SMEthing suspicious in these IPOs?

Just about half the number of IPOs by SMEs this year have made money for their investors. This underscores the need for tighter vigil by market participants for this category of paper. India is going through an IPO bull market where valuations derived by companies planning to list tend to be rich. SME IPOs represent heightened probability of the primary market price overshooting that of the secondary market. Even after listing, relative disinterest by institutional investors contributes to price volatility. Regulators have warned of speculative bubbles appearing in sections of the market as retail investors seek listing gains in SME IPOs. These warnings should be taken seriously, as IPO issues approach the tail of a market boom.

A section of the market is voicing concern that India's primary and secondary markets are decoupling. Correctives being considered are greater institutional participation in IPOs for more grounded pricing and restraint by companies over valuation so that there is more left on the table for investors. These measures, however, have a muted impact on SME IPOs. Small companies have less of a capitalisation headroom as they scale up. Institutional interest tends to gravitate towards larger companies in stable businesses. It, thus, falls on the regulator to enhance vigil over the SME IPO segment to curb excess speculation.

SMEs offer a higher risk-reward trade-off than the broader market. This is amplified by retail interest in IPOs for this section of companies. Majority of retail investors sell their shares within a week of listing. This behaviour feeds the ambitions of issuers, especially those chaining hyper growth in their business. Companies that are late to list during an IPO boom are prone to seek fancier valuations. This affects the IPO pipeline if enough companies destroy investor wealth. In the SME segment, every second company that conducted an IPO is trading at a loss to its listing price. The record must improve before investor fatigue sets in.