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Will the new IPO disclosure norms help investors?


Market regulator Securities and Exchange Board of India (Sebi) has, in an effort to bring more transparency to the initial public offering (IPO) pricing process, sought increased disclosure from issuers coming to the market.

Sebi has asked companies to disclose their key performance indicators (KPIs) and price per share based on past transactions and fund-raising exercises. Companies now have to disclose the price per share based on the primary issue and secondary sale or acquisition in the past 18 months before the IPO goes live. If the company has not done any such exercise in the last 18 months, the timeline is extended to 30 months, and the details of the previous five such transactions need to be disclosed to the public. In addition, a committee of independent directors is expected to approve the price band based on various quantitative factors. This is intended to help investors make a more informed choice of whether or not to subscribe to the IPO issue.

Possible genesis: Sebi had released a similar consultation paper recently to address issues pertaining to the increased number of new-age technology companies (NATCs) coming to the market. Since these companies are initially focussed on scaling up the business rather than generating profits, the disclosure of accounting ratios EPS, P/E ratio, return on net worth, and net asset value (NAV) do not reveal enough about their performance and how the price is affected. Hence, Sebi had asked for public comments on the addition of non-traditional parameters of KPIs and valuation based on past fund-raising by such companies.

New regulations: The present move by Sebi indicates that it had received positive comments on this proposal. The regulations, however, do not specify if these are exclusively for NATCs or for traditional businesses as well. In the absence of such exclusion, these will apply to all issuers coming to the market. A higher level of disclosure reduces the information asymmetry between the issuer and the investor. With NATCs, the information asymmetry is higher as the inefficiency of management can get covered by the excuse of losses incurred due to scaling up. Besides, the prevalence of a hot IPO market may overshadow pricing and management efficiency parameters in investment decision-making, which may result in post-listing losses.

A significant omission that seems to be there in the new guidelines vis-à-vis the consultation paper is that of the role of the auditors.

The consultation paper proposed that statutory auditors will be mandated to audit the KPIs and that there should be a comparison with Indian and global listed peer companies. These details have not been explicitly added to the 30 September guidelines. However, it is safe to assume that Sebi expects any such material details that can affect the investment decision-making to carry the highest credence. Sebi has been trying to make the markets more reliable for investors, and one can expect that the financial indicators need to carry the approval of the auditors.

Expected outcomes: The performance of a few high-profile IPOs upon listing has definitely eroded investor confidence in the pricing mechanism of these public issues. These companies included both NATCs and giant legacy firms in traditional businesses.

A sharp fall in price on listing or over a short period from the day of listing does not bode well for the market and its investors. Hence, the decision of Sebi to bring in more transparency in the pricing process will help in better decision-making.

The current global economic conditions, inflationary trends, the Russia-Ukraine war and the past performance of big-ticket IPOs have all added to the gloom in the primary market. This has led to fewer IPOs coming to the market, reduced retail investor participation, and smaller listing gains this year. This move by Sebi is expected to bolster investor confidence and bring more transparency to the process. One must understand that listing or post-listing losses do not add any benefit to the issuing company. Its goodwill takes a hit, and so might its demand in the secondary market. Hence, the big picture suggests that this move will also be better for the issuers.

P Saravanan is a professor of finance, and Sumit Banerjee is a doctoral student at the IIM Tiruchirappalli

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