KPI Disclosure in an IPO: How to Read the Key Performance Indicators in an Offer Document

Open any recent red herring prospectus and somewhere between the risk factors and the financial statements you’ll hit a table of numbers the company itself chose to show you: orders, active users, revenue per store, EBITDA margin, whatever it thinks tells its story best. That table is the KPI disclosure in IPO documents, and it’s often the most useful page in a document that runs into hundreds. It’s also the page where a company has the most room to make itself look good, which is exactly why SEBI tightened the rules around it.

We’ll walk through what a KPI is in an offer document, what the regulator now expects companies and their bankers to do with these numbers, and how you can read the table without getting carried away by it. There’s a worked example with a made-up company at the end so you can see the checks in action.

KPI disclosure in IPO documents: what it covers

KPI stands for key performance indicator. Wikipedia’s entry on performance indicators describes a KPI as a type of performance measurement used to judge how well an organisation, project or process is meeting defined objectives, and notes that the right KPIs depend on the organisation’s priorities and differ across areas like finance, sales and operations. The same entry makes a point that matters a lot for IPO investors: indicators that are poorly designed can create the wrong incentives or miss what really matters.

In an IPO, KPIs sit alongside the audited financials but are not the same thing. Revenue and profit come from restated financial statements that follow accounting standards. KPIs are usually operating metrics the management tracks internally. A quick-commerce company might show orders per day and average order value. A lender might show assets under management and gross NPAs. A SaaS firm might show net revenue retention. None of these has a single statutory definition, so two companies in the same sector can calculate “active customers” in completely different ways.

That flexibility is why the KPI section ended up in the regulator’s sights. If a company can pick its own metrics, define them loosely and show only the years that flatter it, the “Basis for Issue Price” section can become a sales brochure.

What SEBI changed in November 2022

The rules come from the SEBI (Issue of Capital and Disclosure Requirements) (Fourth Amendment) Regulations, 2022, notified in Mumbai on 21 November 2022 as notification No. SEBI/LAD-NRO/GN/2022/107. You can read the full notification text as reproduced by TaxGuru. The amendment inserted new clauses into paragraph (9) of Part A of Schedule VI, under the heading “Basis for Issue Price”. The notification says these changes apply to all issues where the red herring prospectus is filed with the Registrar of Companies on or after the date the notification was published in the Official Gazette.

The amendment puts the obligation on two parties together: the issuer company and its lead merchant bankers. Here’s what they now have to ensure, in plain terms.

Definitions in simple English

Every KPI, and the terms used in it, has to be defined consistently and precisely in the “Definitions and Abbreviations” section of the offer document, using simple English. Any technical term used to explain a KPI has to be clarified further in simple terms. So if a company reports “GMV” or “contribution margin”, you should be able to find exactly what goes into it.

Audit committee approval and independent certification

The KPIs have to be approved by the issuer’s audit committee. They also have to be certified, either by the statutory auditor or by chartered accountants holding a valid peer review certificate from the Institute of Chartered Accountants of India, or by cost accountants holding a valid peer review certificate from the Institute of Cost Accountants of India. That certificate has to be included in the list of material documents available for inspection.

Same periods as the restated financials

For each KPI, figures have to be given for a period that runs co-terminus with the period covered by the restated financial information in the offer document. A company can’t show three years of revenue but only the one good year of user growth.

An explanation of how management uses them

The KPIs are supposed to be comprehensive, and the document has to explain how management has historically used them to analyse, track or monitor the company’s operational or financial performance. If a business has made a material acquisition or sold off a business during the periods covered, the KPIs have to reflect and explain it, so that a jump in numbers driven by a purchase isn’t passed off as organic growth.

The most telling rule is the three-year look-back: whatever KPIs a company showed its private investors before the IPO, it now has to show you too.

Nothing shown to earlier investors can be hidden

This is the part we’d read first. Under the “Basis for Issue Price” section, the company must disclose all KPIs it has shared with its investors at any point during the three years before filing the DRHP or RHP. The audit committee also has to confirm that verified and audited details of all those KPIs are disclosed in that section. In other words, if a private equity investor was shown a particular metric two years ago, public investors get to see it as well.

Beyond that, the company, in consultation with the lead manager, may add any other relevant and material KPIs that bear on how the issue price was arrived at. KPIs shown elsewhere in the offer document have to be cross-referenced in the “Basis for Issue Price” section.

Peer comparison

For the KPIs in the “Basis for Issue Price” section, the company has to show a comparison with Indian listed peers and, where relevant, global listed peers, wherever such data is available. The peer set is meant to include companies of comparable size, from the same industry and with a similar business model. Where a one-to-one comparison isn’t possible, notes explaining the differences can be added. We’ve written separately about how to use the peer comparison in an IPO valuation, and it pairs well with the KPI table.

Reporting continues after listing

The obligation doesn’t end on listing day. The company has to keep disclosing the KPIs it showed in the “Basis for Issue Price” section at least once a year, for at least the later of one year after listing (or a period specified by SEBI’s board) or until the IPO proceeds are fully used as described in the objects of the issue. Any change in those KPIs during that time has to be explained, and the ongoing figures must still be certified by a qualified professional as described above.

The same amendment also brought in disclosures about the weighted average cost of acquisition of shares in the 18 months before filing, and how the price band compares with it. That’s a topic on its own, and our guide to the weighted average cost of acquisition in an IPO covers it.

How to read the KPI table without being sold to

The rules make the numbers more reliable. They don’t make the company’s choice of numbers neutral. Here’s how we’d go through the table.

