After Paytm fiasco, SEBI tightens IPO valuation scrutiny for startups eyeing listings

Last month, the Securities and Exchange Board of India (SEBI) flagging concerns in proposing stricter disclosures, said more and more new-age tech firms which “generally remain loss making for a longer period” were filing for IPOs, and traditional financial disclosures “may not aid investors.”

The IPO-bound firms are likely to face more scrutiny over business metrics used for valuations, Reuters has reported. The move has unsettled bankers and companies which fear delays in listing plans, the report said.

India’s push comes after the flop listing of SoftBank-backed payments firm Paytm’s $2.5 billion IPO in November which sparked criticism of lax oversight of how loss-making companies price issues at what some say are lofty valuations, sources with direct knowledge told Reuters.

Last month, the Securities and Exchange Board of India (SEBI) flagging concerns in proposing stricter disclosures, said more and more new-age tech firms which “generally remain loss making for a longer period” were filing for IPOs, and traditional financial disclosures “may not aid investors.”

But even before the proposal is finalised, SEBI has in recent weeks asked many companies to get their non-financial metrics -- KPIs, or key performance indicators -- audited, and then explain how they were used to arrive at an IPO's valuation, five banking and legal sources were quoted by Reuters.

Typically for a tech or app-based startup, KPIs could be figures like the number of downloads or average time spent on a platform -- metrics sources said are disclosed but difficult to audit or link to a company’s valuation.

SEBI is asking us to “justify the valuation,” one Indian lawyer was quoted by Reuters advising several companies eyeing IPOs, adding it was “creating uncertainty and increasing cost of compliance.”

Meanwhile, SEBI did not respond to a request for comment, said Reuters report.

Regulators in major markets including Hong Kong do follow practices that subject companies to tighter scrutiny about their business practices and financials, but they don't usually make granular checks on valuation metrics, the report added.