It is welcome that the stock market regulator is trying to improve the disclosures made by new age technology companies approaching the primary market for listing. It was a frenzy in the IPO market last year as these companies capitalised on investor appetite with offers at sky-high valuations. The issue is that digital companies tend to give precedence to growth over profitability and, therefore, are mostly loss-making when they approach primary markets. Traditional accounting ratios mandated to be disclosed by the Securities and Exchange Board of India’s ICDR Regulations under “basis for issue price” in the prospectus such as earnings per share, price to earning ratio and return on net worth of the company are not applicable to these loss-making companies and do not help investors in any manner in their decision-making process. SEBI’s move to mandate disclosure of alternate metrics for the digital technology companies may have come a little too lateas investors have already lost a lot of money subscribing to offers of companies such as One97 Communications (Paytm) and CarTrade, but they are welcome nevertheless.
The new age digital companies use different metrics such as app downloads, website registrations and traffic, subscribers, and so on, to project growth while valuing their shares. It would be difficult for SEBI to list all these metrics for disclosure. An easier option would be to ask these companies to share in the offer document the key performance indicators shared with investors in the pre-IPO funding rounds. Mandating that these metrics be certified by an independent chartered accountant will lend more credibility to the numbers. A three year look-back period for these disclosures appears enough since many of the companies are likely to be start-ups with limited history. Also, with the digital technology space undergoing fast-paced evolution, going back beyond three years may not present an accurate picture. It is imperative that the key performance indicators of the issuer are compared with global peers listed overseas since domestic listed companies in the digital technologies segment are few. While conditions in India may be different when compared to advanced economies, being aware of the risk premium being attributed to such companies in other markets will greatly help domestic investors.
The other suggestion in the discussion paper — that the weighted average cost of acquisition of shares issued or allotted in the pre-IPO period be disclosed in the prospectus — will be useful since it will alert investors regarding allotment to related parties or group companies prior to the issue. Going back to a period of 18 months prior to the issue period appears enough for this purpose since it is just ahead of the IPO that most companies distribute largesse to founding shareholders. Explanations regarding difference in the valuation of pre-IPO issuances and primary offer will be of particular interest to investors as it will help them understand if the issuer is attempting an IPO at unfair valuations.