Understanding Key Performance Indicators (KPI) in Initial Public Offer

Key Performance Indicators (KPI) play a pivotal role in the IPO process by reflecting a company’s financial health, operational efficiency, and growth potential. Defined as quantifiable measures tracked by management, KPI help investors make informed decisions about a company’s valuation. Under SEBI’s new disclosure norms, companies must identify, certify, and present KPI in a standardized format within their offer documents and continue disclosing them post-listing. From revenue and profit margins to RoE, RoCE, and EPS, these indicators create transparency, foster investor trust, and ensure fair valuation during both SME and Mainboard IPO listings.

MAIN ASPECTS COVERED:

• Part A: Key Performance Indicators (KPI) - Definition & Classification.

  • Definition of Key Performance Indicators (KPI);
  • Classification of Key Performance Indicators (KPI);

• Part B: Identification of KPI.

  • Process of selection of KPI;
  • Certification process to be initiated for Selected KPI;
  • Approval by the Audit Committee;
  • Certification by Certifying Professional.

• Part C: Format and Presentation Standards for disclosing KPI

  • Suggested format and presentation for Disclosing KPI

  • Standards for presenting KPI.

• Part D: Continuous Disclosure Requirements of KPI.

  • Standards for continuous disclosure requirements of KPI.

What is the meaning of KPI?

Key Performance Indicators (KPI) are key numerical measures of an Issuer Company’s historical financial and operational performance, which the management of such Issuer Company evaluates and tracks to monitor the performance of the Issuer Company and which provides information to investors to make an informed decision for valuation of the Issuer Company. 

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What are KPI in an IPO?

KPI stands for Key Performance Indicators. These are the measures that show how a company is performing over a certain period. These financial measures provide useful information about the company’s business growth. In both SME IPO and Mainboard IPO, KPI are important because they help investors understand the company’s financial situation, how well it is running, and its future growth possibilities before deciding to invest. 

KPI are important for the company, investors, and other stakeholders. For investors, KPI are very helpful in making informed investment decisions.

What is the Objective and Purpose of KPI standards?

Key Performance Indicators (KPI) have become one of the most important aspects of IPO disclosures under SEBI’s latest guidelines. Whether it is SME IPO on NSE EMERGE or BSE SME, or a Mainboard IPO, KPI play a vital role in showing the true financial health, efficiency, and growth potential of a company. Clear and transparent disclosure of KPI in the Draft Red Herring Prospectus (DRHP) not only helps investors evaluate a company better but also builds trust in the IPO process.

It is crucial for companies planning to launch their IPO to work closely with IPO Advisors, Merchant Bankers, and other experts to ensure that the KPI disclosures are accurate, consistent, and as per SEBI regulations. Proper presentation of KPI in the offer document, certification by professionals, and continued reporting post-listing are now a key part of IPO Procedures.

KPI serve as a bridge between the company and investors, helping to ensure transparency, fair valuation, and successful listing in both SME and Mainboard IPOs.     

The main purpose of the KPI Standards is to bring uniformity in how companies identify and disclose Key Performance Indicators (KPI) during an IPO. These standards make it easier for investors to understand, compare, and evaluate companies before investing.

The KPI Standards aim to:

1. Ensure that companies consistently disclose KPI in their offer documents.
2. Help investors compare companies within the same industry more easily.
3. Remove differences in how KPI are disclosed, improving transparency.
4. Provide clear and measurable metrics so that investors can judge a company’s valuation better.
5. Give investors the right information to assess a company’s financial and business performance, both at the time of IPO and in the future.

These Standards are created in consultation with SEBI and are as per SEBI ICDR Regulations. However, If SEBI makes any changes to the ICDR Regulations that conflict with these Standards, then SEBI rules will always take priority.

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What are the categories of KPI?

