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Globally, the capital market has evolved and undergone tremendous changes with the Indian capital market being no exception. This stands particularly true in light of the stock market, where the market capitalisation of the Indian equities market alone was $3.21 trillion, making it the fifth-largest equity market in the world. This has been linked with the expansion of the Indian manufacturing and technology industry which have contributed 17.4%and 8% respectively to the country’s GDP in the previous two years. Early-stage start-up businesses are now more frequently incorporated and are going public via the conventional initial public offering (IPO) process. In response, 81 initial public offerings (IPOs) were made between 2020 and 2022, raising close to 1.52 lakh crore.

According to reports, the stocks of many new-age start-ups such as Zomato and Nykaa inter alia others spiralled to 49% and 46%, respectively, in comparison to their previous highs in the listing. Many companies that did not have a track-worthy record in their previous three years of business also opted for IPOs. This fall has been linked to the fact that most of these start-ups were ‘growth stocks’ and did not achieve market maturity in cash and business models. As a result, the SEBI proposed that the businesses justify their valuation during the IPO thereby increasing the transparency involved in the process.


The guidelines were proposed in light of the collapse of the four freshly listed equities and therefore to protect investors by increasing transparency. According to the current process, businesses only disclose their price to earnings (P/E), earnings per share (EPS), net assets value (NAV), return on net worth (RoNW) ratio, in addition to comparisons of these values with their competitors in the same sector. The SEBI, however, objected to this and said that disclosure of these parameters only is not enough, especially for new-age start-up businesses. It proposed the disclosure of Key Performance Indicators (KPI) of private equity firms and venture capital firms to help those investing, make a well-informed decision.

The KPIs are intended to include measurements like subscriber growth, market penetration through time, and anticipated future growth rate in addition to just being typical financial yardsticks for comparing a company to its peers. These criteria are also suggested to support their valuation, which would then be audited by a registered accountant or auditor for the company. Prior to being listed through an IPO route, SEBI also suggested that the companies disclose any correspondence they had with venture capital firms, angel investors, and private equity firms while they were raising money.

In order to determine if the company’s value is justified or not, the proposal suggests the listed entity compare its key performance indicators (KPIs) with those of comparable new-age start-up firms around the world. This comparison was suggested to be made before the company is listed. It also suggested that modern IT companies disclose and explain all pre-IPO investor presentations and provide a detailed explanation of how they set their share prices for IPOs. These growth stocks typically prioritise achieving scale and scope economies, and competitive supremacy in the marketplace as a method to accomplish growth, as recently witnessed in the example of Delhivery being listed. This calls for wise capital planning and investment decisions.

This proposal of SEBI was not well-received by the industry as it would stymie the company’s efforts to list themselves. Moreover, the disclosure of the additional parameters as proposed by the SEBI guidelines cannot be applied to loss-making companies as they are already running at a loss thereby leaving them with no other option but disclose KPIs. Valuation of these KPIs is done by the previous business transactions undertaken by the companies in the course of their business and is mostly internal and not verified by the businesses. The industry, however, would not support the act if these values had to be provided to SEBI because valuing these data is a time-consuming procedure. The expansion of the companies will be hampered which would prolong the already existing dry spell in the market should these regulations be strictly followed.


Although the proposal of these measures by SEBI is done in good faith, there are some loopholes that might lead to unintended consequences.

Firstly, it is a well-known fact that in contemporary times, bureaucrats and other such prominent figures attempt to influence the listing of such companies especially when public companies are supposed to be valued by their investors than being asked by regulatory authorities to explain their valuation.

Secondly, the rules shouldn’t be a barrier for privately owned businesses to either delay or completely abandon their desire to become public. In the recent case of Snapdeal and Pharmeasy, the draft red herring prospectus (DRHPs) of the companies was asked to provide additional information regarding KPIs, which caused major delays in their transfer from the private market to the public market where there is a significant emphasis on growth. An excessively high level of monitoring, this hampered the company’s eventual steady progression and transition.

Moreover, according to reports by NYU Stern, a public firm’s intrinsic worth cannot be determined objectively because the valuation of a company requires both, art and science. As a response to the proposed guidelines, NASSACOM suggested that the compliance to link KPIs with issue price can prove to be an onerous task for the firm without being of any significant help to the investor as KPIs are highly volatile due to factors such as technological advancement, change in management strategies in addition to other parameters. Should it still insist on the disclosure of KPIs, SEBI should mandate a proper set of guidelines which can help the investor take an informed decision. It also suggested that in order to thoroughly examine the viability of such a requirement, statutory auditors should be consulted before imposing the necessity for KPI auditing. If it is determined that the current framework for statutory auditors is ineffective, a new framework should be announced following proper industry input regarding the potential for developing KPIs for each sector. According to industry input, statutory auditors often don’t carry out any actions to authenticate or audit information supplied through KPIs. Moreover, NASSACOM said that in order to prevent bias, comparison of KPIs with competitors should be undertaken by third parties.


To conclude, the proposal has both, advantages and disadvantages, especially with regard to implementation. The proponents would contend that the restrictions and liabilities would force corporations to correctly value themselves according to macroeconomics and industry trends rather than unfairly valuing themselves at a premium for no apparent reason during the DRHP. Whereas, a critic would claim that the disclosure requirements regarding KPIs would, in reality, make the capital market less appealing for companies in their pursuit of additional funding through institutional and retail traction and would disproportionately target growth stocks while transferring valuation discretion from the companies and their accountants to bureaucrats. The author is of the opinion that excessive bureaucratic intervention in how markets function and how they are valued would be bad for a free-market economy as valuations are meant to be determined by market players rather than governmental or regulatory bodies. Having a public market where values are supported by other market participants rather than the company itself is better for all parties involved. It is also crucial to recognise that a company’s valuation is a dynamic, ever-evolving concept that takes into consideration a variety of market-based criteria and lacks an objective solution.

Author(s) Name: Ishita Warghat (National Law Institute University, Bhopal)