The chairman of the Securities and Exchange Board of India (Sebi) said internet-based start-ups that were entering the capital markets needed to make better disclosure on valuations as many of them were loss-making.

“Pricing is a critical issue and perhaps more explanation of the basis of pricing in the (offer) document may be a good idea, especially for the new tech companies which are typically loss making,” Tyagi said.

“These companies have their own ecosystem and capital structure. So, in terms of educating the investor on pricing, some more documentation may be helpful in maintaining the trust.” He was speaking at an event of the Association of Investment Bankers of India.

Several start-ups including Paytm, Zomato, Cartrade, Nykaa and Policybaazar were listed on the bourses this year, with many more in the pipeline.

Paytm, one of the most awaited IPOs of the year, witnessed a lacklustre listing and continues to trade below its issue price of Rs 2,150 per share.

The Sebi chairman’s observations gain importance as several analysts are concerned over the valuation of these tech companies and expensive issue prices.

With India adding more unicorns in its fold in 2021, over the next few years, the number of listings are expected to go up.

Utilisation of proceeds

Tyagi said Sebi would not interfere in the valuation process but planed to effectively monitor the utilisation of IPO proceeds.

A consultation paper has been issued by the regulator in November on the use of funds , including for inorganic expansion.

The Sebi chairman also listed out the responsibility of merchant bankers that includes protecting the interest of investors, conducting business with fairness and integrity and ensuring true disclosures to investors so that they are made aware of the attendant risks before taking decisions.

“It is incumbent upon the merchant banker community to not only follow the regulations in letter but also in spirit. It may be an opportune time for AIBI to reflect upon and review the standards of due diligence adopted by merchant bankers in various issue management activities offered by them,” Tyagi said.

The ongoing fiscal year has been a bumper year for the IPO markets with 76 initial share-sales raising more than Rs 90,000 crore till November.

The participation from retail investors in equity IPOs has also increased with the number of applications totalling 5.43 crore till November against 3.8 crore in the previous year.