SME IPO Frenzy: Why Retail Investors are Betting Big Despite SEBI’s Warnings—Experts, Merchant Bankers, and Real Winners Weigh In

Small and Medium Enterprise (SME) initial public offerings (IPOs) are gaining a lot of attention from retail investors lately. Even though the Securities and Exchange Board of India (SEBI) has warned investors to be cautious, many are still eager to jump into SME IPOs. This rush has led to oversubscriptions, where more people are trying to buy shares than what is available. But is this enthusiasm sustainable, or could it be setting the stage for a future crash?

Is There a Risk of a Market Collapse?

Some market experts believe that the current hype around SME IPOs might not end well. They predict that the market could remain unaffected until a few SME IPOs fail. However, the bigger concern is whether retail investors are making safe choices or simply getting caught up in the excitement.

“As of now, there’s plenty of money flowing, and everyone is trying to make the most of it. The retail segment seems to enjoy the thrill of SME IPOs, even though it could lead to big losses. Many new investors haven’t experienced a market downturn, so they think stock prices will always go up,” said Mohit Gulati, Chief Investment Officer and managing partner at ITI Growth Opportunities Fund.

SME IPO Stats and Resourceful Automobile’s Success

In 2024, around 164 SME IPOs have been listed, and about 84% of them are trading above their issue price. A recent example is the Resourceful Automobile IPO, which attracted bids worth nearly ₹4,800 crore. During its subscription period from August 22 to 26, it received bids for 40.76 crore shares against just 9.76 lakh shares available, resulting in a subscription rate of 419 times by the third day.

Why Are Retail Investors So Interested?

The team wanted to understand why retail investors are so eager to invest in SME IPOs. To do this, they spoke with three market experts.

Merchant Bankers: The Real Winners

Arun Kejriwal, founder of Kejriwal Research and Investment Services, noted that retail investors often look at the track record of merchant bankers—the firms that help companies go public—before deciding to invest. If these bankers have done well with previous IPOs, investors are more likely to trust them with new ones.

Mohit Gulati added that the real winners in the SME IPO craze are the merchant bankers, who are making big profits by creating buzz around these IPOs. He compared the situation to gambling, quoting George Bernard Shaw: “In gambling, the many must lose in order that the few may win.” He also expressed concern that the SME exchange, which was meant to help small businesses raise funds, has turned into a risky venture, much like a casino, due to SEBI’s leniency in approving overpriced and risky IPOs.

Why Do Investors Apply for SME IPOs?

Arun Kejriwal explained that investors usually apply for IPOs hoping for quick gains. For example, when they invest ₹15,000 in a mainboard IPO (for larger companies), they might get shares worth ₹15,000 if they’re lucky. But for SME IPOs, they could get shares worth ₹100,000 to ₹130,000, offering a much bigger potential return.

Kejriwal pointed out that new SME listings often see a premium of 70% to 80% on the first day, making the investment even more attractive. Investors are drawn to the higher profit potential in the SME sector, even if they don’t fully understand the companies they’re investing in.

Understanding the Risks

Deepak Shenoy, Founder and CEO of Bengaluru-based Capitalmind Financial Services, highlighted that with the Application Supported by Blocked Amount (ASBA) system, investors’ money stays in their bank accounts until the shares are allocated. When an IPO is oversubscribed, investors often put in more money, hoping that higher bids will increase their chances of getting shares.

Shenoy advised investors to be cautious and only invest in companies they understand well. He warned against buying just for quick listing gains or relying on grey market premiums (GMP) for profit, as these strategies have led to significant losses in the past. He stressed the importance of understanding the fundamentals of the company, including its governance, growth strategies, and the integrity of its promoters, before investing in an SME IPO.