Over several years, India’s startup ecosystem created a slew of a vast number of firms with quickly rising valuations by SEBI. Still, the retail/common investors were forced to sit on the sidelines since these startups couldn’t list on the Indian stock market because they were primarily loss-making. Under SEBI laws, loss-making enterprises were forbidden from being listed on the Indian stock market under SEBI laws. So, why are loss-making startups lining up to go public now?
SEBI follows specific rules and regulations for allowing IPO launches for loss-making companies. If any startup/firm fulfils the required guideline, SEBI will enable them to go public.
SEBI Guidelines for the loss-making company to launch IPO
The issue will be done through a book-building process, with Qualified Institutional Buyers receiving at least 75% of the net offer to the public (QIBs). If the requisite number of QIBs is not reached, the firm will refund the subscription money.
When it comes to going public, the procedure of issuing shares to the public differs between successful and loss-making companies/startups.
This is how shares are handed out when a profitable firm goes public:
Buyers from eligible institutions – 50%, Individuals with a high net worth – 15%, 35 per cent in retail
This is how shares are handed out when a loss-making firm goes public.
75 per cent of eligible institutional buyers, Individuals with a high net worth – 15%, 10 per cent in retail
The total number of shares available to retail investors is the significant gap between profitable and loss-making companies going public — while profitable companies can put forward 35% of their shares to retail investors, loss-making companies can only present 10 per cent of their shares to retail investors.
Tougher norms for loss-making company IPOs by SEBI.
The Securities and Exchange Board of India (Sebi), the market regulator, has recommended tightening disclosure criteria for newly started companies/startups planning initial public offerings (IPOs).
After the fall of SoftBank invested startup Paytm’s $2.5 billion IPO in November, which raised criticisms of inadequate monitoring of how profitless companies price issues at what some argue are exorbitant values, India has stepped up its efforts.
According to the market regulator, Sebi, loss-making and new-age technology businesses who want to go public must let out how they arrived at the IPO pricing. It also wants these startups to provide the price at which they sold shares to investors in pre-IPO rounds that lasted up to 18 months before submitting offer filings with the SEC.
The action by the Sebi comes in the wake of many new generations, tech-enabled enterprises that have neglected to show operating profit after their IPOs. Several of these companies/startups’ stock values have plummeted since their IPO. Some are still trading at a premium to their IPO price but at a discount to their listing price.
Traditional companies were held in mind when the draft offer files’ present announcement requirement was put in place. Established rules for analysing a company’s offer price “may not serve investors much in assessing investment decisions with relation to a loss-making issuer,”. According to Sebi, as being of a more new generation, tech-driven enterprises seek to list. Companies planning an IPO must now disclose important accounting variables such as EPS, price to earnings, return on net worth, and net asset value in their documentation. The offer document must also include relevant accounting statistics from the IPO-bound company’s rivals.
Some rules to bring more transparency
The Securities and Exchange Board of India (Sebi) has recommended changes to the regulations that govern initial public offerings (IPOs) to increase openness and accountability.
The market regulator is limiting how much money companies/startups may raise for inorganic expansion efforts and how much current shareholders can sell in the IPO. Sebi has also suggested increasing the anchor investor lock-in period from 30 to 90 days. It has also appealed that initial public offerings (IPOs) revenue is monitored.
The declared aim of IPOs such as Policy Bazaar, Zomato and Paytm was to support acquisitions and growth activities.
If the public offering proceeds are not used for a defined purpose, the Sebi aims to limit the final use of the money received. It seeks to encourage startups planning to go public to have clear end-use strategies, and this will aid in improved monitoring and investment protection.
Under present regulations, companies can utilise 25% of their IPO earnings for “general corporate purpose (GCP)”.
Sebi has set a combined maximum of 35 per cent of the new issue size for inorganic growth projects and GCP. If the businesses disclose further information about their plans while filing their offer papers, the cap will not apply.
The regulator is especially concerned about the massive drop in existing shareholders following the IPO. Individuals who possess more than 20% of a company’s shares but don’t know who the promoters are can sell up to half of their pre-IPO holdings. The rest will be locked in for at least six months after the public offering.
The measure, according to Sebi, is intended to give investors more skin in the game and boost investor reliance, particularly in the case of loss-making businesses.
Traditional factors such as main accounting ratios are currently revealed in an offer document’s ‘Basis of Issue Price. These accounting statistics include the company’s earnings per share (EPS), price to earnings, return on net worth, net asset value, and a comparison of such accounting ratios with its rivals.
In addition to publishing financial statistics as required by law, SEBI has suggested that the issuing should also provide key performance indicators (KPIs) that were considered or influenced the ‘Basis of Issue Price.’
During the three years leading up to the IPO, an issuer business should provide relevant KPIs and explain how these KPIs contribute to the ‘Basis of Issue Price.’
An issuer firm must also declare any material KPIs discussed with a pre-offering investor at any stage over the three years leading up to the IPO.
According to SEBI, these elements are often associated with profit-making businesses and do not apply to loss-making businesses. When determining whether or not to invest money in a loss-making company, these traits may not be useful to investors.
Edited by Prakriti Arora