SEBI Proposes New Disclosure Framework For IPOs Of Loss-Making Companies

SEBI issued a consultation paper on Feb. 18., proposing a new disclosure framework for IPOs of loss-making companies.

The exterior of the SEBI headquarters in Mumbai. (Photograph: BloombergQuint)
The exterior of the SEBI headquarters in Mumbai. (Photograph: BloombergQuint)

The market regulator has proposed that loss-making new age technology companies looking to list their shares should make disclosures about their key performance indicators considered for arriving at the issue price in offer documents.

The change was proposed by SEBI in a consultation paper issued on Feb. 18. regarding disclosures for the ‘Basis of Issue Price' for loss making companies.

Stakeholders can share their comments with the regulator till March 5.

Currently, the 'Basis of Issue Price' section in an offer document covers disclosures of parameters such earnings per share, 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.

These parameters are descriptive of companies which are profit making only. So, these parameters may not really help investors in taking investment decisions with regard to loss making issuers, the consultation paper highlighted.

It is obvious that disclosures in '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/ fund raising by issuer company
SEBI's consultation paper

Here are the key changes recommended:

Key Performance Indicators

Apart from disclosing the financial ratios, SEBI has proposed that the issuer company make disclosures on the key performance indicators of the business on the basis of which the issue price was arrived at.

The company may be asked to furnish the following details:

  • Disclose all KPIs shared with any pre-IPO investor during the three years prior to the IPO.

  • Provide an explanation for those KPIs that they deem non-relevant for the IPO.

  • The information issued by the company should be described and defined clearly. All KPIs would required to be certified by auditors.

  • Comparison of KPIs with Indian or global listed peer companies (wherever available) should be disclosed in the offer document and comparison of KPIs over time should be explained.

Past Transfers/allotments

The market watchdog has proposed for new-age technology companies to make disclosures about their valuations based on issuance of new shares and acquisition of shares in the past 18 months before filing draft offer documents.

This is subject to conditions where the acquisition or sale is equal to or more than 5 percent of the fully diluted paid-up share capital of the issuer firm in single or multiple transactions.

The recommendations were proposed after SEBI noted that many new age companies do not have a track record of having an operating profit at least in the preceding three years, tapping the initial public offering 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 consultation paper pointed out.

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