• SEBI Chairman Ajay Tyagi has said there is a need for study to identifying key performance indicators (KPIs) and building valuation models for New Age Technology Companies (NATC) companies.
• SEBI has issued consultation paper requiring NATC to disclose the key performance indicators (KPIs) of the business, based on which Issuer Company has priced the issue.
• Paper puts onus on the Auditor for certification of the KPIs

One of the major difficulties facing today’s capital markets is the growing tendency of New Age Technology Companies (NATCs) accessing public markets. Many of the Neg age fintech companies like Paytm, Zomato, Nykaa are trading at half of their peak valuation. Many of the retail investors have burned their hard-earned money in these companies.

This has attracted SEBI’s attention on frothy pricing related to these issues. Speaking at the opening session of the third SEBI-NISM Research Conference, SEBI Chairman Ajay Tyagi said there is a need for study to identifying key performance indicators (KPIs) and building valuation models for NATC companies. Mr Tyagi explained that the valuation of such NATCs is often decided based on other considerations such as trends in key KPIs and their comparison to peers, valuation in previous investment rounds, and market conditions.

SEBI has recently issued a consultation on IPO pricing for loss-making companies in order to incorporate recent lessons learned from the meltdown of fintech/consumer tech companies, which has harmed investors tremendously.

There has been an uptick in the filing of offer documents by New Age Technology Companies (NATC) companies. These Companies have not had an operating profit in the previous three years. These are growth-oriented companies focusing on capturing market and prefer growth over profit. The unit economics are not viable as capturing the market remains the prime concern for these fin tech or consumer tech companies.

SEBI Consultation paper touches some very significant issues concerning the valuation of these companies. It requires that the Issuer Company has to disclose the key performance indicators (KPIs) of the business, based on which Issuer Company has priced the issue.

KPIs should not be misleading. Issuer company has to explain how KPIs contribute to form the basis for issue price and also the details of the material KPIs made before the pre-IPO Investors during the three years prior to the IPO. Issuer Company will have the obligation for consistently and precisely defining the KPI’s. SEBI is also putting onus on the Auditor for certification of the KPIs and comparison of such KPIs with Indian/global listed peer companies.

Auditor is generally unfamiliar with the business environment in which New Age Technology Companies company operates. Each company is different in its business construct and have different KPI’s. Some of these are pure play platform play, some are SaaS oriented, some are online distributor etc. Each New Age Tech Company is different from other and this space is evolving hence there is no defined rules for auditing the KPI’s. Further there can be question of independence as financial figures are attested by the Auditor. So, Auditing Financial Information as well as Auditing KPI’s related to business can have a bearing on the independence of the Auditor. SEBI may also increase the role of bankers, merchant bankers and professional valuers by seeking their services for KPI’s validation as some of the market participant has better understanding about the business and ecosystem.

Given the recent history of loss of money by retail investors in the newly listed tech enabled business, it becomes significant that SEBI undertake some step to weed out the element of frothy valuation. Building rigor on disclosure of KPI’s by these New Age Technology Companies will strengthen the market in the long term but some of the parts outlined by the consultation paper may be difficult to implement.

Bureau Galactik Views