IPO of New Age Companies

GOVERNANCE/ ECONOMY

• GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation. 
• GS-3: Indian Economy & its Challenges

IPO of New Age Companies

Context: The stock market regulator, SEBI is trying to improve the disclosures made by new age technology companies approaching the primary market for listing.

Issues with the new age technology companies

• The digital companies tend to give precedence to growth over profitability and, therefore, are mostly loss-making when they approach primary markets.
• Traditional accounting ratios mandated to be disclosed by the SEBI’s such as earnings per share, price to earning ratio and return on net worth of the company are not applicable to these loss-making companies and do not help investors in their decision-making process.
• The new age digital companies use different metrics such as app downloads, website registrations and traffic, subscribers, and so on, to project growth while valuing their shares. 
• It would be difficult for SEBI to list all these metrics for disclosure.
• Investors who picked up the Zomato, Nykaa and Paytm (One97 Communications) IPOs suffered heavy losses during the stock market correction.
• Investors blame irrational valuations for these losses and SEBI seeks to tighten IPO-pricing rules for new-age technology companies.

What are the suggestions to improve the listing of New age companies?

• An option would be to ask these companies to share in the offer document the key performance indicators shared with investors in the pre-IPO funding rounds. 
• Mandating that these metrics be certified by an independent chartered accountant will lend more credibility to the numbers. 
• A three year look-back period for these disclosures appears enough since many of the companies are likely to be start-ups with limited history. 
• It is imperative that the key performance indicators of the issuer are compared with global peers listed overseas since domestic listed companies in the digital technologies segment are few. 
• The weighted average cost of acquisition of shares issued or allotted in the pre-IPO period can be disclosed in the prospectus as it will alert investors regarding allotment to related parties or companies prior to the issue.

Connecting the dots:

• E-Commerce Regulation

•  New IT rules
• Social Media Concerns

• Dominance of Big tech
• Australia’s News Media Bargaining Code