1. INTRODUCTION
In our last update in October this year on the Securities Exchange Board of India ('SEBI') press release1 dated September 30, 2022 ("September PR"), we wrote about critical regulatory changes on (i) disclosure of additional information for basis of valuation in an Initial Public Offer ("IPO"), (ii) introduction of confidential pre-filing of draft offer documents in an IPO; and (iii) monitoring of use of proceeds raised through a preferential issue and Qualified Institutions Placement ("QIP"), among others approved changes. On November 21, 2022, SEBI notified the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2022 ("November Amendment") formalizing these changes. In this note, we examine the feasibility of the amendments, and potential challenges that issuers and merchant bankers are likely to face in implementing them. Although the November Amendment introduces numerous other changes, in this note, we restrict our analysis to these three topics mentioned above.
2. NEW RULES FOR VALUATION
After a year of discussions on valuations, we now see institutional implementation of certain measures by SEBI to bring transparency in IPO pricing.
2.1 New on valuation
The November Amendment has introduced the following key changes to the disclosures on the 'Basis of Issue Price' section in the offer documents:
| 2.1.1 | KPI disclosures: Issuers must, in their IPO offer documents, disclose all Key Performance Indicators ("KPIs") that have been disclosed by it to its investors in the last three years, along with explanation on how they have been historically used to analyse, track, and monitor performance. Issuers may, in consultation with the merchant bankers, also choose to disclose additional KPIs. All KPIs must be disclosed for the same periods as the financial statements included in the offer document. |
| 2.1.2 | Comfort on the KPIs and valuation: The November Amendment seeks to ensure completeness and accuracy of these KPI disclosures in two ways: (i) confirmation by the audit committee that all KPIs presented to the investors in the last three years have been disclosed in the offer documents and that such KPIs are verified and 'audited'; and (ii) certification of KPIs by statutory auditor, or peer reviewed chartered accountants or peer reviewed cost accountants. |
| 2.1.3 | Peer comparison: KPIs disclosed in the "Basis of Offer Price" section have to be compared with Indian and global listed peers (wherever available), with explanations where comparison is not possible. |
| 2.1.4 | Continuing obligations: After listing, issuers must at least annually disclose updates to KPIs disclosed in the "Basis of Offer Price" section, till the later of (a) one year from listing date or (b) full utilization of the IPO proceeds, with explanations for changes. |
| 2.1.5 | Share acquisition data: Issuers must disclose the price per share in primary and secondary transactions during the last 18 months where transaction size is five percent (5%) or more of the diluted share capital of the issuer, either individually or in aggregate with other transactions over 30 days, and calculation of the weighted average cost of acquisition ("WACA") of this data with comparison to IPO floor and cap price. Secondary transactions in this context are limited to transactions by promoters, promoter group, selling shareholders or shareholders with board nomination rights. In case no transaction qualifies for this, the price per share of the last five primary or secondary transactions within the last three years, regardless of size, shall be disclosed, along with a comparison of their WACA to the IPO price band |
| 2.1.6 | Price band recommendation: The price band advertisement is required to include a recommendation from a committee of independent directors of the issuer stating that the price band is justified. |
2.2 What do we think?
SEBI had released a consultation paper in February 2022 on the 'Disclosures for 'Basis of Issue Price' section in offer document under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018' ("SEBI KPI Paper") that laid a background for these disclosures, i.e., the sufficiency of the existing disclosure requirements in case of new age technology companies ("NATCs") or companies without a strong financial track record. Historically, the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("ICDR Regulations") prescribed disclosure of critical accounting ratios, i.e., earnings per share, price to earnings, return on net worth, and net asset value, along with a comparison of such ratios with comparable industry peers of the issuer. Though these factors are relevant for companies with strong financial track record, for NATCs these parameters for 'basis for issue price' seemed to fall short. For their private placements, NATCs do rely on unconventional KPIs to give potential investors an idea of their prospective growth opportunities. Therefore, the need for additional disclosures in the "Basis of Issue Price" section, for NATCs or companies without a strong financial track record was well understood. However, despite the background set in the SEBI KPI Paper, in an attempt to standardize disclosures with global standards, the November Amendment has applied these requirements to all issuers, including those with strong historic financials.
To view the full article click here
Footnote
1. SEBI Press Release no. 29/2022 dated September 30, 2022
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
