SME IPO Frenzy: Initial public offerings (IPOs) for small and medium businesses (SME) seem to be gaining popularity among retail investors lately. Despite an alert issued by the Securities and Exchange Board of India (SEBI), retail investors have shown a lot of interest in the SME IPO category, leading to oversubscription and frenzied activity. It's natural to question whether this surge is sustainable or if it will eventually come to an end. The question seems almost rhetorical.
We might argue that we are sitting on a ticking time bomb, though, since market analysts predict that the markets won't be affected until three or four SME IPO failures. However, the issue at hand is the level of safety for retail investors and the criteria on which they are deciding to subscribe to the offering.
“As of now, the liquidity-injected party is in full swing, and everyone is making hay while the sun is shining. I think the retail segment enjoys the thrill of playing SME IPOs knowing very well that this could be a recipe for disaster. New-age market participants have never seen a down cycle in the markets so the fundamental understanding is that stock prices perpetually only rise!,” said Mohit Gulati, the CIO and managing partner of ITI Growth Opportunities Fund.
As of 2024, there have been approximately 164 SME IPOs listed, with about 84% of them trading above their issue price. Resourceful Automobile IPO has been in the spotlight with bids reaching close to ₹4,800 crore in the past few days. During the subscription period from August 22 to 26, the company's IPO received an overwhelming response, with bids for 40.76 crore shares against the 9.76 lakh shares available, resulting in a subscription of 419 times on the third day of the bidding process, as per the data.
The livemint team, always curious, chose to investigate the potential factors driving retail interest. They also sought to comprehend the psychology of retail investors by speaking with three distinguished market experts. Let's delve into their findings.
Arun Kejriwal, the founder of Kejriwal Research and Investment Services, pointed out that retail investors primarily rely on the track record of the merchant bankers when considering IPO subscriptions. If the performance of the merchant bankers' past issues has been positive, retail investors tend to subscribe to the new issues.
Mohit Gulati, the CIO and managing partner of ITI Growth Opportunities Fund, shared a thought-provoking quote from George Bernard Shaw, stating that "In gambling, the many must lose in order that the few may win," which accurately illustrates the situation in the SME IPO segment.
Similarly, Gulati too highlighted that the real winners here are the merchant bankers, who are making windfall gains in taking mandates for these issues while creating buzz around them. Even small auto dealerships with just 8 employees were able to raise subscriptions worth 4,000 crores in the recent case!
“Unfortunately, the SME exchange, which was meant to be a great platform for small and medium-sized businesses to raise funds, has now turned into nothing more than a risky gambling table. This segment has essentially become a casino, all due to the excessive leniency shown by SEBI in allowing overpriced and reckless issues to be approved,” added Mohit.
Kejriwal emphasised the importance of understanding the rationale behind applying for IPOs. Using an example, Arun elaborated that investors apply for mainboard IPOs because when they apply with an amount like 15,000, and if the retail portion gets oversubscribed 10 to 12 times, they may be allotted shares worth 15,000 if they are fortunate.
An initial public offering of a mainboard typically yields a gain of 30-45% at most. In the case of an SME IPO, one could receive shares worth around 100,000 to 130,000 rupees if they are fortunate. If we use 150,000 rupees as an example, the possible return would be 120,000 rupees, which is the average amount.
Another point to consider is that usually, new listings command a premium of 70% to 80% on the first day. Therefore, the 120,000 rupees would increase by 96,000 rupees. Investors are finding greater opportunities for profit in the SME segment. It's not necessarily that they understand it better, but rather they recognise the potential for making money in this sector. This factor is the driving force behind their interest, said Arun Kejriwal.
On the other side, Bengaluru-based Capitalmind Financial Services' Founder and CEO, Deepak Shenoy, explained that subscription is now irrelevant since the whole thing is Application Supported by Blocked Amount (ASBA). Money lies in your own bank account until it gets allocated, and getting allocation is tough when there is an oversubscription. So people just put more money in thinking there is a lower allocation, so a higher bid will increase the chances of allocation. That's all, really. It's not love for the company.
“In general, since you have to invest larger sums of money, be very careful and only invest in what you understand. Buying for listing gains, or looking at GMP for arbitrage, has ended in lots of tears in the past. Don't ignore the fundamentals - buy only after you understand the company well enough, since these are SMEs they neeed more detailed understanding. Meaning you know about governance, growth strategies, integrity of promoters, past record, how well they can communicate their strategy and so on,” advised Shenoy.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.
