SME IPOs look like a tale of listing day boom and then gloom

If getting allotment in an SME IPO is akin to winning a lottery ticket, then you should be smart enough to book profit on listing day itself.

Out of the 166 SME IPOs listed in 2024, two-thirds have given at least 50% return and 67 have delighted investors by doubling their money. Many of them doubled on Day 1 itself till NSE imposed a 90% price cap a couple of months ago.

However, after the listing day boom, comes the real hurdle as most investors resort to flipping. Shares of about half of SME stocks, 72 to be precise, that got listed in 2024 are now trading below the listing day's closing price, according to data from Prime Database. Such losses go as high as 69%.



Shares of Varyaa Creations, whose Rs 20 crore IPO made investors richer by 80.5% on listing day, have fallen 69% since then.

In January 2024, Euphoria Infotech's Rs 9 crore IPO lived up to its euphoric name literally as the minion issue was not just oversubscribed 379 times but also delivered a 81.5% return on Day 1. Gradually, the euphoria fizzled out as the SME stock was trading not just below the listing day price but also its offer price.

Medicamen Organics was a multibagger on Day 1 and ended 326% higher on debut but Since then, more than half of the listing day gains have been wiped out.

However, there are outliers too. Owais Metal is not only the best SME IPO of 2024 with a mind-boggling return of over 1,400% from the issue price but it has also rewarded investors handsomely those who stood beyond the initial few days of listing. The stock is up 409% from Day 1's closing price.

Other exceptions include Alpex Solar, Vruddhi Engineering, TAC Infosec, and KP Green Engineering.

What should investors do?

Last week, the IPO of two-showroom bike dealer Resourceful Automobile got wider public attention as the issue was oversubscribed 400 times but old-timers have been raising red flags on how the demand is exceeding supply by a wide margin leading to inflated valuations.

“Many SMEs of doubtful credentials are getting their IPOs oversubscribed many times and the stocks on listing are manipulated and driven to upper circuits for days. Due diligence is conspicuous by its absence. Many retail investors, driven by greed, are rushing into this gambling game. This will end in tears for the newbies who have no understanding of market fundamentals,” warns Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services.

On its part, Sebi has also issued an advisory saying investors in the SME market must exercise caution.

"Some of the SME companies and/or their promoters have been resorting to certain means that project an unrealistic picture of their operations. Such companies/promoters have been seen to make public announcements that create a positive picture of their operations. These announcements are typically followed up with various corporate actions such as bonus issues, stock splits, preferential allotments, etc," Sebi said.

Earlier this week, Sebi whole-time member Ashwani Bhatia said stock exchanges should learn not to say no to SME IPOs that come with inflated balance sheets. "The auditors should be good doctors - don't give them steroids when they can survive on paracetamol," he said.

The regulator is expected to revise norms for listing SMEs by tightening norms related to disclosure and eligibility. NSE has already intensified scrutiny of companies seeking to list on its SME platform and introduced positive free cash flow to equity (FCFE) requirements.

A section of the market is also worried about over-regulation.

"Should the regulators step in on the valuations? I do not think that is right because there is no golden rule on what should be the right valuation. The market is the best determinant," says Dalal Street veteran Sunil Subramaniam.

Ace investor Ashish Kacholia rues that many people are taking a sledgehammer to the entire SME ecosystem as if it is a plundering machine for founders to loot a gullible public.

"The SME platform is one of the biggest fundraising opportunities for SMEs to access public funds to grow their business and create value for stakeholders. Sure, there will be a few rotten eggs but overall this is going to fuel innovation by dynamic young founders and drive economic growth for India," Kacholia said in a social media post on X.

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