Concerned over the irrational rise in share prices on the listing day of small and medium enterprises' (SME) initial public offerings (IPOs), the National Stock Exchange of India (NSE) last week imposed a price control cap of 90% over the issue price.
The rule means that the listing-day gain can't be more than 90% of the issue price.
This has sparked a debate among industry experts—while some believe it will bring stability and discourage speculation, others worry it could hurt valuations and hamper efforts to raise capital.
A Mint analysis of data, sourced from primedatabase.com for 281 SME IPOs listed on NSE since 2021, revealed that around 43% of these small businesses saw healthy gains on the listing day, with their closing prices up to 40% higher than the offer prices.
Around a quarter of these firms saw gains between 40% and 90%, and nearly 20% soared over 90%. A strong investor appetite fuelled these gians. However, not all IPOs were a success story. Around 14.6% of the companies experienced losses on their listing day compared to the offer price.
Of the 20% of SME firms that made a phenomenal market debut, shares of around 88% are trading at 90% above the issue price.
“The NSE's new rule limiting SME IPO opening prices may impact capital raising and valuations. While intended to curb excessive speculation, this 90% cap could potentially reduce initial investor enthusiasm and first-day gains,” said Atul Parakh, chief executive at online investment and trading firm Bigul. “This might make SME IPOs less attractive to some investors, potentially affecting demand and the amount of capital companies can raise.”
The new rule could, however, result in more stable post-listing performance and realistic valuations, Parakh acknowledged.
"Companies may need to price their IPOs more conservatively to ensure adequate investor interest. Overall, this rule may encourage a more measured approach to SME listings, balancing growth potential with market stability," he added.
Their phenomenal journey could also be captured in the meteoric rise of the Nifty SME Emerge Index which is designed to reflect the performance of a portfolio of eligible small and medium enterprises. It has been on a tear, rocketing nine-fold since the start of 2021, compared to the nearly 74% rise in the Nifty 50 index.
Kush Gupta, director at SKG Investment & Advisory, welcomed the NSE's action. “NSE’s imposition of price control is a significant first step in regularizing the SME IPO space, which has seen its share of malpractices. It indicates a focus on sustaining this asset class which will only help it grow further.”
“In the last two months alone, 10 IPOs gave more 100% gains on the listing day, with six of them giving more than 200%. This is an unsustainable pattern which is most likely to hurt retail investors at some point,” he added.
"Also, such lucrative gains resulted in pre-IPO rush and manipulation of prices. It was giving a bad name to the industry and increasing speculation. This move will curb that– if the gains are no longer as lucrative, it will demotivate the stakeholders to engage in false practices."
The SME segment is witnessing a boom with funding reaching new heights. Last year, 182 SMEs raised a record ₹4,686 crore in IPOs. So far this year, 117 issues have mobilized ₹3,641 crore.
