Source: BS
Context:
A recent RBI Bulletin study authored by Bhagyashree Chattopadhyay and Shromona Ganguly has highlighted significant volatility in India’s Small and Medium Enterprises (SME) IPO market, marked by sharp listing gains followed by swift price reversals. The findings point to signs of overvaluation in several SME stocks listed during FY24 and FY25, raising regulatory concerns for the segment.
Key Findings of the RBI Study
- Sharp Listing Gains, Quick Reversals:
- Many SME IPOs witnessed strong listing-day gains, often driven by retail enthusiasm.
- However, these gains were frequently followed by negative returns within weeks or months, indicating unsustainable valuations.
- Retail Investor Frenzy:
- The decline is more pronounced in IPOs that attracted heavy retail participation.
- Retail investors, lured by potential for “quick profits,” often ignored business fundamentals, leading to price inflation at listing.
- Overvaluation Signals:
- The study compared price-to-earnings (P/E) ratios of 100 SMEs listed in FY24–FY25 with their respective industry averages.
- Around 20% of these stocks had excessive P/E multiples, suggesting overvaluation relative to peers.
- Dominance of Fresh Capital Issues:
- In FY24, fresh capital accounted for 94.8% of total issue size.
- In FY25, it was 91.5%, showing that companies are raising funds for expansion rather than providing exits to existing shareholders.
- Regulatory Response:
- The Securities and Exchange Board of India (SEBI) has initiated steps to tighten SME IPO norms, including stricter disclosure requirements and monitoring mechanisms to curb speculative activity.
Background: SME IPO Boom in India
- The SME platform was introduced by SEBI and stock exchanges (NSE Emerge, BSE SME) to help smaller firms raise capital efficiently.
- Over the past two years, record SME IPO activity has been observed — over 250 listings in FY25 — with massive retail participation.
- However, valuation discipline and post-listing governance have emerged as key challenges.
About SME IPOs
- Definition: IPOs issued by Small and Medium Enterprises to raise equity on specialized SME exchanges.
- Eligibility: As per SEBI, post-issue paid-up capital should be below ₹25 crore.
- Platform: Listed on BSE SME and NSE Emerge.
- Objective: To provide smaller businesses access to equity financing and visibility in capital markets.
