New SEBI rules to make vetting IPOs easier: What you need to know

New SEBI rules will mandate IPO issuing companies to disclose data about price per share and funds raised before the IPO to help investors make better investment decisions. The companies also get a concession: their Draft Red Herring Prospectus (DRHP) on SEBI's website will now be private and confidential, unlike earlier when DRHPs were public.

Initial Public Offerings (IPOs) generally provide investors with an opportunity to earn returns, but they are also associated with a high levels of risk. Recently, the Securities and Exchange Board of India (SEBI) approved amendments to a wide range of IPO issues. As reported in the Financial Express,  the revised rules require companies applying for an IPO to:

1. Disclose price per share: When a company's operations are running in losses and these loss-making companies apply for an IPO funding, it is difficult to evaluate these companies based on their audited financial statements since loss-making companies cannot disclose an Earning Per Share (EPS). Thus SEBI has mandated companies that apply for IPO to disclose the price per share in previous rounds of capital raising so that investors are better able to evaluate the IPO price. 

2. Disclose funds raised over the past 3 years: Companies will also have to disclose the quantum of funds raised by these companies in initial funding rounds. An independent board of directors now also has to make recommendations regarding the IPO price.

3. Concessions regarding the pre-filing of offer documents: At the moment, SEBI hosts the draft red herring prospectus (DRHP) on its website for several weeks, which gives an unfair advantage to the issuer’s competitors. But as per the revised rules, companies can now pre-file their offer documents with SEBI and keep them private. Since this data would be confidential between the IPO issuing company and the exchange, it will benefit the company if the IPO offer is rejected or delayed by the SEBI. 

How will this help investors? 

1. Everyone will have requisite information: The information available to institutional investors will be available to all investors, including retail investors.
2. Valuations make better sense: When companies provide a historic comparison of valuations or EPS, IPO managers can be held accountable to explain unrealistic valuations. This brings better transparency regarding the IPO pricing and investors can decide better on investing in an IPO.
3. Better cost-benefit understanding: When companies disclose the historic data about the ratio of their IPO price band to the weighted average costs of shares in the prospectus, the investors will have a more comprehensive understanding of the pricing.
4. Addresses regulatory gaps: IPOs of startups like Paytm, Zomato, and Policy bazaar, have caused investors huge losses since their share price today is much lower than their listing price. This new amendment in regulation is expected to help investors in making better investment decisions when it comes to investing in loss-making startups with negative cash flows but still want to get listed.

To conclude, this move is expected to bring more post-IPO price stability and control the volatility in stock prices to increase transparency and boost investors’ confidence.