SEBI chief warns investment bankers on new-age cos’ valuation – The Hindu BusinessLine

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Merchant bankers must follow rules in letter & spirit: Tyagi

With retail investors burning their fingers in the Paytm IPO, SEBI Chairman Ajay Tyagi today warned investment bankers on valuations of new-age tech companies.

Sources told BusinessLine that the SEBI chairman was upset that retail investors had suffered losses on the listing of Paytm shares in November. Most tech companies were start-ups raising money based on future acquisition plans but were actually giving an exit opportunity to private investors invested ahead of the IPO.

Listing losses

The share price of Paytm, India’s largest IPO so far, crashed nearly 50 per cent from the IPO price in just two days of listing. It brought back memories of the 2008 Reliance Power IPO in which retail investors lost heavily as the stock listed at 50 per cent discount to the issue price.

Paytm IPO had had a huge following especially as it came on the heels of the IPO of fashion accessory seller Nykaa, another tech company that enjoyed unprecedented price-to-earnings multiple post listing.

Zomato and PolicyBazaar were the other tech companies that went public this year with lofty valuations. Over ₹90,000 crore has been raised by companies via IPOs, which had also disturbed secondary market liquidity, analysts said.

Tyagi’s warning came at a conference organised by the Association of Investment Bankers of India (AIBI).

‘Explain basis of issue price’

“Companies, especially new-age technology firms, should clarify the basis of their issue price in their IPO documents to help maintain the trust of investors. It is incumbent upon the merchant banker community to not only follow the regulations in letter but also in spirit. Needless to say, SEBI will not shy away from taking action if it finds any intermediary not adhering to its mandate,” Tyagi said.

Tyagi said that it was an opportune time for AIBI to reflect upon and review their standards of due diligence and also their issue management services since primary market offerings of new-age companies have various issues such as non-traditional business models and valuation-related fears.

“Typically, new-age tech companies are loss-making at the time of listing and the extant regulatory framework acknowledges that. Going forward, based on experience gained and stakeholders’ feedback, there would be learnings and the need for appropriate tweaking of regulations,” Tyagi said.

Fund-use norms

SEBI had come out with a consultation paper in November, proposing a cap on IPO proceeds earmarked for making unidentified future acquisitions and monitoring funds reserved for “general corporate purposes”.

Also, the regulator had suggested certain conditions for offer-for-sale by significant shareholders.

Tyagi said the regulator would soon take a view on the issues raised in the paper.

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