SME IPO Frenzy: Is This the New Gold Rush or a Risky Gamble for Investors?

In recent years, small and medium-sized enterprises (SMEs) have increasingly turned to the stock market to raise funds. These IPOs typically range between ₹5 crore to ₹50 crore. What began as a small trend has now gained serious momentum. The average size of SME IPOs has jumped significantly, growing from ₹10 crore in 2020-21 to ₹36 crore by 2024-25. The growth has been impressive: from April to August 2024-25, 109 SMEs raised a combined ₹3,983 crore—this is more than what was raised in the entire financial years of 2020-21, 2021-22, and 2022-23 together. On average, nearly one IPO has been launched per working day.

Though the year 2023-24 also saw record-breaking activity with ₹6,265 crore raised across 203 SME IPOs, there are concerns about whether this growth is sustainable or if it risks creating instability.

Oversubscription Concerns

While the surge in SME IPOs is a positive sign, it has also raised some issues. One major concern is the extreme oversubscription of some IPOs, with some receiving thousands of times more interest than the shares available. This raises doubts about the long-term health of the market. High interest doesn’t necessarily mean fraud, but there have been instances of market manipulation in the SME segment.

Market Manipulation

A common problem involves inflating IPO subscriptions to mislead investors. Scammers submit hundreds of duplicate applications to make it seem like there is overwhelming demand. Initially, these appear as valid subscriptions, but the registrar later rejects the duplicates. By this point, many investors have been tricked into thinking the IPO is highly in demand and invest in it, only to suffer losses.

Here’s how the scam typically works:

1. A scammer submits 100 or more duplicate applications, inflating the subscription numbers.
2. This creates a sense of urgency, encouraging investors to rush in, thinking the IPO is in high demand.
3. The scammer, however, never intends to buy the shares, as they know their duplicate applications will eventually be rejected during the allotment process.

Regulatory Changes to Combat Fraud

Regulators have introduced changes to prevent such fraud. Registrars and transfer agents (RTAs) have always been responsible for identifying and rejecting duplicate or ineligible bids. Previously, these duplicate applications were still counted in the subscription numbers, creating a false sense of demand. Stock exchanges now have stricter controls in place, filtering out duplicate applications right from the start.

For SME IPOs, stock exchanges now verify PAN (Permanent Account Number) details at the time of application. Any duplicate applications with the same PAN are automatically rejected, preventing scammers from manipulating subscription figures. Special categories, such as employees or existing shareholders, are also more closely monitored, further tightening controls.

Additionally, the National Stock Exchange (NSE) now requires SMEs to show positive cash flow in at least two of the last three financial years before they can be listed. This is meant to ensure that only strong, reliable companies are listed.

Should You Invest in SME IPOs?

Investing in SME IPOs can be riskier than investing in mainboard IPOs because SMEs are smaller companies with less history and more vulnerability to market changes. Their stocks tend to be more volatile due to lower market capitalisation and limited trading activity.

Another issue is liquidity. Since SME shares trade in specific lot sizes, it can be harder to buy or sell shares without significantly affecting the price.

Despite these risks, SME IPOs can offer higher returns for investors willing to take on more risk. Recent regulatory changes have made the SME platform more transparent and reliable, helping to build investor trust.

However, investing in SME IPOs is not a guaranteed way to make money. It requires thorough research and a deep understanding of the risks involved. Investors need to be prepared to spend time studying the companies before making decisions.

Conclusion

SME IPOs are growing in popularity and can offer high rewards, but they also carry significant risks. With stricter regulations in place, the market has become safer, but potential investors still need to be cautious and well-informed before jumping in.