SME IPOs: Are There Signs to Worry For Investors?

The SME IPO market has been on a roll, with companies witnessing overwhelming subscription levels. However, amidst the frenzy, concerns about potential malpractices and market manipulation have been raised.

A Wave of Over-Subscriptions

Resourceful Automobile, Travels & Rentals, HOAC Foods India, and Magenta Lifecare are just a few examples of SME IPOs that have attracted astronomical levels of interest. Despite relatively small issue sizes, these companies have seen subscription multiples ranging from hundreds to thousands.

The IPO of Resourceful Automobile garnered bids of ₹4,800 crore for a ₹12 crore issue, while the offer for Travels & Rentals earned ₹7,075 crore for a ₹12.4 crore issue. Earlier this year, HOAC Foods India and Magenta Lifecare saw 1,963 and 1,002 times oversubscription, respectively, despite their issue sizes being only ₹5.10 crore and ₹6.64 crore..

As compared to 204 corporations that raised ₹5,971 crore in FY24, 104 companies in FY25 raised ₹3,396 crore through initial public offerings (IPOs) till August.

Investor Caution

While investors have been reaping the rewards of these over-subscriptions, the market’s volatility is a constant reminder that the tide can turn. Former BSE Chairman S. Ravi has cautioned investors about the potential risks of SME IPOs. He emphasises the importance of thorough research and due diligence before investing, focusing on the company’s fundamentals and business model.

Factors Fueling the Frenzy

The reduction in the ASBA blocking period has made it more attractive for investors to participate in SME IPOs. Additionally, concerns about market manipulation have been raised, with allegations of promoters and merchant bankers creating artificially positive sentiments.

Sebi’s Warnings

The Securities and Exchange Board of India (SEBI) has issued warnings about potential irregularities in the SME IPO market. The regulator has highlighted tactics such as unrealistic portrayals of companies, bonus issues, stock splits, and preferential allotments, which can create a false sense of optimism among investors.

Grey Market Premiums and Conflicts of Interest

The significant grey market premiums associated with SME IPOs raise further concerns. These premiums often exceed the IPO price by several times, suggesting potential overvaluation.

Moreover, the relationship between merchant bankers and market-makers in the SME Exchange has been questioned. The potential for conflicts of interest arises as market-makers are often associated with merchant bankers, leading to concerns about market manipulation and insider trading.

Conclusion

While SME IPOs offer opportunities for investors, it is crucial to approach them cautiously. The recent surge in popularity and the associated risks highlight the need for thorough due diligence and a balanced perspective. As the market evolves, investors must remain vigilant and informed to navigate the potential pitfalls.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.