Start with the definitions page. Before you look at any growth figure, find the definition. “Monthly transacting users” that counts anyone who opened the app is a very different number from one that counts only paying customers. If the definition is vague even after the rule change, that itself tells you something.

Match every KPI to the money. Operating metrics should eventually show up in revenue, margins and cash flow. If users have doubled but revenue per user has halved, the growth story is weaker than the headline. If orders are rising but losses are widening just as fast, ask what each extra order actually earns.

Check the periods. Because KPIs must now cover the same periods as the restated financials, any gap or a strangely short window deserves a second look. Also watch for a partial-year figure placed next to full years. A six-month stub period isn’t directly comparable with a full year.

Look for acquisitions. The rules require the KPIs to reflect and explain material acquisitions or disposals. Read that explanation. A jump in store count that came from buying a rival is not the same quality of growth as stores opened from scratch.

Read the peer comparison critically. Companies choose their peer set within the rule’s broad guidance. If the IPO company is being compared mostly with richer, faster-growing listed names, the valuation will look cheaper than it is. The abridged prospectus gives a quick view, but the peer details usually sit in the full RHP.

Note what isn’t there. The three-year look-back means metrics shown to earlier investors should appear. But a company can still stay silent on metrics it never tracked or never shared. If every peer in a sector reports customer churn and this company doesn’t, it’s fair to wonder why.

A KPI that grows faster than revenue for three straight years isn’t automatically good news. Sometimes it means the company is buying growth it can’t monetise.

Worked example: reading a hypothetical KPI table

Let’s take a made-up company, Company Q, a hypothetical online grocery business filing its RHP. Every figure below is invented for illustration. Suppose its KPI table shows this for three financial years:

• Orders: 20 lakh in Year 1, 40 lakh in Year 2, 70 lakh in Year 3
• Average order value: Rs 500 in Year 1, Rs 450 in Year 2, Rs 400 in Year 3
• Revenue from operations: Rs 100 crore, Rs 180 crore, Rs 280 crore
• Contribution margin, as a percentage of revenue: 2% in Year 1, 4% in Year 2, 6% in Year 3

On the surface this is a strong story. Orders have gone up three and a half times in two years, from 20 lakh to 70 lakh. Revenue has grown 2.8 times, from Rs 100 crore to Rs 280 crore.

Now let’s do the checks. First, the arithmetic. Orders multiplied by average order value gives gross order value: 20 lakh times Rs 500 is Rs 100 crore, 40 lakh times Rs 450 is Rs 180 crore, and 70 lakh times Rs 400 is Rs 280 crore. Those match the revenue line, so in this example revenue is being recognised on the full order value. That’s worth confirming in the accounting policies, because many platforms only book a commission. A mismatch between the KPI maths and revenue is one of the quickest red flags you can spot.

Second, the trend in order value. Average order value has fallen 20%, from Rs 500 to Rs 400. That means growth is coming from more, smaller orders. Smaller baskets usually cost almost as much to deliver, so the question is whether contribution can keep improving if this continues.

Third, contribution in rupees. A 2% margin on Rs 100 crore is Rs 2 crore. A 6% margin on Rs 280 crore is Rs 16.8 crore. So contribution has gone up more than eight times while revenue went up 2.8 times. That’s a genuinely good sign, but only if “contribution margin” is defined the same way every year. This is where the definitions page and the auditor’s certificate earn their keep: you check what’s deducted (delivery costs, discounts, payment fees) and whether it changed between years.

Fourth, the acquisition test. Suppose a note says Company Q bought a smaller rival at the start of Year 3 that added 15 lakh orders. Then organic orders in Year 3 were 55 lakh, not 70 lakh, and organic growth over Year 2 was 37.5% (from 40 lakh to 55 lakh) rather than 75%. Same company, very different story. The 2022 rules require exactly this kind of explanation to be in the document.

Fifth, the peer check. If listed peers in the “Basis for Issue Price” section show contribution margins well above 6%, Company Q is still behind the sector, whatever its trend. If they’re lower, the improvement is a real edge. Either way, you want to compare like-for-like definitions before you draw a conclusion.

Where KPI disclosure fits in your IPO homework

The KPI table is one input, not the decision. It tells you how management measures the business and gives you a way to test the growth story against the audited numbers. It doesn’t tell you whether the price is right, how much of the issue is an offer for sale, or what the business looks like after the IPO money is spent. For the full checklist, our guide to IPO investing in India covers the rest.

One practical habit helps a lot. After listing, the company has to keep reporting the same KPIs for a while. Bookmark the RHP’s KPI table and compare it with the first annual disclosure after listing. If the metrics that sold the IPO quietly stop improving, or the explanations for changes start getting longer, you’ll see it there before you see it anywhere else. Also keep in mind that the ICDR Regulations have been amended many times, so for a live issue check the current version of the rules on SEBI’s website.

Quick recap

KPIs are the operating metrics a company picks to show how its business is doing. Since SEBI’s ICDR Fourth Amendment of 21 November 2022, KPIs in an offer document must be defined in simple English, approved by the audit committee, certified by an auditor or peer-reviewed professional, shown for the same periods as the restated financials, adjusted and explained for acquisitions, compared with listed peers where data exists, and include every KPI shared with investors in the three years before filing. The company must keep reporting them after listing for a set period. Read the definitions first, tie each KPI back to revenue and margins, separate organic growth from bought growth, and treat the peer table with healthy scepticism.

Disclaimer: This article is for educational purposes only and is not investment advice. Company Q and all figures in the worked example are hypothetical. Regulatory requirements described here are as notified in November 2022 and may have been amended since; refer to the latest SEBI regulations. Investments in securities are subject to market risks; do your own research and consult a SEBI-registered adviser before making investment decisions.