SEBI’s New Disclosure Norms for Startups and Unicorn IPOs: Enhancing Market Discipline and Investor Protection

Author: Shobha Tiwari, City Group of Colleges, Lucknow

To the Point

India’s securities market regulator, SEBI, has introduced sweeping changes to its disclosure framework for startups and unicorns approaching Initial Public Offerings (IPOs). These amendments target the opacity and speculative valuation practices prevalent among new-age companies, ensuring that public investors are not misled by metrics lacking standardised benchmarks.


Use of Legal Jargon

This article uses terms such as Draft Red Herring Prospectus (DRHP), Issue of Capital and Disclosure Requirements (ICDR), Differential Voting Rights (DVR), Key Performance Indicators (KPIs), Materiality Threshold, Corporate Governance Framework, Offer for Sale (OFS), Investor Due Diligence, Startup Valuation Disclosure Norms, Regulatory Compliance, Capital Market Integrity.


The Proof

On 30 June 2025, SEBI notified amendments to the SEBI (ICDR) Regulations, 2018, requiring that startups and unicorns mandatorily:

1. Disclose the basis of IPO pricing by providing a detailed explanation of how valuations were arrived at, including quantitative factors such as revenue growth, user acquisition, market share, and unit economics.
2. Include all Key Performance Indicators (KPIs) used for prior fundraising rounds along with definitions, calculation methodology, and limitations of such KPIs.

3. Compare pre-IPO valuations with the IPO price band, especially where the IPO pricing deviates substantially from recent funding valuations.

4. Clarify Differential Voting Rights (DVRs) or other control-enhancing mechanisms embedded within their corporate structure that may affect voting rights of public shareholders.

5. Ensure that any financial metric disclosed is consistent with Indian Accounting Standards (Ind AS) to avoid regulatory arbitrage via non-standard financial presentations.
















Abstract

The impetus behind these reforms lies in SEBI’s objective of aligning the Indian IPO ecosystem with global best practices. In recent listings, companies leveraged non-GAAP financial metrics or ambiguous operational KPIs to justify high valuations, only to witness drastic corrections post-listing. This not only erodes investor wealth but also undermines market credibility.

The new norms aim to:
Protect retail investors by providing them with comprehensive, comparable, and reliable data.
Enhance transparency in the IPO process by preventing startups from cherry-picking favourable metrics.
Strengthen corporate governance by holding promoters and management accountable for valuation disclosures.


Detailed Analysis and Practical Impact

1. The Valuation Conundrum

Startups, especially unicorns, derive valuations based on futuristic growth prospects rather than historical profitability. While venture capitalists or private equity funds can conduct exhaustive due diligence, retail investors lack such resources. By mandating the disclosure of valuation bases and KPIs used for such assessments, SEBI has bridged a critical information asymmetry.

2. Alignment with International Practices

Globally, regulators like the U.S. Securities and Exchange Commission (SEC) require companies to present “non-GAAP financial measures” with equal prominence to standard GAAP metrics, along with reconciliation statements. SEBI’s move is similar, pushing startups to standardise their disclosures and avoid misleading presentation of growth figures.

3. Impact on Founder Control Structures

The requirement to disclose Differential Voting Rights (DVRs) will impact many Indian startups that emulate the dual-class share structures popular among U.S. tech giants. Investors must be aware if promoters retain decision-making power disproportionate to their economic interest, which affects corporate governance standards and investor rights.

4. Enhanced Corporate Governance Standards

The reforms ensure that startups adhere to materiality thresholds and risk disclosures similar to traditional companies. This enhances confidence in the Indian IPO market, attracting long-term domestic and international institutional investors.

5. Potential Compliance Challenges

Startups may find it challenging to adapt internal financial reporting to align with these enhanced norms within short timelines. There will be a greater reliance on company secretaries, CFOs, legal advisors, and merchant bankers to draft DRHPs that withstand regulatory scrutiny and avoid post-listing litigations or reputational damage.

Case Laws

While SEBI’s amendments are regulatory in nature, their spirit is upheld in Indian jurisprudence emphasising the importance of fair disclosure in public offers:

1. Sahara India Real Estate Corp Ltd v. SEBI (2012) 10 SCC 603
The Supreme Court held that any company mobilising funds from over 50 investors is a public issue, mandating SEBI compliance to protect investor interests.


2. SEBI v. Pan Asia Advisors Ltd. (2015) SCC OnLine SAT 199
This judgment highlighted that misrepresentation or omission of material facts in offer documents attracts SEBI action for misleading investors.


3. Shristi Infrastructure Development Corporation Ltd. v. SEBI (2019) SAT
Reinforced that companies must adhere to the highest standards of disclosure to ensure that investors are not prejudiced by partial or opaque information.


4. In Re: NSE Co-Location Case (SEBI Order, 2019)
Though not an IPO matter, SEBI’s principle of penalising information asymmetry was upheld, underscoring its commitment to fair market practices.

Conclusion

India’s startup ecosystem has fuelled innovation, employment, and economic growth. However, capital market integrity requires that such growth be transparent, fair, and accountable. SEBI’s revised disclosure norms:

Build investor trust by ensuring valuation justifications are data-backed and comprehensible.

Enhance compliance and governance standards, which are crucial for startups aiming for global competitiveness.

Prevent potential market shocks arising from overhyped IPOs with unsustainable valuations.


Startups must proactively engage legal and financial advisors to integrate these disclosure norms into their IPO planning. While initial compliance may appear burdensome, the long-term benefits of market credibility and investor confidence outweigh transitional costs.

FAQS

Q1. Why were startups previously exempted from such stringent disclosures?
Earlier, startup valuations were largely accepted on market terms given their unique business models. However, post-listing underperformance prompted SEBI to formalise a robust framework.

Q2. What are KPIs and why are they critical in the IPO process?
Key Performance Indicators (KPIs) measure operational or financial health, such as Gross Merchandise Value (GMV), user growth, or EBITDA margins, guiding investors on business potential.

Q3. How do these norms affect merchant bankers?
Merchant bankers must ensure due diligence on disclosed KPIs, valuation justifications, and compliance with SEBI’s standardisation requirements before filing offer documents.

Q4. Are there penalties for non-compliance with these new norms?
Yes. SEBI can impose monetary penalties, withhold approvals, or direct withdrawal of the offer document under Section 11B of the SEBI Act, 1992 for misleading disclosures.

Q5. Will these changes slow down IPO approvals for startups?
While initial adaptation may lengthen preparation timelines, it will ultimately streamline the approval process by reducing SEBI’s clarifications and queries arising from insufficient disclosures.