SMEs Drive Robust IPO Activity in 2024 as 117 Companies Hit Dalal Street in H1

The Indian IPO market is thriving, with many companies making their debut on Dalal Street daily. This surge is fueled by strong participation from all investor segments.

Growing Enthusiasm for SME IPOs

Investors are particularly excited about IPOs from small and medium enterprises (SMEs). These SMEs have attracted significant attention from retail and non-institutional investors. In the first half of 2024, 153 companies have gone public, with 117 of them being SMEs, accounting for 77% of the total.

Comparing with Last Year

In the same period last year, 70 SME companies raised funds from the capital market, showing a 67% growth this year. According to several companies’ Draft Red Herring Prospectuses (DRHPs), the main reasons for raising funds are to meet debt obligations, fund expansion, and fulfill working capital needs.

Offer-for-Sale Transactions

Volumes from offer-for-sale (OFS) transactions have surpassed fresh capital issuances. Private equity (PE) and venture capital (VC) investors are using both primary (IPOs) and secondary (block deals) market routes to exit. PE firms are taking advantage of bullish conditions in the secondary market to sell their stakes.

SEBI and Exchange Regulations

The surge in SME IPOs has caught the attention of SEBI and the exchanges. The National Stock Exchange recently imposed a price control cap of 90% over the issue price for SME IPOs. This ensures that listing-day gains cannot exceed 90% of the issue price.

Market Froth Concerns

Some SMEs have experienced significant listing gains, sparking concerns about market froth. For example, Shivalik Power debuted with a premium of 211% over its issue price. Investors are closely monitoring grey market premiums as indicators of listing-day performance.

Mixed Reactions to New Regulations

While some experts believe the new price cap will discourage speculation, others worry it could negatively impact valuations. Earlier this year, SEBI chairperson Madhabi Puri Buch highlighted signs of manipulation in the SME segment.

Insights from Kush Gupta

Kush Gupta, Director at SKG Investment & Advisory, shares his insights into the key factors driving interest in companies raising funds and his perspective on the current IPO boom.

Motivations for Raising Capital

Gupta explains that SME IPOs have been very successful in recent years, with 2022 and 2023 being particularly notable. Many companies are now exploring the capital markets, driven by financial prudence on the part of the promoters. Traditionally, small companies relied on bank loans for expansion and working capital needs, but debt can be burdensome. Equity capital allows for growth without the fear of debt.

SEBI’s Role

SEBI’s efforts to ease the IPO process have also played a significant role. Companies now have confidence that their interests are being looked after, making it easier to navigate the stock market complexities.

High Subscription Rates

The high subscription rates for SME IPOs have been remarkable. Last year, the top 10 IPOs were oversubscribed by an average of over 641 times. Gupta attributes this to two main factors: tremendous listing-day success and increased investor confidence in SMEs as an asset class.

Sustainability of the IPO Boom

Gupta believes the current IPO boom is not entirely sustainable. While the number of listings may continue to increase, the extraordinary listing-day gains and high subscription rates are signs of an overheated market. SEBI is also stepping in to address potential issues, which could lead to a tapering of investor returns.

Advice for Retail Investors

For retail investors, Gupta recommends caution. He advises investors to consider valuation and the purpose of the IPO. A high price-to-earnings (PE) ratio in an overvalued market can be risky. Additionally, investors should be wary of IPOs where the capital raised is primarily used for promoters to sell their stakes rather than for company growth.

Retail investors should pay attention to these factors and make informed decisions before investing in IPOs. The IPO market will remain active, but expectations for returns should be tempered.