SME IPOs Need More Caution

In this financial year, we’ve already had 28 initial public offerings (IPOs), with close to Rs 40,000 crores raised and we’re only at the end of August. It may still be early to say, but indications are that we might be heading for the best ever year in terms of main board IPOs.

For context, last year we had 76 IPOs raising about Rs 62,000 crore. The year before that, we had 37 IPOs raising Rs 52,000 crore. We could be heading for a record year because of the IPO pipeline we have ahead of us – there are 22 companies sitting with SEBI approval, looking to raise close to Rs 20,000 crores. Of these is the mega issue of Bajaj Housing, which is going to be close to $1 billion. Apart from this, there are another 44 companies looking to raise close to Rs one lakh crores. This includes the mega issue of Hyundai Motor, which is expected to be launched later this year and likely to be in the range of around $3 billion. While all these issues may not materialise, we also have the Sugi IPO, which is quite anticipated, and others like Mega Mart, Niva, Bupa. The filings continue.

Just after the budget, there were 16 filings in July, 17 in August and several other companies are in the pipeline. This is the supply part. As far as demand is concerned, not just the primary market, but the secondary market has also shown no dearth of demand over the last couple of years.

Whether it is individual investors, retail investors, or high net-worth individuals (HNIs) or on the institutional side, the dependence that the primary market, or even the secondary market in India, had on foreign investors, has significantly reduced. This has been in line with the growth of the domestic asset management industry, the domestic mutual fund industry, which are becoming big players in both the primary and secondary markets. Our issuers and investor issuers have the confidence that they can launch issues and the issues can go through just with the support of domestic industry.

Now, when it comes to the SME space, it’s been a bit of a mixed bag. We’ve seen a lot of regulatory action against some of the SME companies off late as well. Of course, it's not to say that all companies need to be painted with the same brush, but it's been a bit of a mixed bag.

Investors need to approach this segment with a lot of caution. We know that a lot of investors, especially retail investors, are coming into IPOs, whether main board or SME, from a listing point of view. In 2024-2025 the average listing gain of an SME IPO has been 77%, calculated on the closing price on the day of listing. That’s a huge return.

The other interesting data point is the number of retail application in the SME segment. In FY 2019-2020, the average number of retail applications was just 408 per issue in SME IPOs. In 2024-2025, it is already 2.13 lakh. Why are they investing? Because they're getting attracted by the huge listing gains that they are seeing.

There is a need for greater regulatory intervention. Both the regulator and the exchanges are looking at this space closely. There’s a different process for SME IPOs versus main board IPOs. They don't require an approval from SEBI. The approval comes in from the exchanges, and exchanges are also free to shape the guidelines.

The other aspect is that these are small companies. There is relatively less information about these companies in the public domain. So the advice would be to understand whether you're coming in from a long term investment point of view or just from a listing gain point of view.

SEBI itself put up very interesting statistics at the beginning of the year, that three out of four individual investors actually move out of the IPO within a month of listing. This shows that most individual investors are primarily coming from a listing point of view. In that case, in a secondary market you have historically seen that the chance of getting a listing gain is reasonably high. That’s what’s playing out – retail investors are essentially investing in every single IPO which comes out, hoping that they get some allotment. Of course, with the kind of subscription one is seeing, allotment is not a sure shot. It is not significant in terms of moving the needle.

And this has been made easier because of the various apps available, where, in a matter of two or three clicks, you can invest in an IPO. So it becomes so simple.

Regulators and exchanges need to look more closely at who the investors are at the time of listing, and who the subsequent investors are.