Tech IPO booms: analysis of value drivers and regulations

Abstract

India has seen a boom of tech IPOs recently. It all began with Zomato which was welcomed by the investors with open arms. It has been followed by some impressive debuts by Nykaa (FSN e-commerce) and Policy Bazaar (PB Fintech). But after Paytm’s (One97 Communications) recent debacle at the Indian stock exchange market, investors have become wary of the valuations that these companies are trading. It is not just a mad rush to cash in on the benefits by the initial investors. It has usually been observed that there is a huge change in the valuation once the company shifts from private markets to public markets. There is evidence of valuation of companies dropping once the company gets listed in the public markets. This happens due to better price discovery in the public markets. This has come in tandem with a frenzy in private markets, in which over 40 companies attained $1 billion valuations in 2021 and around 10 have already become unicorns this year. While the private equity and venture capital space is run almost exclusively by investment professionals, public markets see greater retail participation. As a result, public listing involves greater disclosures and scrutiny by SEBI (Securities Exchange Board of India) to protect the interests of investors. At the same time, public markets are a cheaper source of capital since they provide liquidity and the option to diversify away the non-systematic risks. As a result, the same fundamentals may give different valuations in the two markets. The recent wave has seen some interesting examples of this dynamic playing out. For instance, Zomato IPOed in its cash burn stage, before it was profitable. While such a company requires greater oversight of investors, it has shunned oversight by deciding not to go ahead with customary quarterly earnings calls. These dynamics have raised several questions on the regulatory front.