One of the hot topics of March 2022 is why the IPO of new generation companies falling drastically. Before jumping to the reason let us first get acknowledged with the term IPO. Initial Public Offering, in short termed as IPO, is the process of offering shares to the public of the private company to make the company public in a new stock exchange. The companies sell their shares to the public to collect fund to run the company and the people who buy those shares are known as shareholders of the company.
Reason for the decline in IPO:
IPO and stock market have been on a rise since before Covid pandemic. The companies such as Paytm, Zomato, LIC, Nykaa, Bajaj energy, etc. which recently started their IPOs in the market have already been on a decline because of the new proposal SEBI put forward. SEBI i.e., Securities and Exchange Board of India, has suggested to tighten the IPO pricing rules for the new-age tech firms. It plans to ask the companies to justify the pricing of their shares in IPOs.
SEBI issued a draft proposal containing the following points:
i. Companies from now on will be asked to explain in detail about the pricing of their issues.
ii. They will also be asked to compare the issues with the sales before the IPO.
iii. Disclosing the presentation made to the investors before IPO. This will help the investors gain a detailed information about the company.
This follows the meltdown of the share prices of the newly listed firms. SEBI expected the public to give their opinion about the new issue by 5th march 2022 and set the deadline as the same.
Why SEBI did that:
Before launching the IPO of any company in the market, the companies have to go through many procedures and submit a lot of documents to SEBI that regulates the entire process of investments through IPO. According to the on-going IPO rules, the companies have to disclose net asset value (NAV) of the past and the present year, return on net worth (RoNW), earning per share (ESP), etc.
In spite of all this data collected, SEBI thinks that these are not enough for the new-age firms as they are usually a loss-making entity. Without having a proper record of profit for at least three years some companies have launched their IPOs and are now on discounted level. Happening of such things should be stopped is the sole purpose why SEBI proposed such a rule in IPO. The new proposal will ask the companies to show the key performer indicator (KPI) and only if the KPIs are certified by the auditors, investors and the issuers, SEBI will consider the company for the stock market.
Impact on the new firms:
Six of the eight new firms listed on the Indian bourses in 2021 hit new lows, ending about 53% of their market capital on average. Seven of the companies saw their shares decline by at least 49% from their respective peaks. The worst performers were the automobile classified website, Car Trade, and digital payment platform, Paytm.
Car Trade lost more than 70% from its 52-week high of Rs.1,610. The stock sold at Rs.1,585 in IPO ended up trading at Rs.470. Paytm, which launched the largest ever IPO in India, lost more than 64% of its investor money from the IPO price of Rs.2,150. Its shares are now even 60% below its 52-week high of Rs.1,961. Other firms that have eroded more than 50% of their shareholder value were FINO payment, Policy Bazaar’s parent company PB fintech and food delivery company Zomato.
Relatively better-performing stocks in their starting age such e-commerce Nykaa,
gaming firm Nazara Technologies and hospitality start-up Easemytrip, were also under a lot of pressure from their shareholders. Nykaa’s shareholders have witnessed a 49% slide in their investment. The best performer among the new-age tech stocks listed in 2021 and 2022, Easemytrip, has also seen a decline in their shareholders value.
Future of the new-age firms:
Portfolio advisors, retail investors, etc. have already stated that the fall in the IPO pricing of the new-age tech firms is just the beginning and it will continue to decline in the coming period. They believe that the dropping of new-age businesses will be 50% to 60% this year. But there are some tech stocks where the growth of the company in the future is visible and the investors can consider investing in the second half of 2022.
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