Sebi proposes rules on pricing of IPOs

India's market regulator plans to ask new-age technology companies to justify the pricing of shares for their initial public offerings to ensure transparency after a meltdown in stocks of some of these companies eroded billions of dollars in investor wealth.

A discussion paper issued on Friday by the Securities and Exchange Board of India (Sebi) has set 5 March as the deadline for the public to submit their comments. Shares of some new-age tech firms such as Paytm and Zomato have plunged since their listings.

The regulator wants new-age tech firms to explain in detail how they priced their shares for initial public offerings (IPO), compare it to pre-IPO share sales and publish all pre-IPO investor presentations to help investors make informed decisions.

Sebi has observed that many of these companies that do not have a proven track record of profitable operations for at least three years are launching IPOs. Such companies have generally been loss-making for a long period before achieving break-even as they opted for scale over profits during their growth phase.

Some made public listings in the past year, hoping to capitalize on a record rally in the stock markets. Most are, however, currently trading at discounted levels. Currently, companies only disclose earnings per share (EPS), price to earnings (P/E), return on net worth (RoNW), and net asset value (NAV), as well as comparisons of these accounting ratios with their peers, i.e., companies of similar size in the same industry.

Such traditional parameters, Sebi said, cannot be applied to the new-age tech companies. It said disclosures in the 'Basis of Issue Price' section, particularly for a loss-making company, must be supplemented with non-traditional parameters such as key performance indicators (KPIs) and disclosure of certain additional parameters such as valuation based on past transactions/fund-raising.

In its six-page paper, Sebi said such companies should disclose all material KPIs shared with any pre-IPO investor in the three years before an IPO.