some relaxation. PharmEasy did not respond to a request for comment.
It is not clear whether the additional information requested by SEBI would be released to potential investors.
Pranav Pai, the founder of Indian VC firm 3one4 Capital, said the SEBI imposed no limits on valuations and only brought “parity of information” between profitable and loss-making companies targeting IPOs.
“SEBI doesn’t ask for anything out of the ordinary,” Pai said.
Rising Worries, Hot IPO Market
The tighter scrutiny comes as Indian startups and other companies have become a darling for foreign investors and are increasingly entering the markets.
Last year, more than 60 companies — including high-profile tech companies — made their market debuts, raising more than $13.5 billion, with many like ride-hailing company Ola and hotel aggregator Oyo still to come.
However, the Paytm listing raised concerns about valuations. After falling on the day of listing, shares of the Indian payments company are currently trading 64% below their issue price, with some fund managers saying the episode will “hopefully bring some realism to valuations”.
Concerns are widespread among bankers, lawyers and corporations as the investigation continues, even as the SEBI’s proposal on whether such KPI-related disclosures should be enforced or not was open to public comment until March 5, three added. sources to it.
The proposal argued that key accounting ratios, such as price-earnings ratio, were insufficient to assess the activities of loss-making companies. For three years, the SEBI wanted to monitor and make public “all material KPIs” shared with pre-IPO investors.
“Many investors, founders and commercial banks have reservations about SEBI’s proposal,” said Vivek Gupta, National Head for M&A at KPMG in India.
According to sources, investment bankers from Bank of America and India’s Kotak Mahindra have expressed concerns to the SEBI about such planned controls on IPOs. They declined to comment.
A senior executive at an Indian startup planning an IPO said his company was concerned.
“This will further encourage future generations of startups to incorporate outside of India so that they can easily advertise abroad.”
