ipo: private equity financing details for information on IPO prices

The Securities and Exchange Board of India’s (Sebi) decision to tighten disclosure standards for IPO-bound companies makes sense. More transparency will enable retail investors to make informed pricing decisions. There have been concerns that traditional financial disclosures are not appropriate for many new-age technology companies, which generally make losses over long periods of time.

The recent sharp correction in some stocks’ prices after their listing hurt retail investors and prompted Sebis to take action. The new IPO norms require all companies to disclose details about the pricing of their shares in previous fundraising by private equity (PE) investors. This conveys a more realistic picture of the company valuation. A drastic difference in the pricing of a pre-IPO stock sale and IPO prices should be a red flag for investors.

Retail Investors provide an exit for private equity investors investing up to a certain scale and give startups credibility in delivering products and services. Disclosing the price at which private equity investors closed the deal is not unreasonable.

Companies are required to disclose price per share based on new share issuance and secondary sales or acquisitions during the 18 months prior to the IPO. If there have been no transactions in the 18 months prior to the IPO, price per share information must be disclosed based on the last five primary or secondary transactions not older than three years prior to the IPO. Independent directors would have to recommend that the price range is justified based on quantitative factors. Compliance costs could increase.

Allowing confidential pre-submission of bid documents as an alternative mechanism is welcomed. It allows issuers to conduct limited interactions without having to disclose sensitive information. The intention to maintain the confidentiality of nuanced business and financial information from competitors until an issuer is certain of going to market is solid. Overall, the changes to the regulatory framework for IPOs aim to balance the interests of IPOs and investors.