Sebi Moots New Disclosure Framework For IPOs Of Loss-Making Companies

Markets watchdog Sebi on Friday proposed that loss-making new age technology companies planning to list their shares should make disclosures about their key performance indicators considered for arriving at the basis of issue price in offer documents.

Besides, such companies should make disclosures about their valuations based on the issuance of new shares and acquisition of shares in the past 18 months before filing draft offer documents, according to a consultation paper.

The move comes against the backdrop of many new-age companies, that do not have a track record of having an operating profit at least in the preceding three years, tapping the Initial Public Offering (IPO) route to raise funds.

Such firms generally remain loss-making for a longer period before achieving break-even as they opt for ways to gain scale of operations rather than profits in the initial years.

The Securities and Exchange Board of India (Sebi) has sought comments from the public on the consultation paper till March 5. At present, the 'Basis of Issue Price' section in an offer document covers disclosures of traditional parameters such as key accounting ratios. These include Earnings Per Share (EPS), price to earnings, return on net worth and net asset value of the company as well as a comparison of such accounting ratios with its peers.

According to Sebi, these parameters are typically descriptive of companies that are profit-making and do not relate to a loss-making firm. These parameters may not aid investors in making investment decisions with respect to a loss-making issuer.

"It is obvious that disclosures in the 'Basis of Issue Price' section, particularly for a loss-making company, are required to be supplemented with non-traditional parameters like key performance indicators and disclosure of certain additional parameters such as valuation based on past transactions/ fundraising by issuer company," Sebi said in the consultation paper.

Apart from disclosing the financial ratios as per the current requirements, Sebi has proposed that the issuer company should also make the disclosures about the Key Performance Indicators (KPIs) that have been considered/have a bearing for arriving at the 'Basis of Issue Price'.

An issuer company should disclose relevant KPIs during the three years prior to the IPO and an explanation of how these KPIs contribute to form the 'Basis of Issue Price'.

Also, an issuer company should disclose all material KPIs that have been shared with any pre-IPO investor at any point time during the three years prior to the IPO.

However, for those KPIs that the issuer company deems are not relevant for the proposed IPO, the issuer should provide an adequate explanation with proper cross-reference to a table disclosing the said KPIs.

KPIs stated by an issuer company should be described and defined clearly,  consistently and precisely and should not be misleading. Besides, all KPIs should be certified or audited by statutory auditors. In addition, Sebi has suggested that a comparison of KPIs with Indian listed peer companies and/or global listed peer companies (wherever available) should be disclosed in the offer document and a comparison of KPIs overtime should be explained.

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 issuing 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 the offer price along with a 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, the regulator said in the consultation paper.