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Too many restrictions on new-age IPOs will kill the nascent segment

In the aftermath of the recent correction in a slew of digital IPOs, SEBI wants to make these companies disclose more. In the last few months, IPOs like Paytm, Nykaa, Policybazaar and Zomato lost more than 45% from their post IPO peaks. That is the crux of the problem.

5 mins read   |   19 - Feb - 2022   |  
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written by Bani Thakkar

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What prompted this idea?

There was a lot of euphoria in India when the first mega IPO of Zomato was launched. It was a huge success as seen by the subscription and by post listing performance. However, the stock fell more than 50% from its highs. It is just around its IPO price, but the regulator feels that damage to investor sentiment could be huge. That is correct because this trend was seen across digital IPOs like Zomato, CarTrade, Nykaa, Paytm and Policybazaar. What was the trigger? In a way, it was about expectations. For instance, investors expected that most of the stock would have a runaway rally post listing. Many of the stocks were expected to show turnaround profits in a quarter, which was impractical in the first place. Investors believe that with so many marquee institutional investors, there would be price support. However, most of these stocks fell vertically. In the middle of all this chaos, a series of price downgrades only worsened the scene for the IPO investors. The result was an absolute carnage in most of the recently listed IPOs resulting in losses for investors and a jolt to confidence. 

SEBI enters the fray

SEBI chairperson, Ashok Tyagi, recently indicated that there was the need for tighter regulation. For instance, SEBI has suggested that new age IPOs which are making losses should make much more comprehensive disclosures and also reveal most of the key performance indicators (KPIs) that are relevant. SEBI has gone to the extent of saying that all the disclosures that these digital names have made to venture capitalists and PE investors should be made in the IPO prospectus too. Greater transparency is always a good idea, but the challenge is about understanding risk. That is where most investors faltered in these IPOs. 

Guide investors on risk

The recent spate of IPO listings and the sharp fall has made a lot of investors wary of new age IPO. But it also made many new age issuers wary, if you look at the number of companies that are putting off their IPOs. Many of the big digital names, yet to firm up IPO plans, are putting off the idea for now. The market reaction has been bad and too much regulation will only worsen it. The experience of other markets has been that too much regulation does not work in such sectors. Such businesses are bets on macro and technology trends and it is hard to give linear estimates. The best method is to guide investors about the risk and the need to limit the allocation and also their expectations.