Key Performance Indicators (KPI) used in IPO disclosures are generally classified into three categories:

1. GAAP Financial Measures
   These are financial metrics prepared as per Generally Accepted Accounting Principles (GAAP). They show the basic financial health of the company and help investors compare performance across companies and industries. Examples include revenue, net profit, and earnings per share. Companies include such measures in the offer document as KPI based on their business model and industry.
2. Non-GAAP Financial Measures (including financial ratios)
   These are modified financial metrics where certain items are added or excluded to give a clearer picture of financial performance. Ratios like EBITDA margin, PE ratio, or debt-to-equity ratio are also part of this. These help investors do deeper analysis beyond traditional numbers.
3. Operational Measures
   These are non-financial data points that reflect how the company operates. They give insight into business performance, efficiency, and long-term growth potential. Examples may include customer base size, production capacity, market share, or employee strength.

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What are the types of KPI in IPO?

In an IPO, companies present Key performance indicators to highlight their financial performance, profitability, efficiency, and valuation. These indicators give a clear picture on the financial performance of a company and help investors to make informed investment decisions.

The commonly used KPI in an IPO are as follows:

• Revenue from Operations
• Profit after Tax (PAT)
• Profit After Tax Margin (PAT Margin)
• Return on Capital Employed (RoCE)
• Return on Equity (RoE)
• Return on Net Worth (RONW%)
• Debt-Equity Ratio
• Earnings per Share (EPS)
• Price-to-Earnings (PE) Ratio
• EBITDA
• Price-to-Book Value

What is the Format of disclosing KPI in the offer document?

SEBI has introduced a standard format for companies to disclose Key Performance Indicators (KPI) in their IPO offer documents.

The table below shows some important Key performance indicators for the periods listed here.

Notes:

• Latest financial year is required to mentioned first.
• Where relevant, part of the most recent financial year/ interim period may also be disclosed.
• The management of the Issuer Company may include any other relevant notes.

Why should companies explain metrics in the DRHP?

In DRHP (Draft Red Herring Prospectus), companies are required to explain their KPI clearly. This explanation helps investors understand how the company’s management has been using these KPI to track, monitor, and evaluate the company’s operational and financial performance. 

How do KPI help a company get a better valuation for IPO?

KPI help companies get a better valuation in an IPO. It shows the real strength and potential of the business. Strong KPI such as revenue from operations, PAT, EBITDA, ROCE, ROE, EPS, etc., highlight that the company is financially fit and efficient for the IPO. It also ensures that the company is capable of generating profits in the future. Investors can also refer to KPI disclosed in DRHP/RHP to decide whether IPO is good or not and whether they should apply for IPO. How to invest in IPO (Beginner's Guide)

Better KPI also help justify a higher price multiple, as they indicate lower risk and stronger growth prospects compared to peers. 

What disclosures related to KPI are required in the DRHP?

In the Draft Red Herring Prospectus (DRHP), companies are required to disclose their Key Performance Indicators (KPI) clearly so that investors can understand the business and growth of the company. This includes giving the list of KPI, their meaning, and how they are calculated. 

Companies are also required to explain why those KPI are important and how they connect to the company’s performance and valuation. These disclosures help investors compare the company with others in the industry and make better investment decisions.

What is the Role of the Audit Committee in reviewing and approving the KPI under the SEBI ICDR Regulations?

The Audit Committee plays a vital role in checking and approving the KPI that a company wants to include in its IPO offer document. The company’s management first prepares and presents all the necessary information to the audit committee, such as:

• The data and draft disclosures of KPI.
• Select the data that is not classified as KPI but is still included as a part of the disclosures in the offer document.
• KPI disclosures for industry peers are also required to be identified for inclusion.
• For each KPI selected, the company’s management is required to explain how it has been used in the past to review, track, or measure the business operations and financial performance of the Company.
• The meaning of the terms used for the KPI, along with the disclosures required for them, according to the KPI Standards.
• A confirmation that while preparing the selected data and KPI, the company has properly followed the applicable KPI Standards.
• Any other related matter considered material by the management of the Issuer Company.

The Audit Committee reviews the information provided and makes any needed changes, and then officially approves the KPI that will be shown in the ‘Basis for Issue Price’ and ‘Business’ sections of the offer document. Detailed minutes of the meeting are also maintained.

What are the SEBI’s new guidelines on the KPI disclosures?

