Sebi's New Strict IPO Valuation Scrutiny Jolts Start-Ups Eyeing Listing, Says Report

New Delhi: The Securities and Exchange Board of India (Sebi) has strengthened scrutiny of IPO-bound companies by questioning how key internal business metrics are used to arrive at valuations.

This new process of checks and balances has unsettled some bankers and companies which now fear delays in listing plans, as sources have told Reuters.

It is said that after Paytm debacle, the regulator has come up with stricter norms. The decision by the Sebi hints at the flop listing of online payments firm Paytm’s $2.5-billion IPO in November last year which sparked criticism of lax oversight of how loss-making firms price issues at what some say are lofty valuations, according to the Reuters report.

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Last month, the market regulator flagged concerns in proposing stricter disclosures, saying 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, the 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 said.

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.

According to a lawyer, the regulator is asking us to “justify the valuation”, adding it was "creating uncertainty and increasing cost of compliance."

The Sebi, however, did not respond to a request for comment.

Regulators in major global 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.

One document from February containing Sebi’s remarks to an IPO-bound firm asked for “explanation regarding how KPIs form basis” for arriving at the IPO issue price, adding they should be "certified by a statutory auditor."

Digital healthcare platform PharmEasy, which had filed papers for a $818 million IPO in November, is one such company which was hit by scrutiny. One source with direct knowledge said the company raised concerns with the Sebi about auditing and supplying such details, and is likely to get some relaxations. PharmEasy also didn't respond to a request for comment.