JK Files & Engineering Ltd and Elin Electronics Ltd, both situated in Delhi, have received clearance from the Securities Exchange Board of India (SEBI) to undertake initial public offerings (IPOs).
JK Files & Engineering, which is backed by Raymond, submitted draft papers in December to seek Rs 800 crore via an initial public offering (IPO) by Raymond Ltd, which has a 100 percent ownership in the company.
In November, Elin Electronics Ltd submitted draft documents to raise Rs 760 crore. The IPO would consist of new issuance of shares worth Rs 175 crore and a promoter and shareholder offer for sale of up to Rs 585 crore.
The company would pay off its debt with Rs 80 crore. It has a net debt of 127.51 crore as of September 2021. Elin Electronics would also invest Rs 48.97 crore in Uttar Pradesh, Ghaziabad and Goa, to modernize and expand its facilities.
The company is one of India’s biggest fractional horsepower motor manufacturers and a leading electronics manufacturing services supplier of end-to-end product solutions for major brands of appliances.
SEBI’s new IPO norms: A window into the performance and potential of start-ups
Following an expected rise in US Federal Reserve interest rates, foreign-portfolio-driven outflows, and the continuing Russia-Ukraine crisis, the previous few weeks have been defined by enormous market volatility and corrections. In the wake of the much-anticipated IPOs of new-age technology businesses, mounting investor worries and skepticism about their profitability have prompted SEBI to examine the current IPO price standards and give a more realistic perspective of such companies’ prospects.
In this context, SEBI issued a consultation paper in February proposing that new-age technology businesses be required to provide more disclosures and aim for more openness. The goal isn’t to go back to a merit-based system as in 1988 when a bureaucrat decided on an IPO’s price and size, but to enhance the quality of disclosures so that investors can make better decisions.
The SEBI Regulations, 2018 now require corporations to provide metrics that serve as a “base of issue pricing,” such as earnings per share, price to earnings, return on net worth, and net asset value, as well as a comparison of such accounting ratios with peers. Traditional metrics, on the other hand, are usually appropriate to profit-making enterprises and are insufficient performance indicators for new-age technology companies, according to Sebi.
The regulator understands that such businesses are predominantly loss-making for a longer length of time before they break even since they often prioritize scale above profits. As a result, comparing them to the well-established industries is difficult and improper for ordinary investors. In reality, practically all technological start-up IPO filings over the last year have seen greater IPO valuations than in the pre-IPO period, only to trade substantially below their issue price post-listing.
According to the proposed rules in the consultation paper, which are based on SEBI’s Primary Market Advisory Committee’s recommendations, existing “basis of issue price” metrics should be supplemented by disclosure of non-traditional parameters and any other key performance indicators shared with pre-IPO investors at any point during the three years leading up to the IPO, to justify the pricing of its shares in the IPO. These corporations would also have to explain how these KPIs affect the issue price in detail.
The KPIs would also have to be validated by a statutory auditor to provide greater credibility to such disclosures and verify that the KPIs revealed in the offer materials are not deceptive. Companies will also have to compare their KPIs to those of their listed competitors in India and abroad.
Furthermore, if enacted, the proposed regulations would force corporations to declare the value of their shares previously acquired or sold in secondary markets for a period of 18 months prior to submitting offer paperwork with SEBI. In this context, the consultation paper suggests that both main issuance and secondary transactions disclose their weighted average cost of purchase. Issuers would also have to explain why the offer price is (x) times the price of the initial issue or secondary transaction.
The aforementioned ideas would provide investors a clear picture of the company’s previous performance as well as its potential to meet projected targets. This would also remove any possible unjust IPO values, particularly in light of recent reports of sky-high valuations for certain start-ups.
Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.