“India tightens scrutiny of IPO valuation, shakes up startups eyeing listings”

Push comes after Paytm’s IPO debacle; Tighter scrutiny worries bankers, lawyers and businesses

India has tightened scrutiny of IPO-bound companies by questioning how key internal business metrics are used to arrive at valuations, unnerving bankers and companies fearing delays in IPO plans, sources with direct knowledge told Reuters.

India’s push comes after the flop of SoftBank-backed payments firm Paytm’s $2.5 billion IPO in November, which sparked criticism of lax oversight over how loss-making companies assess issues at high valuations.

The Securities and Exchange Board of India (SEBI) last month expressed concerns about proposing stricter disclosures, saying a growing number of new-age tech companies that “generally make losses over an extended period of time” are filing for IPOs, and traditional financial disclosures “can’t help investors.”

But even before the proposal is finalized, SEBI has in recent weeks asked many companies to have their non-financial metrics — KPIs, or Key Performance Indicators — audited and then explain how they were used to arrive at an IPO valuation, five banking and legal sources said.

Typically for a tech or app-based startup, KPIs can be numbers like the number of downloads or the average time spent on a platform — metric sources that are said to be disclosed but difficult to audit or assess of a company are to be linked.

SEBI is asking us to “justify the valuation,” said an Indian lawyer who has advised several companies eyeing IPOs, adding that it “creates uncertainty and increases compliance costs.”

SEBI did not respond to a request for comment.

Regulators in key markets, including Hong Kong, follow practices that subject companies to more rigorous scrutiny of their business practices and financial data, but they don’t typically conduct detailed reviews of valuation metrics.

A February document containing SEBI’s comments to an Indian IPO-linked company, viewed by Reuters, asked for “an explanation of how KPIs form the basis” for determining the IPO issue price, adding that they ” should be certified by an auditor”.

Indian digital health platform PharmEasy, which filed papers for an $818 million IPO in November, is one company hit by one such scrutiny: A source with direct knowledge said the company has concerns at SEBI over of examining and providing such details and is also likely to get some relaxation. PharmEasy did not respond to a request for comment.

It is not clear whether the additional information requested by SEBI would be shared with potential investors.

Pranav Pai, founding partner of Indian VC firm 3one4 Capital, said SEBI does not set valuation limits and only provides “equal information” between profitable and loss-making companies targeting IPOs.

“SEBI isn’t asking for anything out of the ordinary,” Pai said.


The closer scrutiny comes as India’s startups and other companies have become darlings of foreign investors and are increasingly entering the markets.

Over the past year, more than 60 companies — including high-profile tech firms — made their market debut and raised more than $13.5 billion, with many still in the pipeline, like ride-sharing company Ola and hotel aggregator Oyo.

However, the listing on Paytm raised concerns about valuations. After tanking on trading day, shares of the Indian payments firm are currently trading 64% below their issue price, and some fund managers had said the episode would “hopefully bring some realism to valuations”.

The concerns are widespread among bankers, lawyers and companies as the scrutiny is ongoing, although SEBI’s proposal on whether or not to enforce such KPI-related disclosures was open to public comment until March 5, the three added sources added.

The proposal said key balance sheet metrics like price-to-earnings ratios weren’t enough to evaluate the businesses of loss-making companies, adding that SEBI wants to have an audit and disclosure of all “key KPIs” that it has shared with investors for three years prior to the IPO would be shared.

“Many investors, founders and commercial banks have reservations about SEBI’s proposal,” said Vivek Gupta, national head of mergers and acquisitions at KPMG in India.

According to sources, investment bankers from Bank of America and Kotak Mahindra of India have expressed concerns to SEBI about such a planned scrutiny of IPOs. They declined to comment.

An executive at an Indian start-up planning an IPO said his company was concerned.

“This will further encourage future generations of startups to incorporate outside of India so that they can easily be listed abroad.”

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