Context:
Retail investor enthusiasm has been the primary factor behind the robust fundraising in the SME (Small and Medium Enterprise) IPO segment. Strong post-listing performances of SME stocks have encouraged continued investor participation.
- Exponential Growth in Retail Participation
- The average number of retail applications per SME IPO surged from 297 in 2020 to 188,000 in 2024.
- This increase is largely driven by listing gains that have jumped from 1% to 60% in the same period.
- BSE SME IPO Index Growth
- The BSE SME IPO index (tracking prices of SME-listed stocks) rose 2.5 times in 2024, compared to a 32% increase in the BSE IPO index for mainboard companies.
- Recent Performance
- However, despite past success, SME IPOs have recently experienced a sharp correction. On a year-to-date basis, the BSE SME IPO index is down by 26%, while the mainboard index has declined by 19%.
Concerns About SME IPO Risks
- High Risk and Illiquidity
- SMEs tend to be riskier and illiquid investments, which could be problematic for small retail investors.
- Some experts argue that investors may not fully understand the inherent risks of investing in the SME segment.
- Regulatory Warning
- Pranav Haldea from Prime Database emphasized that although SME IPOs have attracted attention due to high returns, these stocks are extremely volatile.
- He expects a potential drop in issuances unless overall market sentiment revives.
Sebi’s New Regulatory Measures
The Securities and Exchange Board of India (Sebi) tightened the regulatory framework for SME IPOs in response to investor exuberance, introducing measures to ensure only companies with strong track records can list:
- Profitability Requirement
- Companies must show an operating profit of at least ₹1 crore over the last two to three financial years before launching an IPO.
- Offer-for-Sale (OFS) Cap
- The OFS size by selling shareholders is now capped at 20% of the total issue size, and individual selling shareholders can’t sell more than 50% of their holdings.
Ticket Size and Retail Accessibility
- Minimum Application Size
- The minimum application size for SME IPOs is ₹1 lakh, which was initially intended to deter retail participation.
- However, as investor incomes have increased over the years, many are now comfortable investing in SME IPOs without full understanding of the associated risks.
- Call for Stricter Controls
- Some experts, including Ambareesh Baliga, suggest raising the minimum lot size for SME IPO applications to ₹2 lakh to limit uninformed retail participation.
Future Outlook and Challenges
While SME IPOs have been a significant fundraising avenue, regulatory tightening and increased market volatility may temper future enthusiasm. Experts predict a potential slowdown in the number of issuances unless market sentiment improves and investor awareness grows about the risks associated with these high-risk stocks.
