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SEBI, Start-ups & Valuation for IPOs: Part I OF III

Updated: Nov 9, 2022

SEBI scrutinises start-ups raising funds from the PE/VC funds

Authored by:

Mr Anuroop Omkar, Partner

Ms Anushree Jugade, Senior Associate

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 Networth 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:

  1. Date of latest valuation;

  2. Cost of cumulative investments made;

  3. Latest valuation of the investment portfolio;

  4. Whether the valuation is done by an independent or internal valuer;

  5. If an additional valuation exercise was carried out during the financial year;

  6. Details of valuation methodology;

  7. If there were any deviations from the said methodology &

  8. Whether the scheme has a valuation committee.

In the past few years, Alternative Investment Funds or AIFs[6] have emerged as a preferred investment vehicle for many wealthy Indian investors leading SEBI to tighten rules for the funds. SEBI officials have proposed that the schemes of PE & VC funds should be ring-fenced from each other so that any stress and liabilities in one pool of money do not spill over to another. The regulatory intent here is to lower the risks faced by investors by raising the bar on disclosure for close-ended AIF which is typically the route VCs take to fund startups. This would pave the way for the market regulator’s approach to pivot from minimising the systematic risk to a scrutiny of the business risk. However, this action of the SEBI would not address the underlying issue with the modus operandi of valuing start-ups which is apparently the main concern.

It would be pertinent to note the fact that the rise of start-up culture has led to a more inclusive nature of the business regime in India. The last decade has witnessed people across all sects defeating every factor to make it big in the business world in the form of start-ups. These start-ups are known to be solution-oriented companies where the USP lies in selling products on the basis of quick and tested solutions that eventually lead to the development of a swift ecosystem in business affairs. Start-ups such as Swiggy, Practo, and FinBox are a few among the long list of remarkable Indian start-ups grown in the last decade. While the step taken by the capital regulator is imperative, it is pertinent to remember that the spirit of Startups lies in ‘entrepreneurship’ and not only in its ‘valuation’.

The key lacuna lies in the fact that India does not have a uniform regime for valuing a start-up. Adding to this, the laws on valuation already existing in India are contradictory to each other which leads to the urgent need of developing an exhaustive set of laws to regulate the valuation regime in India. With the market regulator taking active steps, we can be hopeful for an exhaustive law on the valuation of startups to come soon.

Information credit:

[4] High Networth Individuals or HNIs are widely defined as those having an investible surplus of more than 5 crores.

[5] Net Asset Value or NAV is the value of an entity’s assets minus the value of its liability, often in relation to open-end or mutual funds.

[6] AIFs means any fund established or incorporated in India which is a privately pooled investment vehicle which collects funds from sophisticated investors, whether Indian or foreign, for investing it in accordance with a defined investment policy for the benefit of its investors.

In Part II, we would be discussing the key takeaways from the recent SEBI meeting held on September 30th, 2022 regarding the insider trading regulations and key performance indicators (KPIs) that should be added for investors' consideration. Part III would be highlighting the Valuation mechanism existing in India.

Stay tuned!


The note is prepared for knowledge dissemination and does not constitute legal, financial or commercial advice. AK & Partners or its associates are not responsible for any action taken based on its contents.

For further queries or details you may contact:

Mr Anuroop Omkar,

Partner, AK & Partners

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