News and developments
SEBI, Start-ups & Valuation for IPOs: Part I OF III
India’s market regulator Securities and Exchange Board of India (SEBI) has been on a spree to determine the factors based on which the private equity (PE)/ venture capital (VC) houses fund start-ups’ in India. At a time, when India has been recognised to hold the highest rate of recognising start-ups per day, the recent actions of the market regulator were quite unprecedented but not entirely surprising.
Apart from PE/VC funds, SEBI is also said to have made up its mind to fortify disclosure norms for Indian start-up IPO[1]. This comes at a time when India is being acknowledged to offer one of the best ecosystems for start-ups.[2]
SEBI claims to take such scrutinising steps only after receiving a series of complaints from several investors and recent reports of opaque accounting of unicorns came into the light.
According to an Economic Times article[3], many start-ups have been alleged of indulging in propped-up valuation acts. Propped-up valuation means providing a rosy or illusionary picture of the portfolio to a fund’s investors which in consequence paves the way for the fund manager to attract more money from new as well as old investors in the next round of fund-raising. The market watchdog on September 6th asked a significant number of funds to disclose their valuation practice and share other requisite details. SEBI sought details such as the qualification of the valuer, the designation of the valuer hired or if there has been a significant change in the valuation methodology in the past three years.
SEBI claims that the current radar on the fund-raising ecosystem would ensure consistency in the way valuations are carried out. It would further enhance transparency in this entire market practice and would act in investors' interest. Going by the facts, SEBI stated that there are more than 900 Private Equity and Venture Capital funds in India in which many High Net-worth Individuals[4], famously known as HNIs, have been investing. The market regulators' other contentions consist of artificially boosted NAVs[5] misleading existing and potential or new investors.
The list of queries by the market regulator does not end here. According to the recent SEBI directive, the funds are required to share the following details as well:
Authored by: Mr Anuroop Omkar, Partner
- Date of latest valuation;
- Cost of cumulative investments made;
- Latest valuation of the investment portfolio;
- Whether the valuation is done by an independent or internal valuer;
- If an additional valuation exercise was carried out during the financial year;
- Details of valuation methodology;
- If there were any deviations from the said methodology &
- Whether the scheme has a valuation committee.
Authored by: Mr Anuroop Omkar, Partner