Fundraising via SME IPOs touches new high in FY24

The initial public offerings (IPOs) by small and medium enterprises (SMEs) hit a new high in 2023-2024 (FY24).

In this financial year, data from the Prime Database showed that 190 companies raised Rs 5,579 crore through the SME IPO route.

This financial year’s tally bettered the fundraising in the previous financial year when 125 companies raised Rs 2,235 crore.

Retail exuberance, bolstered by strong after-listing performances, is the main reason for robust fundraising through the SME segment.

High-net-worth individuals (HNIs) and savvy investors initially shifted their focus to SME IPOs because the mainboard IPOs had dried up at the beginning of the year.

In the first two months of the financial year, only two mainboard IPOs hit the market, while the SME IPO segment saw 17 issues during the same period.

The returns delivered by SME IPOs attracted more investors.

The BSE SME IPO index, which tracks the stock price of companies listed on BSE’s SME platform, has more than doubled so far this financial year.

During the same period, the BSE IPO Index, which tracks the performance of newly-listed firms on the mainboard, has risen 67 per cent.

However, the exuberance on the part of investors has also raised concerns about the segment.

Markets regulator Securities and Exchange Board of India (Sebi) has flagged concerns of manipulation at both the trading and issuance in the SME stocks.

And is investigating investment banks regarding inflated subscriptions in SME IPOs.

Recently, Sebi chief Madhabi Puri Buch said the regulator is working to introduce more disclosures to safeguard investors.

“The kind of fundraising and response we saw in the SME segment was a bit of a surprise, even when the markets have been down.

"There seems to be a lot of froth in the segment. Sebi’s action will have an impact and should lead to a slowdown,” said a banker on the condition of anonymity.

Stock exchanges have implemented additional surveillance mechanisms on SME stocks and tightened norms for migration to the mainboard.

The SME platform was introduced in 2012, operates separately from the mainboard, and adheres to different rules.

The minimum application size for SME issues is around Rs 1 lakh, compared to Rs 15,000 for the mainboard issues.

The higher ticket size which was intended to discourage retail investors, is no longer a deterrent as most investors are comfortable placing bids worth Rs 1 lakh or more.

“It has a small float compared to the mainboard, and it is prone to price manipulation. In some cases, quite a few of these SME IPOs have given superb returns of up to 10x.

"However, the question is how many can sustain these higher levels.

"There are signs of the euphoria petering off slowly thanks to the concerns raised by Sebi and actions against NBFCs against IPO funding,” said Ambareesh Baliga, independent equity analyst.

Baliga said investors should not take long-term positions in SME IPOs unless they are familiar with the sector and the company.

“If you have applied for an IPO based on the subscriptions or grey market premium, one should exit within a couple of days,” said Baliga.