SME IPOs faltering under regulatory scrutiny, but the pain may be worth it

The SME IPO market, which has been rewarding for investors in recent years, is now facing a noticeable slowdown following heightened scrutiny by the Indian regulators.

Starting July, exchanges have brought in a series of tighter norms to boost stability and transparency in the market, which is resulting in lower subscription numbers and listing gains.

According to the data analysed by ETMarkets over the last three months, the average listing day gains fell to 30% in September from 56% in August and 71% in July. For comparable purposes, the IPO data for July is taken from July 5, when the NSE introduced the 90% opening price cap on SME IPO listings.


Further, only 5 IPOs in September were listed at maximum price of 90% as against 9 issues in August and 10 in July. Among the 35 IPOs that listed in September, nearly half of them are trading below the issue price.

Investor response also seems to be on a downtrend in the last two to three months. In September, only 14 SME IPOs received 100x subscriptions, a fall from a high of 20 IPOs in the month of July.


The BSE SME IPO index, which tracks a wide range of companies listed on the SME platform, is also down about 14% from the record high made in August. Over the past year, the index saw a meteoric rise, climbing 170% and 111% in 2024 alone.

Analysts say the current downtrend due to increased regulatory checks is not just a temporary phase, but may just be a beginning of a longer-term trend that is likely to persist if regulatory scrutiny continues.

"However, this isn’t a negative development. Stricter regulations are aimed at improving the quality of companies that enter the market. While we may see fewer IPOs and lower subscription levels in the short term, the focus is to ensure that only financially sound and genuinely strong companies get listed," said Kresha Gupta, founder and director, StepTrade Share Services.

The scrutiny around the SME IPOs was amped up from July this year after the Sebi chief warned of price manipulation and inflated valuations in the market, hinting at a bubble-like scenario. Some of the IPOs were also subject to ridicule for massive oversubscription numbers even with relatively small scale business models.

The regulator also tapped the exchanges to be more thorough in vetting out offer documents for SME companies, even if it leads to a slowdown in terms of the pace of approvals.

Further, Sebi is working on a proposal to tighten the norms around the listings, according to Sebi whole-time member Ashwani Bhatia. A consultation paper on the matter is expected to be floated within a few months.

As Sebi and exchanges continue to tighten the screws, market observers predict a future where fewer but higher-quality companies will make it to the public markets.

The increased focus on due diligence, alongside new eligibility requirements such as demonstrating positive free cash flow to equity (FCFE), is expected to weed out weaker companies, leaving behind those with more robust financials.

During the last decade, SME companies raised over Rs 14,000 crore, of which a whopping Rs 6,000 crore was mopped up during FY24.

Gupta said the tougher regulatory environment will lead to fewer, but higher-quality and more credible companies in the SME space. "Companies will have to adapt to these new norms if they want to go public, and while the regulatory process may slow things down, it will ultimately strengthen their business fundamentals."

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)