Sebi chief Ajay Tyagi on Thursday said the increasing trend of new age technology companies, which are generally loss making, accessing public market is a key challenge to the capital markets.
In addition, the flourishing landscape of ESG (environment, social, governance) investments is another major challenge to the capital markets due to absence of uniform ESG evaluation matrices, he said.
Also, the regulator is in the process of notifying the detailed modalities for the proposed Social Stock Exchange, a platform for listing social enterprises and voluntary organisations so that they can raise capital.
Tyagi made these remarks at a SEBI-NISM Research Conference on ‘Investing in recovery: challenges and opportunities for Indian securities markets’.
In the current financial year, new age tech companies (NATCs) have raised about Rs 43,283 crore through IPOs till date. Out of these, no less than 85 per cent of the issuer companies were backed by private equity investors and all of such issues also had an offer for sale (OFS) component.
“Appropriateness of valuation of these companies is a matter of intense debate among stakeholders these days,” Tyagi said.
At the time of accessing the capital markets, these companies are generally loss making as they prefer gaining scale over profits in their growth phase, he added.
The traditional parameters required to be disclosed in an offer document, like the financial ratios, are typically descriptive of profit-making companies.
Globally, valuation of such NATCs is generally determined on the basis of additional factors — trends in Key Performance Indicators (KPIs) and their comparison with peers, valuation at earlier funding rounds, market conditions etc.
“Disclosure of additional parameters will aid investors in making investment decisions in NATCs,” the Sebi chairman said.
The regulator recently came out with a public consultation paper on strengthening the disclosure requirements in offer documents so as to ensure that the rationale adopted by issuers for valuation is transparently known to the market and investors are able to take more informed investment decisions.
Research on identifying material KPIs and developing valuation models for NATCs could be very useful, he added.
Speaking about ESG, Tyagi said a universally accepted matrix for ESG norms is still a work in progress.
“Despite the absence of uniform ESG evaluation matrices, vast amounts of funds are being raised by professional fund managers and corporations to invest in projects and initiatives that purportedly are ESG compliant,” he added.
With regard to ESG rating and data providers, Tyagi said as of now, the ESG rating space in India is unregulated, and the rating methodologies are often not transparent.
Further, ESG ratings or scores of a company may vary significantly across different rating providers as they use varied evaluation matrices, he said.
Considering the significance of ESG ratings in the investment ecosystem, Sebi recently came out with a consultation paper on ESG rating providers.
Tyagi said Sebi will take a view in this regard after evaluating all stakeholders’ inputs.
“A lot more work is required before we can put in place a comprehensive framework that deals with all aspects of ESG and related issues,” he noted.
In the listed space, Sebi has attempted to provide a uniform standard for disclosures that have a bearing on ESG evaluation by prescribing the Business Responsibility and Sustainability Report (BRSR) in May 2021.
BRSR requires listed companies to make disclosures related to nine principles covering both environment and social aspects, such as climate action, responsible consumption and production, gender equality, and working conditions.
The BRSR is applicable to top 1,000 listed entities by capitalisation, for reporting on a voluntary basis for 2021-22 and on mandatory basis from 2022-23 onwards.