Key performance indicators willhelp in valuingloss-making firms
With a large number of new age technology companies planning to get listed on the stock exchanges, SEBI has proposed to make it mandatory to list out key performance indicators (KPI) in addition to the financial ratios while making disclosures in ‘Basis of Issue Price’ sectionof the offer document.
Under existing rules, companies planning for an IPO arerequired to make disclosure of critical accountingratios includingearnings per share (EPS), price to earnings (P/E), return on net worth(RoNW), and net asset value (NAV) witha comparison of suchaccounting ratios with its peers i.e., companies of comparable size in the same industry.
Loss-making start-ups
“It is observed that the above parameters are typically descriptive of companies which are profit-making and do not relate to a company issuer that is loss-making.Thus, these parameters may not aid investors in taking investment decision w.r.t. loss-making issuers,” SEBI said in a consultation paper issued on Friday
This assumes significance in the light of a large number of start-upsfiling offer documents for IPOs. Most such companies do nothave atrack record of operating profit in preceding three years. “New age tech companies generally remain loss making for a longerperiod before achieving break-even as these companies in their growth phase opt for gaining scale over profits. Investors are on boarded on these companies on the premiseof future potential, and accordingly the company strives for long-term market leadershiprather than short-term profitability considerations. The growth in such businessescomes from expanding into new micro-markets and adding or acquiring newcustomers/companies/technology etc. Thus, profitability targets are longer term goals,” SEBI said in the paper.
Globally, IPOs follow a disclosure based regime and prohibit any future projections formarketing of the issue. Thus, basis of issue price is based on traditional parameters such as P/E ratio, NAV etc.; trends in KPIs over the past years; valuations done at the earlier rounds of fund raising; andmarket conditions.
In India, present requirement for the ‘Basis of Issue Price’ section in offer document coversonly disclosure of traditional parameters.
“It is obvious that disclosures in ‘Basis of Issue Price’ section, particularly for a loss-makingcompany, are required to be supplemented with non-traditional parameters like keyperformance indicators and disclosure of certain additional parameters such as valuation based on past transactions/fund raising by issuer company,” SEBI said.
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