SEBI has introduced new guidelines on KPI disclosures in IPO to improve transparency and protect investors. These rules are applicable from 1 April 2025 to make IPO disclosures clearer and more reliable.

• It is required to define and explain each KPI (Key Performance Indicator) using standard accounting terms.
• It must include both financial and non-financial operational KPI relevant to their business and valuation.
• For the selected KPI, management must explain how it has been used in the past to review, track, or measure the company’s business operations and financial performance.
• These KPI must be certified by the company’s MD, CEO, CFO (or equivalent), and then verified by a qualified professional such as a CA or CMA according to the ICAI/ICMAI guideline.
• The IPO offer documents must present these KPI in a clear format, including definition, comparisons with industry peers, and present them in the Section “Basis for Issue Price” or “Business”
• Companies must also continue disclosing these same KPI regularly (e.g., annually) for at least one year after listing or until the IPO funds are fully used—whichever is later.

Official document for the SEBI Guidelines on the KPI disclosures.

https://nsearchives.nseindia.com/web/sites/default/files/inline-files/Circular.pdf

What are the standards of the presenting KPI in the offer document?

SEBI has laid down clear guidelines on how financial indicators must be presented in IPO offer documents. 

• The unit of measurement of financial indicators (like lakhs, crores, millions, etc.) must follow the format prescribed under SEBI ICDR regulations.
• If financial indicators are shown in foreign currency, they must also be presented with their equivalent value in Indian Rupees.
• Commas should follow the Indian system of Numbering for lakhs and crores and the International system for millions. Uniformity must be maintained throughout the offer document.
• For financial indicators shown in foreign currency, commas must follow the International System of Numbers.

Detailed process of SME IPO according to SEBI ICDR regulations, 2018

What are the certification requirements for KPI disclosed in the offer document under the SEBI guidelines?

SEBI requires that KPI disclosed in the offer document are properly certified to ensure accuracy and reliability.

• The KPI must be certified by the qualified Certifying Professional.
• The Certificate to be issued by the Certifying Professional of The Institute of Chartered Accountants of India (ICAI) or The Institute of Cost Accountants of India (ICMAI).
• The issued certificate must also be included in the list of material documents available for inspection by investors.

FAQs

• What is a KPI?

Key Performance Indicators (KPI) are important financial measures that reflect an Issuer Company’s past financial and operational performance. These are tracked and evaluated by the company’s management to monitor the overall progress of the company. For investors, KPI provide clear insights that help them assess the company’s performance and make informed decisions about its valuation.

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• What is the full form of KPI?

KPI stands for Key Performance Indicators. These indicators represent the financial performance of the company. It helps the company to get a better IPO valuation. It also helps investors to make informed investment decisions.

• Why are KPI important in IPO Valuation?

KPI are very important in IPO Valuation, whether SME IPO or Mainboard IPO. They provide a clear view of the financials of the company and its past performance. Investors rely on the numbers that are present in KPI. By comparing the KPI of the Issuer company with its industry peers, investors can make better decisions for investment.

• Why KPI disclosure is required in DRHP?

When a company wants to go public, the Issuer company is required to file a DRHP with the SEBI or a Recognized Stock Exchange. In the DRHP, the company is mandatorily required to disclose the KPI. KPI gives a clear vision about the Past performance of the company, the Financial health of the company. Such disclosures make it easier for investors to compare the company with its industry peers and take informed investment decisions.

• What information does KPI provide?

KPI are key metrics that a company uses to measure its performance and operational efficiency. When a company discloses about KPI in the DRHP, it helps investors to compare the company with others in the same industry and make an informed investment decision.

For the company, KPI build trust and transparency with potential investors by proving its ability to grow and manage business operations. KPI are a very important part of evaluating the true picture of the company during the IPO process.

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• How to Evaluate an IPO based on KPI?

KPI is a financial metric that can be used to evaluate the success and performance of the IPO. They help investors to analyze the future growth of a company. 

To evaluate an IPO, investors should look at the company-related KPI such as profitability (PAT or PAT margin), efficient RoE, Debt equity ratio, and Valuation (P/E ratio). Comparing these with the industry peers, investors can get a clear picture of the company to make investment decisions.