More transparency is better

There are no two questions about that. Any move by the regulator that brings about greater transparency is better. The pricing of digital IPOs has obviously been a contentious issues, especially in the light of the sharp correction in these stocks from their peak prices. The fall in the price of these digital stocks was in the range of 30% to 60%. This raised serious questions about the way these IPOs were priced and sold to investors. 

Questioning valuation metrics

While transparency is a good idea, the more complex part will be questioning the valuation metrics, which is what the regulator is now trying to do. It has called for a detailed note on justifying the price of IPOs of new age companies with a detailed analysis and disclosure of the parameters that go into valuation. This is more so since most of these new age companies; or perhaps all of them, are loss making. It is tough to value loss making companies on traditional market parameters like P/E ratio, earnings yield etc. This is just part of the problem. The real problem is that SEBI wants the KPIs and non-financial parameters audited. 

It is dampening IPO funnel

Now comes the tougher part of this entire proposed legislation. Even before this legislation was announced, SEBI has been asking many of these new age companies to get its non-financial KPIs or key performance indicators audited and explained. SEBI wants to be clear how these parameters for digital plays like eyeballs, page views, GMV or gross merchandise value, downloads and customer footprint. SEBI wants these new age companies to explain how all these fancy parameters add up to the price. In fact, this has been one of the key reasons why so many of the digital IPOs approved by SEBI are yet to come out with their public issues. Investment bankers are suggesting caution here. 

Is this really feasible?

Let us put it this way. It is tough to justify valuations of digital plays, just as it is hard to justify steep valuations of FMCG plays like Nestle and HUL. One can argue about ROE and brands, but most digital plays are disruptive. Look at how Flipkart disrupted commerce or Byju’s disrupted learning or Paytm went about changing the payment ecosystem. These are hard to explain as it is based on the network effect. Today, many high quality digital plays are rethinking their IPO plans. Too much regulation will only export capital raising or drive these companies to the SPAC route. India cannot lose out on this market!